PRA Group Inc (PRAA) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2005 Portfolio Recovery Associates, Inc. earnings conference call. We will conduct a question and answer session towards the end of this conference. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Jim Fike. Please proceed, sir.

Good afternoon. Thank you for joining Portfolio Recovery Associates third quarter 2005 earnings call. Speaking to you, as usual, will be Steve Fredrickson, our Chairman, President and CEO, and Kevin Stevenson, our Chief Financial and Administrative Officer. Steve and Kevin will begin with prepared comments, and then follow up with a question and answer period. Afterwards, Steve will wrap up the call with some final thoughts.

Before we begin, I would like everyone to please take note of our safe harbor language. Statements on this call which are not historical, including Portfolio Recovery Associates, our management's intentions, hopes, beliefs, expectation, representation, projection, plans, or predictions of the future, including with respect to the future portfolio's performance, opportunities, future space and staffing requirements, future productivity of collectors, expansion of the RDS Alatax, IGS Nevada, and Anchor receivables management businesses, and future contribution of the RDS Alatax, IGS and Anchor businesses to earnings, are forward-looking statements. These statements are based upon management’s beliefs, assumptions, and expectations of the Company's future operations, and economic performance, taking into account currently available information. These statements are not statements of historical fact.

Forward-looking statements involve risks and uncertainty, some of which are not currently known to us. Actual events or results may differ from those expressed or implied in any such forward-looking statements, as a result of various factors, including the risk factors and other risks that are described, from time to time, in the Company's filings with the Securities and Exchange Commission, including but not limited to, its registration statements on form S3, its annual reports on form 10K, its quarterly reports on form 10Q, and its current reports on form AK filed with the Securities and Exchange Commission, and available through the Company's website, which contain a more detail discussion of the Company's business, including risks and uncertainties that may affect future results.

Due to such uncertainties and risks, you are cautioned not to place undue reliance on any forward-looking statements which speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein, to reflect any change in the Company's expectation with regard there to, or to reflect any change in events, conditions or circumstances on which any such forward-looking statements are based, in whole or in part. Now here is Steve Fredrickson, our Chief Executive Officer.

Thanks Jim. And thank all of you for attending Portfolio Recovery Associates third quarter 2005 earnings call. On today's call, I will cover the Company's results broadly, and discuss the strategy behind the numbers. Kevin will then take you through the financial results in detail. After our prepared comments, we'll open up the call to Q&A.

Q3 was a strong quarter for PRA across the board. We had solid debt purchases, new record productivity, and strong cash production. We also made progress with our fee for service businesses. Please note, this quarter represents our first with at least partial results from our new RDS Alatax business, which was acquired earlier during in the quarter. Alatax operates nationally under the RDS name. Alatax is the local brand. So, I will be referring to the business from here forward as RDS.

Our financial highlights are as follows: net income drew substantially in the quarter, increasing by 34% to $9.3 million. Per share earnings rose to $0.58 on a diluted basis. Cash collections on owned portfolios increased 22% to $47.5 million, with a 27% increase in cash receipts to $51 million. Cash receipts comprise cash collections on our portfolios, plus commissions generated by our fee for service businesses Anchor, IGS, and RDS. This drove a 33% increase in revenue, to $37.5 million.

I'll begin my detailed discussion by looking at our portfolio acquisitions in the quarter, which totaled $16.5 million. We continue to operate in a market that remains very competitive from a pricing perspective. In our opinion, pricing continues to be high, and there remains a great deal of competition, at times somewhat irrational. While deal flow was up nicely over the prior year, it was down when compared with both Q1 and Q2 of this year.

In all, we acquired 29 pools from 13 different sellers including several new relationships for us. About 90% of our third quarter purchase volume, in terms of dollars invested, was in Visa Mastercard, and private label credit card asset classes. Included in the Visa MasterCard category were several pools of bankrupt debt. We did purchase pools of consumer solvent loans, as well as small amounts of telecom, auto deficiency, medical and other accounts. Due to intense competition, we found far fewer compelling purchase opportunities in the non-credit card arena this quarter, despite a great deal of volume in the non-credit card asset classes.

