Encore Capital Group Inc (ECPG) 2006 Q4 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you for standing by and welcome to the Encore Capital fourth quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] This conference is being recorded today, February 28, 2007.

I would now like to turn the conference over to Tony Rossi of the Financial Relations Board. Please go ahead.

Thank you, operator. Good afternoon and welcome to Encore Capital Group's fourth quarter 2006 conference call. With us today from management are Brandon Black, President and Chief Executive Officer, and Paul Grinberg, Chief Financial Officer.

Management will discuss fourth quarter results and will then open up the call to your questions. Earlier today, Encore Capital Group filed its 10-Q for the year ended December 31, 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, 2006.

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 reflect the occurrence of anticipated or unanticipated events, whether as a result of new information, future events, or for any other reason.

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

Thanks Tony and good afternoon. The fourth quarter was a solid one in most respects for Encore. Our collections and revenues increased over 2005 as we are beginning to see the benefit of the new initiatives we began in early 2006 and ramped up later in the year. As we will discuss today, these initiatives represent a substantial investment in Encore's future and although they will depress Encore's near-term earnings, they are necessary to enhance and ensure our long-term success.

Of note, we were able to retire the remaining $10 million of outstanding principle on our previous credit facility. This was accomplished through the sale of all remaining accounts purchased under that facility that were not either active payers or in our legal channel. These were accounts we had owned for an average of four years and, therefore, had a higher cost to collect than the servicing fee paid to us under our agreement with the lender. Paul will discuss this sale in more detail later.

During the quarter, we invested $64 million to buy approximately $1.4 billion in face value of debt. Our ability to deploy capital to purchase portfolio has been positively influenced by our new initiatives and by our expansion into India. Additionally, our purchases were spread across multiple assay classes, including credit card, healthcare, automobile deficiency, telecommunications, and consumer loan portfolios.

We continue to invest in our long-term growth initiatives, including healthcare, India, legal collections, and Ascension. We have added to our internal healthcare collection staff and are now collecting on our entire healthcare portfolio from our site in Phoenix. To date, we have completed transactions with four different hospital groups, two of which were completed in the fourth quarter. We have in place the collection experience and capacity to handle significant increases in growth and volume in 2007.

Our collector headcount, India, increased to more than 180 people at the end of the year. During 2006, we've proven our ability to collect lower balance receivables. Beginning in 2007, we expanded the balance ranges and our team in India collecting across the entire balance spectrum. As a result, we anticipate significant growth in collections in 2007. As we scale our collection team there, we will absorb more of the fixed cost related to these operations, which will reduce our overall cost per dollar collected.

Our legal placements and collections in the fourth quarter were at all time highs. The new initiative in the legal channel, which we began earlier in the year and expanded in the fourth quarter, is on track to generate significantly more collections on certain accounts than we would have collected using prior strategies.

Finally, with respect to Ascension Capital, our outsource bankruptcy servicing business, we've made some personnel changes and have hired two senior business development leaders. Ascension has not met the expectations we had when we completed the acquisition in late 2005. We believe that is partially due to the long period of reduced bankruptcy filings, but also to a lack of traction on the sales front. These new team members come from Chase Auto Finance and ADP, and they bring a professional solution sales approach to Ascension.

In addition, we are expanding our potential new customer base beyond the secured auto market into the real estate and consumer loan markets.

We've also taken advantage of the low volumes in 2006 to re-engineer many of our internal processes at Ascension. We expect that when we complete this process at the end of 2007, we will be able to reduce the need for additional staff because we will have achieved significant productivity increases per person. We continue to believe this is the right investment long-term for Encore and expect significant progress in 2007.

All of these investments are important and necessary given the industry's pricing environment. 2006 losses at credit card issuers were dramatically lower than 2005 levels and as a result, many issuers reduced their sales volume. Unfortunately, there was not a corresponding reduction in demand. In fact, there were new entrants to our industry as recently as last month. This has resulted in a pricing environment where increases have slowed, but continued to drift upward. As an example, the selling price for assets from one large credit card issuer increased 20% from the beginning of 2006 to the end of 2006. Nevertheless, as a direct result of our initiatives, we are able to bid more competitively on portfolio. These investments will, however, have a negative impact on our short-term earnings. The cost associated with these investments must be incurred upfront while revenue, in accordance with SOP-0303, is recognized over the life of the assets.

Looking specifically at the 2007 expectations for the accounts we expect to place through our new legal initiative, we anticipate the investments to yield almost $80 million in incremental collections and revenue over the life of the accounts, which could be over a number of years. This compared to an original expectation of only $16 million. To achieve these collections, however, we expect to invest $20 million in upfront court cost during 2007. Of that amount, we expect to recover $10 million back over time and will record the investment on our balance sheet as deferred court costs. The other half would be expensed in 2007. This incremental $10 million in expense is expected to impact earnings by approximately $0.26.

Revenue, on the other hand, increases only gradually when IRRs are raised for the quarterly pool groups where the accounts reside. As a result, revenue recognition occurs over several years. During the period of time that we are building toward a steady state of placements using this initiative, our earnings will be impacted negatively. However, as we've stated previously, we manage this business to maximize our cash return and have, therefore, chosen to pursue this strategy and position the company for future increased collections and earnings.

Our industry has changed. Pricing remains at very high levels and the long-term success for anyone in the debt-purchasing business will be driven by continual innovation, not by the gradual extension of legacy strategies or the expectation that pricing will drop to levels seen in early parts of this decade. We believe our proactive approach to developing alternative collection channels like India and our continued innovation and unique strategies for liquidating distressed debt, will position us as a leader in our industry and will allow us to grow profitably.

We have a very positive outlook for our long-term future. Accordingly, our Board has decided it was not in the best interest of our stockholders to pursue the sale of the company at this time. Instead, we will focus our efforts internally to fully deploy our initiatives and strategies. We believe that successfully executing on our business plan represents the best opportunity to maximize value for our stockholders.

In addition, the Board has authorized a securities repurchase program under which the company may buy back up to $50 million of a combination of our stock and our convertible notes with a maximum of $25 million available for the repurchase of convertible senior notes. We have the necessary amendments to credit facility in place that will permit us to make such purchases immediately.

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

Thanks Brandon. Let me begin with the results from our debt purchasing business. Gross collections in the fourth quarter of 2006 were $94.5 million, an increase of 31% over the $72 million in the fourth quarter of 2005. The increase year-over-year was driven largely by sales, which increased to $20.8 million or 22% of collections in the quarter versus $7.7 million or 11% of collections in the fourth quarter of 2005.

As Brandon mentioned earlier, we made a decision to sell all the accounts that we had purchased under our previous credit facility that were either accounts that were not currently paying or accounts that were not being actively worked in our legal channel. This sale amounted to approximately $13.9 million of collections in the quarter. The accounts that we sold were older accounts and therefore had a higher cost to collect in the servicing field out under our previous credit facility.

We are required to share with a lender the residual collections from these receivables after applying the servicing fee. In general, for every dollar collected on the accounts we sold, we were attributed 40% servicing fee after which every dollar collected was shared equally with our lender. Because these accounts were older, our cost to collect was in excess of 50%. This resulted in very low pre-tax margins on these specific accounts equating to approximately 17% of net collections after cost. Therefore, we analyzed our alternatives and determined that the net present value from selling these accounts was higher than continuing to collect on them with the current economics.

Although it was very expensive, this previous credit facility was one of the only financing sources available to us at the time we entered into it and it was crucial to our survival at that time. Today, because of our success over the ensuing years, we have less expensive financing options available to us and the company continues to take steps like this to reduce the future impact of this expensive facility. We expect that the accounts that we did not sell will continue to generate solid profits for the company at the allocation attributed to servicing fees and the cost to collect are more favorable to us on the remaining accounts.

Excluding sales, collections grew 14% year-over-year. Legal collections continue to grow increasing to $33.7 million in the fourth quarter of 2006 versus $22.2 million in the fourth quarter of 2005. This represented a 52% year-over-year growth in legal collections and was 36% of our total collections in the quarter. We believe this is a direct result of the new initiatives put in place earlier in the year. For the second quarter in a row, legal collections represented the largest component of collections.

Collection sites represented 27% of collections at $25.7 million in the quarter. The remaining 15% of collections were primarily from outsource collection agencies.

Our revenue from receivable portfolios in the quarter was $65 million, an increase of 20% over the $54 million in the same period of the prior year. $3.2 million of the revenue increase was additional zero-basis revenue compared to the fourth quarter of 2005, which is primarily the result of the large sale during the quarter. Many of the accounts sold were from zero-basis pools and as such as all of the proceeds from the sale of these accounts were recorded as zero basis revenue.

Additionally, net allowance charges taken during the fourth quarter of 2006 were $711,000, which was $1.6 million lower than in the fourth quarter of 2005.

Revenue recognized on receivable portfolios as a percentage of portfolio collections was 69% in the fourth quarter compared with 75% in the same period of the prior year and 76% in the third quarter of 2006.