Our bankruptcy portfolio continues to perform as anticipated, and we acquired bankrupt accounts throughout the quarter. Looking head, we do believe the recent changes in bankruptcy legislation will temporarily disrupt historical bankruptcy collection curves. This will make it more difficult to accurately price bankrupt accounts created after the bankruptcy law changes took place on October 17. We will take this into consideration as we make future investments in this sector.

We commented during our last conference call, that we had yet to see much impact from the then pending changes in bankruptcy law on our existing portfolios. Generally, our experience is, the further away from charge off an account is, the more bankruptcy-proof it tends to be. And while this continues to hold true, our steady to slightly declining bankruptcy rates of April, May, June, and July, saw about a 20% spike in August, followed by a further 40% spike in September.

Although our data is not yet complete, filings increased again substantially in the days prior to October 17. This, we surmise, was driven by debtors moving quickly to file for bankruptcy ahead of the regulatory changes, as well as increased advertising from attorneys. We anticipate our observed filing rate will decline dramatically to historically normal rates, now that October 17 has passed. At this point, we do not anticipate that the temporary spike in filings will materially affect the anticipated liquidation of our portfolios of purchased debt, although we continue to analyze the filings we have received.

Much like our buying, owned portfolio cash collection results were also strong during the quarter. Portfolio Recovery Associates collected $47.5 million in the third quarter, up from $38.8 million a year earlier. Recoveries were strong across our portfolios, and they came without regard to date of purchase. As you know, we track productivity in terms of recoveries per hour paid, the core metric that measures the average amount of cash each collector brings in. This metric finished just below its record at $136.18 for year to date 2005. This compares with $117.59 for all of 2004.

While our employees were extremely productive, especially considering the seasonal slowness we typically experience in Q3, our staffing fell behind targeted levels, as unexpectedly high turnover was not offset quickly enough by new hires. We finished the quarter at an owned portfolio collector head count of 630, versus head count of 679 at the end of Q2. Because of this decline, even with strong productivity, we were not able to achieve the kind of record cash collections we would have preferred.

However, let me put this in context. First, we believe the turnover we experienced in Q3 was transitory. Thus far in October, we are experiencing normal turnover levels. Second, and perhaps more important, during this period, we did a good job retaining our most productive employees. Most of the unusual turnover in the third quarter involved employees who had performance or workplace behavior issues, such as attendance problems.

More than 90% of the collection employees who quit during Q3, as opposed to those we fired, had formal corrective actions taken against them in the prior 90 days. They saw the handwriting on the wall. In many cases, rather than work to improve performance, they changed jobs. The only way to build a strong, productive work force over time is by continuously maintaining high quality. Turnover of poor performers is required over time, and it is not something we will shy away from.

Going forward, we have accelerated hiring in Q4, and are generally pleased with the quality of applicants we are finding. We believe the Q3 staffing issue should be resolved during the current quarter, and that we will be well prepared for the strong seasonal collection environment we have seen historically in the first two quarters of the year.

Let's turn now to our fee for service businesses, IGS Nevada, Anchor, and our newest business, RDS. During the third quarter, as we conducted our last quarter's call, IGS and Anchor made combined progress on the top line, slightly increasing revenue from Q2, 2005. We believe this trend of improving revenue will continue in Q4.

IGS continued its strategy of quiet diversification. It signed numerous new clients, including several larger national lenders, and increased placements for many clients, both existing and new. Placements from our larger legacy clients remained at historically reduced levels. We expect aggregate new placements to trend up from here.

In addition, we continue to enjoy marketing success, and feel we will be able to continue to broaden IGS's client base from here. Anchor has continued to attract new clients as well, and we expect increased placements in Q4 versus Q3. Like IGS, we have recently intensified our marketing efforts at Anchor, and look for those activities to help drive future revenue growth.