The decrease in the revenue recognition rate year-over-year was largely attributable to the higher level of sales in the quarter as compared to the prior year and its impact on total collections. As we said previously, the revenue recognition rate is dependent on several factors.

First is the mix of collections. Collections from purchases made in 2003 and prior have higher revenue recognition rates than more recent purchases.

Second is seasonality. Since revenue on any pool group is relatively constant from period to period, during periods of higher collections like the first quarter, the revenue recognition rate will typically be lower than periods of lower collections like the fourth quarter. The fourth quarter of 2006, however, had unusually high collections as a result of the sale and, therefore, it did not follow this usual seasonal pattern.

Third is the timing of purchases. Revenue is generally at its highest in the period immediately following the purchase. Finally, the amount of allowances recorded during the period, if any, will have an impact on the revenue recognition rate.

Moving onto Ascension, our outsource bankruptcy servicing business, servicing fees for the quarter were $3.2 million, in line with the expectations we provided on our last quarterly conference call. Ascension's results for the fourth quarter, like previous quarters in 2006, continue to be negatively impacted by the significant drop off in bankruptcy filings following bankruptcy reform in the fourth quarter of 2005.

Personal Chapter 7 bankruptcy filings in 2006 had been at 20-year lows. While bankruptcy filings continue to increase, industry experts are now predicting that volumes will not reach the pre-bankruptcy reform levels until late 2007. Originally, filing volumes were expected to have returned to pre-reform levels by the end of 2006. Ascension's revenue for 2007 will continue to be impacted by lower placement volumes.

At this lower level of revenue, Ascension generated a net loss in the fourth quarter of $690,000 following a loss of $1.1 million in the third quarter and a loss of $660,000 in the fourth quarter of 2005. Included in the loss for the fourth quarter of 2006 were approximately $900,000 in non-cash amortization charges relating to the amortization of intangible and other assets established in connection with our purchase accounting for Ascension.

In 2007, we expect that Ascension will be mildly cash flow positive, but will be $1 to $1.2 million dilutive before tax from an earnings perspective due to non-cash amortization and the timing of revenue recognition related to Chapter 7 filings.

Tuning to expenses, our total operating expenses for the fourth quarter of 2006 were $48.2 million compared with $38 million in the same period last year. Our operating expenses in the fourth quarter of 2006 included stock-based compensation expense of approximately $1.3 million, operating expenses of $3.9 million for Ascension which is a fee-based business, and $500,000 in costs related to our consideration of strategic alternatives.

Excluding these items, our operating expenses as a percentage of collections were 45% in the fourth quarter of 2006 compared to 46% in the fourth quarter of last year, and 50% in the third quarter of 2006. Note, however, that the decrease in the percentage quarter-over-quarter can be attributed mostly to the increase in sales collections which have a lower cost to collect than other channels.

Our legal expenses as a percentage of collections from our legal channel were 45.5% in the fourth quarter of 2006 compared to 41.1% in the fourth quarter of 2005. This increase relates specifically to the expansion of our newer initiatives within the legal channel.

As Brandon discussed in detail, the significant portion of the cost associated with our new strategies are incurred upfront. As we continue to ramp up these initiatives, we would expect this ratio to remain higher in 2007 than it has historically and then it's expected to decline over time to a normalized level.

However, during periods when we are ramping up these strategies, these costs could increase. Our commissions to the third party collection agencies as a percentage of collections from those agencies remained consistent at 37% in the fourth quarter of 2006 compared to 37% in the same period in 2005.

Our total interest expense was $9 million in the fourth-quarter of 2006 compared to $7.8 million in the same period last year. The contingent interest component of interest expense was $5.8 million in the fourth quarter of 2006 compared to $4.6 million in the same period last year.

The increase in interest expense year-over-year is primarily related to the increase in contingent interest resulting from the large sale of accounts discussed earlier. Approximately $1.6 million in contingent interest was the result of the additional $3.4 million in zero basis revenue resulting from the sale.

Going forward as it relates to stated interest expense, we expect to realize some improvement in our weighted average interest rate. The stated rate on our previous secured credit facility, which we paid off at the end of 2006, was prime plus 3% or 11.25% at year end.

The stated rate on our line of credit is either prime or LIBOR plus a spread between 1.75% and 2.25% depending on our leverage levels. At year end, our weighted average interest rate on our line of credit was 7.6%.

In 2007, we expect contingent interest expense to be approximately 50 to 55% of 2006 levels. However, we caution this is entirely dependent upon collection levels achieved on those portfolios, financed under our previous credit facility.