Finally, we began the integration of the RDS business, and have found that process better than anticipated, to date. The RDS team has a deep sales culture, and is working on traditional client prospects. In addition, it is working with our other businesses on potential cross-selling opportunities.

Commission revenue from our fee businesses in the third quarter increased to $3.5 million, from $1.2 million in the year ago period. This figure includes RDS revenue from August and September 2005.

Before I turn the call over to Kevin, I'd like to briefly discuss two separate press releases we issued earlier today. To begin, we announced the appointment of Penny Kyle to our Board of Directors. Penny, who is President of Radford University, brings to PRA considerable experience in corporate America and in leadership positions with growing organizations. She also has substantial experience working within state government. Penny is a great addition to our Board, and I'm very pleased to welcome her. Penny is replacing Peter Cohen, whose business acumen, insights, and participation have been of great value to PRA over the years. All of us at PRA wish Peter the very best in his future endeavors.

Lastly, we announced the promotion of Kevin Stevenson to the newly created position of Chief Administrative Officer. Kevin will remain CFO in addition to his new duties. So he'll continue to participate in our quarterly calls, and remain a primary contact for all of you in the investment community. Kevin's promotion is well deserved, and I look forward to the great energy and talent he will bring to this newly expanded position. Now let me turn the call over to PRA's Chief Financial and Administrative Officer, and take you through the financials. Kevin?

Thank you, Steve. As Steve said the third quarter of 2005 was another strong quarter for Portfolio Recovery Associates. Let me run through the financial results quickly. Net income in the third quarter grew 34%, to $9.3 million from the year ago period. Our quarterly net income compares with the actual net income of $7 million in the third quarter of 2004. Total revenue for the quarter was $37.5 million, which represents growth of 33% from the same period a year ago.

Breaking our revenue down into three components, in the third quarter once again, the majority of total revenue or $34 million, came from income recognized by the finance receivables. This is revenue generated by our own debt portfolios. Income in finance receivables is derived from the $47.5 million in cash collections we recorded during the quarter, which represents a 22% increase over Q3 of 2004. These cash collections were reduced by an amortization rate of 28.4%. Our amortization rate now stands at 30.6% for the first nine months of 2005, compared with 30.9% in the first nine months of 2004. We incurred no reserve charges during the quarter. In aggregate, our cash collection results for Q3 were ahead of our accounting projections.

During the third quarter, cash collected on fully amortized pools was $7.5 million, up from $7.4 million last quarter and $6 million in Q3 of 2004. In referring to fully amortized pools, I mean purchase pools with no remaining basis on their balance sheet, zero basis assets. Eliminating those pools from our amortization calculation, gives us a core amortization rate for Q3 of 33.8%. Our core amortization rate now stands at 36.1% for the first nine months of 2005, compared with 36.3% in the first nine months of 2004.

During the quarter, commissions and fees generated by fee for service businesses Anchor, IGS and RDS totaled $3.5 million. This compared with $1.2 million in the year ago quarter. Please note, this quarter's results include two months of RDS operations, while last year's comparable period, do not include any RDS or IGS results. The third component of total revenue, cash sales of finance receivables, was zero for the quarter. During the quarter, we retained all of our purchases for our internal collection efforts.

As Steve discussed, recoveries per hour paid for the first nine months of 2005, was a strong $136.18, just below our record of $137.02 achieved in the year-to-date period that ended with Q2. This strong Q3 performance compares with $117.59 for all of 2004. If you back out legal cash collections, the comparison is $91.79 for year-to-date 2005 versus $82.06 for all of 2004. This great performance was driven by our excellent collections staff, state-of-the-art systems, and enhanced portfolio management, as well as portfolio mix.