Our tax expense in the quarter was $4.6 million. Our effective tax rate was 40.8% compared to 40% in the prior year. This rate is in line with the 40 to 41% range we expect in the future. Our fully diluted earnings per share were $0.28 in the fourth quarter of 2006 compared to $0.32 for the same period last year.

There were several items that impacted EPS during the quarter. Increasing EPS was the positive impact of the zero basis revenue from the large sale of older accounts offset by additional contingent interest which together increased EPS by approximately $0.05.

Decreasing EPS was the impact of expensing stock options by $0.03, the cost of evaluating strategic alternatives by $0.01 and the upfront costs associated with the new initiatives in our legal channel.

Our adjusted EBITDA was $51.2 million in the fourth quarter of 2006, which reflects net income before interest, taxes, depreciation and amortization, stock-based compensation, and portfolio amortization. This was up 36% compared to the $37.6 million in the fourth quarter of 2005. We continue to believe that this metric demonstrates our ability to profitably liquidate portfolio and generate strong cash flows.

Before we open up the call for questions, I would like to turn the call over to Brandon for some additional remarks. Brandon?

Thanks Paul. We view 2007 as the second year in a two-year period of investment and transition for Encore Capital. As we've discussed previously, we believe that the distressed consumer debt industry has undergone significant changes that will require a fundamental shift in operating strategies to effectively compete in the future. We believe we identified these changes in our industry at a very early point and now have a good headstart in developing the strategies that will lead to strong growth and profitability in the coming years.

The most significant issue facing us in 2007 is the diminishing contribution from older portfolios that carry high multiples as they approach their complete liquidation. Within our collection mix, they are being replaced with collections from portfolios purchased in the past three years when pricing became elevated, and as a result these portfolios carry lower multiples. This has a pronounced effect on our reported revenue. Even though we expect overall collections to increase in 2007, the revenue as a percentage of collections will be lower.

In addition, we continue to be in the relatively early stages in the development of the new initiatives we discussed on today's call. While we expect to see increasing production from these initiatives, we will still incur elevated expense levels until the strategies reach a more steady state.

The combination of lower reported revenue and higher expense levels are likely to have a negative impact on our earnings per share. However, we do expect our cash generation to remain strong as our adjusted EBITDA should continue to increase in 2007.

While 2007 will be challenging to the bottom line, we are confident that the steps we have taken will provide a strong foundation for future growth. This confidence is based on the encouraging results we have seen from our major investments to date.

The Jefferson Capital purchase continues to outperform our initial expectations as evidenced by the fact that the multiple assigned to our 2005 purchases, which was larger than Jefferson Capital portfolio, now stands at 2.5 when they were originally put on the books at 2.2.

We've seen an acceleration in the volume of healthcare receivable that we're evaluating for purchase and this area should make an increasingly meaningful contribution in 2007 and beyond. Our India team has proven itself and over time will allow us to reduce the cost per dollar collected and expand into other asset classes.

And the incremental collections from our new initiative in the legal channel have already allowed us to raise some IRRs and lead us to believe that we should significantly improve liquidation of certain accounts in our portfolio.

In order to provide our stockholders and the investment immunity with more context around some of the initiatives we put in place and our business in general, we expect to file an 8K and post a presentation on our website within the next several days, which summarizes the excellent value that we see in the company. This presentation will provide additional insight into our strategic vision.

In summary, we continue to grow our business and operate with a long-term perspective. We are optimistic that we can provide more evidence of this success of our new initiatives as we move through 2007 and demonstrate that we are well positioned to create additional value for our stockholders in the years to come.

We'll now be happy to answer any questions you may have. However, I must qualify that by saying we have already provided the extent of information regarding the review of the strategic alternatives that we can discuss. Therefore, we cannot engage in further discussions regarding the strategic alternatives process in the Q&A session.

Operator, we are now ready for the first question.

Thank you. We will now begin the question and answer session. [OPERATOR INSTRUCTIONS]

And our first question is from Dan Fannon with Jefferies & Co. Place go ahead.

Good afternoon, and thanks for taking my questions. I guess I want some more clarity on what you guys are talking about for 2007. You made several comments, the first of which is that your collection should be significantly higher in '07 versus '06, and then you obviously commented that your expenses will also be significantly higher and then you mentioned -- you quantified the legal component of that. I am wondering the $10 million higher in cash expenses, I think, that you said, is that something that we should see -- that we've already seen come -- start to build in the fourth quarter? Is that something we should continue to see in the first and second quarter of '07?

So you have seen the growth throughout the year of those costs and not to the levels that we discussed in today's call. And so I think what we are trying to say is that that building will continue into 2007, but it has been part of the strategy and part of the cost structure of the company throughout most of 2006.

So an additional $10 million still needs to come into the -- be expensed in '07?

That's correct, although the expense, Dan, comes with placements of accounts through the channel. So there is a correlation between the accounts that go in the channel in that expense. That number could be higher or lower based on how much we put through the channel, and -- but it is not just a $10 million number, it's tied to units of accounts that go through the channel.

Okay, and the collection number, is it -- is there anyway that you -- I mean, you quantified the legal component on the cost side. I mean, is there any way you can give us a little bit of color as to the magnitude of collections increase you think you could see in '07?

Yeah, we -- we generally don't give guidance. We thought it was important to show where we are making areas of investment, the potential magnitude. I think our purchase in the fourth quarter give you a sense of what we believe we are going to be able to do on the purchasing side, but we are not giving any specific guidance to what we think collection growth will be next year.

So the 4Q number is something that -- that level of purchasing is something you think is a base rate as you look into '07?

I'm not sure I'd use the word base rate. I think it's something that -- it certainly shows that we've been able to, as we've gotten more comfort with the returns from the strategy started earlier in the year, we are able to accelerate buying in the end of the fourth quarter. It is all going to be a function of what portfolio comes in the market, and what we are competing against, what happens with pricing. I think the general understanding is I think we believe that we are less constrained to buy today than we were early in 2006.

Okay. And then just taking your overall outlook for '07, and then also factoring in declining interest expense, I mean, is it -- do you think that you could earn less in '07 on an earnings basis than you did in '06?

I think that's certainly a possibility. Again, if that were to happen, that would be us continuing to invest in these strategies, which as we discussed earlier have costs well in advance of revenue.

Okay. I'll get back in the queue with other questions. Thank you.

Yes.

Our next question is from Mark Hughes with SunTrust. Please go ahead.

Thank you very much. You had commented that the collections would be higher, but your revenue recognition would be lower. And then also later you referred to the combination of lower revenue and higher expenses. Is that to say that the revenue ought to be down year-over-year?

No, that's just saying that if you think about our revenue recognition --

All right.

-- it's the -- I am sorry, Mark.

Yeah, I got that. I think I understand that that you were just -- you were pointing out that the collections would be up but your revenue recognition would be lower, but you are not necessarily saying revenue will be down year-over-year.

We are not -- we're saying revenue as a percentage of collections will be down.

Okay, I understand. And then is it possible to share the amortization breakout between sales and the collections in the quarter, collections from your other channels?

So we treat all proceeds as collections, and so there is no -- we don't have a different amortization rate or revenue recognition rate. They get loaded into the curves as collections, and float through the waterfall that way. So there is not a different accounting.

I understand. And then in terms of the legal channel, just kind of describe how you -- how much of the legal work will you be doing in-house with your own staff versus how much will be done with partners or on an outsourced basis? And then how does the compensation to those partners generally work in terms of upfront spending with them versus success based missions? Could you kind of walk us through that?

Sure. So right now, 100% of our collections are done through partnerships with external law firms. We don't do any work internally although we have a team of people that manage those law firms, and it's our own network that we've developed over time.

Essentially, the costs are there is a -- there are costs to file with the court system, that are the costs we referred to earlier in the call. So the costs we are describing are kind of out-of-pocket costs that are pass-throughs from the law firms directly to us to initiate litigation through the court system.

Then as the collection process continues, we do pay a contingency fee based on the level of collections that we get through the channel. But there are costs that are incurred that aren't paid to the law firms, they are passed through to the court system.

Right. Anyway you could breakout the -- kind of, the proportion which is upfront versus success based?

So on the numbers we gave earlier were all upfront costs.

Right.

And so I think if you -- well, you can't back into it, can you? So the number is about 30% from a contingency fee.

Right.

So you can add to that the dollars we collect through the legal channel. You get upfront costs and then the cost per dollar collected is about 30% on top of that.

Got you. Thank you.

Sure.

Our next question is from Jeff Nevins with First Analysis Corporation. Please go ahead.

Good afternoon, guys. My -- I guess my question is just on the outlook and I am just trying to maybe summarize it here if this is accurate. And again I know you are not giving guidance, but it sound like gross collections are up, revenue may be up, but the revenue recognition rate is going to be little bit lower. But earnings could, in fact, be down just due to dramatically higher expenses, and is the -- is that accurate, in terms of just kind of summarizing some of the thoughts?