We continue to focus considerable energy on expense control during the quarter. In Q3, operating expenses totaled 59.8% of revenue, up slightly from Q2, and now at 59.5% for the first nine month of 2005. For full year 2004, the ratio is 60%. Operating expense to cash receipts is another important ratio to discuss, because variations in purchase price amortization rate tend to move around our revenue ratios somewhat. Operating expenses as a function of cash receipts excluding sales, has shown solid improvement over time, narrowing steadily from 54% in 1999, to 43% in 2004. This ratio is 44% for Q3, and stands at 42.4% for the first nine months of 2005.

Our legal collections increased to 34.8% of total cash collections in Q3 of 2005, from 32.2% in Q2, and from 30.6% in the third quarter of 2004. This is due to our maturing pipeline of legal accounts, a slightly extent of legal collections strategy, and seasonal trends. For year-to-date 2005, legal collections stand at 32.6% of cash collections versus 29.3% for full year 2004.

Our balance sheet remains extremely strong, providing us with substantial flexibility for future opportunities. Cash balances were $67.4 million at the end of the third quarter, down less than 2% from our level at the end of June of 2005, despite our Q3 portfolio purchases of $16.5 million and our acquisition of the RDS business.

Rounding out the balance sheet, we had $117.2 million in finance receivables, 9.1 million in property, equipment and other assets, $18.3 million in good will, and $9.8 million in intangible assets, all related to the IGS and RDS acquisitions. We are now amortizing approximately $250,000 per month in intangibles. We have less than $2 million of long-term debt and obligations under capital leases, with total liabilities, both long and short term, of $37.3 million. At quarter's end, shareholders equity totaled $184.5 million. We have no amounts outstanding on our $25 million line of credit.

I'm extremely pleased with our performance in Q3. Our integration of the accounting functions of RDS is going well and is ahead of schedule. While it's doubtful we can have RDS completely compliant under SOX for 04 by year-end, we are moving aggressively in that direction. The RDS team is outstanding, and has been a real pleasure to work with. I'm confident we have a bright future with the RDS business.

As we mentioned previously, other two fee businesses, Anchor and IGS, did move forward from the revenue levels of Q2, albeit modestly. Driven by a whole new focus on marketing, we anticipate we can continue to expand our client base, increase placements, and grow revenue at both companies over the long run.

Finally, a quick comment on the owned portfolio business. Buying has been strong in 2005. In fact, over the past 12 months we have deployed $79.8 million, providing us with significant raw material for the years ahead. This has been achieved in a very tough pricing environment that has made our focus on underwriting -- on the underwriting of each account and each pool we price more important than ever. Our track record for understanding the long-term liquidity of the pools we acquire is strong. Only those debt buyers that can accurately underwrite new purchases will prevail in a market like this.

Our collection process, driven by portfolio segmentations, thorough collection strategy, outstanding collectors, and effective attorneys, is wringing more dollars out of every pool than we thought possible. As we become better collector, we become a more effective purchaser, and this is one of the keys to our acquisition business. With that, I’ve completed my prepared comments. I'd like to open the call up to Q&A. Steve and I will both be available to answer your questions. Operator?

You first question comes from the line of Bob Napoli with Piper Jaffray. Please proceed.

Good afternoon and congratulations Kevin.

Thanks Bob.

I would like to get a little bit more into the decline in collectors, and kind of how that -- where that transpired and what effect you think that had on the collections in the quarter. Steve, I think you had suggested that you were back on track with the numbers of collectors and were expecting stronger trends in the fourth quarter. Is that what I heard?

We have really gotten on our recruiting and new class structure, Bob. A report, as of yesterday, had our staffing -- and again this is versus 633 at quarter's end, at 708 as we sat yesterday. So we have really packed our pipeline full, and want to make sure that we don't get caught shorthanded again. It's hard to come up with an exact impact on the quarter, but suffice it to say, with less people in seats collecting, we felt as though it had an impact.

Did you see, in your opinion, on the cash collections front, was there any weakness in the consumer through the quarter versus your expectations due to economic reasons or the hurricane, the bankruptcy act? What are you seeing with the consumer? Is the consumer as solid today as, you think, as a year ago? Has there been some weakness in the consumer?