I think it's generally accurate except the last part. I would say is the impact of earnings may be kind of disproportionately affected by investments we are making that are -- that are expenses, but will ultimately yield collections in the future.

Okay. The court cost thing, had you not deferred court costs in the past or capitalized them?

We have and we continue to do so.

Okay.

So about half get capitalized and half get expensed.

And so is it -- is it fair to say there is an additional, someone had said $10, is it $10 million in incremental Opex in '07, and most of that is related to the court costs?

Yes.

Okay. What's your -- I think, what's your broader -- I mean, I guess you kind of said it already, but you are not alone in feeling the pricing is high, and kind of what you do here? And I know you went through this sort of strategic alternative review, but how long do you think this could really take? I mean, it is possible that the pricing environment may be bad for two years, and then maybe '08 is a transition year as well.

So what is -- what's your confidence that things are going to turn up a little bit better and these liquidation strategies will really take hold? Is that what we are kind of hanging our hat on to make '08 a coming-out-of-a-transition year?

I don't know. So, we've built the business around the assumption pricing won't come down.

Okay.

And so we have made these investments under the assumption that pricing won't down. If it comes down, great. That will improve our returns even that much more. We just think that to continue to kind of do what we are doing before in an environment where pricing has gone up, won't yield the returns our stockholders are looking for and we needed to make these investments to reach those returns. So we feel very comfortable that the investments we are making this year will yield the positive results in 2008.

Okay. Just one final question and I'll hop off. Paul, on interest expense, I know you gave the number on contingent interest, higher debt levels, but obviously a lower blended rate. So are we still coming out at maybe a similar level to '06 just in terms of the credit facility interest rate excluding the contingent stuff.

Excluding the contingent interest, the rate should be relatively constant. Obviously it will depend upon what happens with rates in the market in general but our rate is either prime or floating or LIBOR and 175 to 225 basis points. So it would all be dependent on the market. Since we do not have any principle left on the secured credit facility, which had a higher rate, the rate will average down, although we didn't have a significant amount outstanding under that facility throughout the year. So it didn't have a large impact on our rate during the year.

Okay. One other quick -- you know, since you are announcing the stock buyback, is this something that you want to buy the stock back as soon as you -- the window opens or is this just something over the next year that you are going to take advantage of?

We had -- the Board has appointed a repurchase committee that will look at, over time, the demands on capital for the company, and make the appropriate decisions. I think what -- what we announced, we are comfortable with our business plan and the $50 million buyback. So we'll look at the demands on capital, but we feel quite comfortable we can accomplish our business goals and the buyback in the window.

Okay. Thank you.

Our next question comes for Justin Hughes with Philadelphia Financial. Please go ahead.

Good afternoon. I was just wondering, you did a good job breaking out for us the impact of the portfolio sales on EPS. Could you give us what that added to revenue so we get, kind of, the core yields in the quarter?

It's the same amount on revenues, $3.4 million in revenues. So it additional [BBA] revenue of 3.4.

$3.4 million in revenue.

Okay. And it sounds like Ascension had some losses in the quarter and you are saying that revenues will likely be down next year. When could that business turn back to profitability?

Well, I think what we are saying is actually from a cash flow basis, it is profitable. The challenge with Ascension is with placement. There is a lag in reported revenue. So we believe that the company is going to be cash flow positive in 2007, and we believe with the investments in the two new gentlemen we brought on should allow us to grow the organization throughout the year. But right now it is better than breakeven on a cash basis.

Keep in mind that a significant portion of Ascension's expenses are non-cash amortization charges associated with the purchase accounting that we did when we acquired Ascension.

Okay. Were there any portfolio impairments in the quarter?

Yes, it was a net of $700,000 and change.

$700,000. Okay, and the last question, the -- you had a really good quarter for purchases, almost $64 million. What did you put those on as a collection multiple?

Well, that goes in a specific multiple, that multiple for '06 continues to be at 2.2.

2.2, thank you.

Our next question is from Jaime Lester with Soundpost Partners. Please go ahead.

Hi, guys. I have a few questions. The first is when you are buying -- I guess, what sort of an ROE do you expect when you're buying stuff at 2.2 times collections?

We have never disclosed the IRR we're looking or the ROE on portfolio purchasing. We do have a hurdle rate, but we've never disclosed it.

Yeah.

And keep in mind that we put them on the books initially at a 2.2. Over time as the portfolio seasons we've typically increased that multiple. So as we've shared with you in the past, that is that the initial multiple we placed accounts on, overtime it has increased.

Okay. If I back out the zero basis sales at $14 million, I am getting to an amortization of about 19% for the fourth quarter. Is that accurate or is that being distorted somehow?

You could only back up 3.4. So the sales -- the only --- the zero basis ---

Okay.

-- component of that sale was only $3.4 million. The rest of it was unrelated to zero basis accounts.

Okay. And then on the stock buyback, I mean, it's obviously great to see. I just wonder if you've considered -- it seems like your stock trade is about a million bucks a day assuming your window for repurchasing is some fraction of trading days. To get to $50 million, you're going to have to buyback 25% of the shares that trade everyday for a year. It seems pretty aggressive, I mean, it's obviously good in some ways, but not good in some other ways. Have you thought about the implications of that? Are there large holders that you've approached or who have approached you to buy their stakes?

So what I would say is the Board has considered treading volumes and other factors and then set the limit, and we recognize there are some restrictions in the process.

Okay, let me rephrase that. Are there any -- is there any timeframe that you'd expect this buyback to be associated with?

No.

So it could go a year, it could go six months, it could go five years?

It could.

Okay. And then what are the -- I guess, give me a sense for how you think about buying back the stock versus the converts; what the -- is the goal to try and buyback both or is there an internal hurdle rate calculation or an ROI type investment consideration to buy back one versus the other?

I think the goal is to have the flexibility to do both and both will trade in certain levels and based on what levels they trade out, we'll make the decision on where to deploy the capital.

So the convert at 90 and the stock at 10? Any preference?

I'm sure there is one, but not one I'd go through on the call.

Okay. And then final question, the guiding to increase the EBITDA in '07, you guys put out a number, I think, 177 and then there is probably 1.5 of excess cost in there. I mean, I guess, is that 177 the number you're saying will be higher in '07 or is it the EBITDA after amortization expense in portfolio?

It's the 177, which includes the amortization. So the number that's reported in the press release, that 177, we expect it to be higher than that number. That number takes into account though the amounts that have been applied to the basis of the portfolio.

But 177 does, right?

Yes.

Right. So that's the basis on what you are guiding. If X that amount, X the amount you are applying to the basis, do you still expect that EBITDA to be -- to increase year-over-year --?

[inaudible].

-- i.e. that 177 less the amount applied to the basis, should that increase year-over-year?

I think that's a tough question to answer because again as we outperform our portfolio, we'll amortize more. So I think we want to stick to this calculation.

Okay. And then just on the interest expense, I'm getting to about $24 million given the current draw on the revolver. That's obviously if you buy back debt or shares that the revolver balance will go up. Assuming the 100 million, is that $24 million good roughly?

The $24 million includes the contingent interest expense as well?

Yes, exactly.

So I think what Paul had said earlier was the interest rate related to the couple of hundred million we have outstanding right now will -- you can probably calculate that and contingent interest will be a function of how much we collect in the portfolio that was funded under the secured previous lender, that's -- that number will move over the year.

Right, but just the guidance I think was 50 to 55% down, which would bring it to about 10 million contingent blended interest rate. You got a 100 at sort of 3 and seven-eighths and then a 100 at 8 and then a few million of amortization of fees, right? Is that generally in the ballpark?

That's generally correct.

Correct.

Okay, all right, thanks guys.

Sure.

Sure.

And our next question is from Brian Gonick with Corsair Capital. Please go ahead.

There is $10 million of incremental expense that you've talked about on this legal strategy. How much revenue are you going to have that's incremental revenues, what sort of a net effect is that?

As we said earlier, the incremental revenue will be a function of the timing of the accounts across and the pools that we placed them in. So it's really hard for us to give you specific number, Brian.

How about a range, sort of on the low-end?

So over the life, we expect there to be -- let's go back to the -- over the life, we expect there to be $80 million of additional revenue that will come as a result of this strategy. Giving you the exact timing is very hard to do and unfortunately I won't -- I can't give you on the call.

Okay. Previously you've talked about sort of strategies that were kind of R&D expense, and you quantified it previously, I think, like a little more than $2 million in a quarter. Is that sort of ongoing as well?

So I think what we would say now is a lot of that R&D expense is now production expense.

Okay. And that's what's going to drive our collection multiples from 2.2 to 2.5?

That's what will drive them upward.

Upward, okay.

And Brian to your question I think if you go to the 2004 vintage and the 2005 vintage, they're now at 2.6 and at 2.5 multiple. So -- I mean, you've seen that happen over the last few years. We would expect to see an upward trend, I'm not saying to the exact same numbers, but we expect these strategies will allow us to maintain those higher multiples compared where we booked them.

Right. And stock comp in '07 should be around $4.5 million maybe, does that sound right?

It will continue to decline in year-over-year, but it's not going to drop that much more than it was in 2006. So I would expect it to be just at around 2006 levels, maybe slightly below.

So 5.5 millionish, and correct if I'm wrong, but these are related to options that are all underwater, aren't they?

That's correct.

That's correct.

Thanks, so it's -- okay. All right, thanks.

Our next question is from Richard Eckert with Roth Capital Partners. Please go ahead.

Now, as regarding the contingent interest, is it possible to identify the cost basis of the portfolio still outstanding under the facility or is that something you prefer not to disclose?

We do disclose the unamortized basis of the pools funded in the years where we had the facility and so that'll give you a sense of how much is left to be amortized. We've certainly collected back many multiples of the cost. So if you just look at the multiples, you'll see how much we've collected, but we do disclose the unamortized portion or the unamortized basis by the years where we bought those portfolios. That'll give you a good proxy.

Okay. I was just trying to get a feel for how much longer we'd continue to see this line item because I think the original guidance was that it would stretch through the end of 2007. Would you expect to see a material amount under contingent interest beyond that?

Well, that will be a -- I think that'll be a good news problem because that would mean we've collected more than we thought. So in our original guidance, we didn't think we'd collect as much as we have and so the good news for our stockholders is that we've been able to collect more than our original expectation. And so if it is there, we should all be glad.

Okay, thank you.

Our next question is a follow-up question from Mark Hughes with SunTrust. Please go ahead.

Thank you very much. The proportion of your collections from the legal channel, what is the upper bound, I mean, given the portfolio that you got in hand now? What percentage of your receivables are suitable for legal do you think?

I think as evidenced by what we did this year, we continue to expand definition of accounts that are eligible. So, what I would say is that we would expect the contribution of legal channel to increase in the near term.

Got you. And then looking at the contribution in the quarter from the account sales, it was what about an incremental 12, $13 million. $3.4 million of the revenue impact from sales was zero basis, but the net impact was, I think, maybe $1.1 million. That seems like a low contribution from the sales. Is there something else I should think about when I look at that?

The net contribution was about $1.8 million.

Okay.

The zero basis revenue was 3.4, the contingent interest associated with that zero basis is 1.6 for a net of 1.8. And the rest of those sales dollars were just reflected in as collections, and are put in our curves and impact IRRs, and that's how it is recorded just like any other collection would be.

Got you. So the effect to earnings in the quarter was more a function of the [inaudible] necessarily with the $3.4 million zero basis less the contingent fee got you to the 1.8?

That's right.

Right, okay. And then any additional sales beyond that had an undetermined -- we can make our own assumptions about the contribution?

Correct. They'd be reflected in the currents and as we do our analysis of current period collections and estimated future collections, we would set IRRs for the respective curves, and so it would just get reflected in those curves and may or may not effect the IRRs of those curves.

Right. Thank you.

Our next question is another follow-up from Jaime Lester with Soundpost Partners. Please go ahead.

Yes, just a quick follow-up. The presentation you guys are planning on posting, I guess there are two questions. One is, given that you said that you think that the future of the company is so bright and that it's bright enough you don't think it should be sold now, is that indication you guys should be expected to be buying stock in the open market when you're allowed to?

Well, rather than answer that directly, I think people's decision to buy or sell stock are individual ones and I wouldn't comment on them.

Okay, that's not as reassuring as it could have been. And my second question is the presentation, I guess why not have the presentation ready for this earnings call? Is it just a timing issue or do you think it's going to be a meaningfully different, I guess, base of discussion or form of discussion than the earnings are?

So it is ready --

It just seems little bit 8 --

It is ready. It is just long and so rather than go through a 30-plus page presentation on the call, we thought we'd put that out there for people to look at and ask us questions.

Okay, is there going to be a call associated with that presentation once it's released?

There will not be. But we'll certainly -- we certainly have Ren Zamora's number, who is in charge of our Investor Relations. You know me or Paul, so any of us can answer questions.

Okay.

We will be available.

Yes, okay, good. Thanks guys and I'm looking forward to seeing it.

Sure.

Management, at this time there are no further questions. I'd like to turn the conference back to you for any additional remarks.

I want to thank everybody for joining us today and look forward to speaking with you on our next earnings call. Take care.

Thank you ladies and gentlemen. This concludes today's teleconference. Thank you for participating. You may now disconnect.