Remember, Bob, the consumer that we deal with is a consumer that is in financial stress already. So, what you're really asking is, are the stressed consumers more or less stressed, which gets to be trying to determine pretty fine shades of gray. You know, certainly things like the hurricane weren't cash collection enhancers. I think like most everybody, we would cycle out of making calls to the affected hurricane areas for much of the period in question. And so obviously, that had some impact, but you know, again, I think if people are being smart, they're also deploying those collectors in other directions. So it's difficult, again, to get your arms around an exact dollar and cent impact, other than, it's not a collection enhancing event for us.

And the bankruptcies, I mean you said bankruptcies in your file had increased pretty significantly in August, September and, obviously, in October. Have you noticed any effect? Would you expect any effect from that in the fourth quarter?

If you look at the bankruptcy filings per month, you know we bounce around in a fairly tight band, and typically what we see is an increase toward the beginning part of the year, and then a steady decrease as the year goes on. At least that's the pattern that we've typically seen. We saw much the same pattern occurring this year, and after a peak in March, we saw pretty much a steady decline in the number of accounts that had filed through July. That picked up very modestly in August, but then it continued it's pick up in September and picked up a little bit further even through really the first half of October. It looks like we're going to end up, as a result of all the additional bankruptcy that's going on here as a rush to the October 17 date, just in terms of numbers of filings, it looks like we're going to end up with probably two extra months worth of activity of number of accounts filed, which we don't think is going to have a material impact on our collection numbers.

Great, thank you.

Your next question comes from the line of Charles Trafton, America's Growth Capital. Please proceed.

Hi, thanks guys. Did you have any costs associated with the deals -- or with the acquisition this quarter that were embedded in operating expenses? Legal fees, etcetera?

No -- besides the amortization?

Yes, besides the amortization.

No, not significantly.

Okay, and the amortization in the quarter had only two months of amortization as well?

That's correct.

And what did you site as the monthly number now?

It's about $250,000 a month.

So, 750ish a quarter.

And that's total amort?

That's for intangibles, yes.

Okay, just for intangibles. Okay.

The rest would be historical depreciation kind of amounts.

Right, right. Impairments during Q3, did you have any?

No. Had none.

Are you guys party to any forward flows at this point?

I think we have a couple of small ones, yes. I don't have those numbers in front of me.

Okay. Presumably, collections off of BKs will be more difficult in the future and that would translate to lower prices on BKs. Are you going to take a wait-and-see-attitude the next six months or so on buying BKs or do you think you have an edge knowledge wise and you're going to be aggressively buying them?

I would say it's somewhere in between, Charles. We won't check out of market, but I wouldn't characterize our stance as aggressive either. We're going to watch, and wait, and see how results are, versus how we believe the new bankruptcy amendment should impact recoveries. And as we gain confidence that we're modeling the right way, we'll step up again. But we're going to be cautious participants, I guess I'd characterize it, until we get some more history on how the new bankruptcy law is being implemented.

And it sounds like the drop in employment at PRA this quarter was due to the denominator in the net hiring number going up. So -- were you -- people leaving they didn't think would leave? How many people did you hire during the quarter, and were you pleased with that?

Well, we're always hiring during a quarter, and generally, we're hiring significant amounts of people. So you know, it would be just given the size that we're at now, you know we'd certainly be in a typical quarter, and again, this is talking about just our Norfolk folks -- or, I'm sorry, just our own portfolio folks, you know, we're talking about in excess of 100 people. And what happened was that the turnover, or the departure side, got ahead of where our trends had been, number one.

Number two, based on strong productivity through the year, we were running staffing a little bit on the lean side, taking advantage of that productivity, and so, you know, running lean, and then also getting hit with unexpected turnover, you know really caught us during the quarter and made our ability to intelligently recruit, as opposed to just fill seats with anybody, and then get those people through our -- you know, we use the six-week training program, which is a pretty long one. So we do have a little bit of reaction time. We took those actions during the quarter, and as we said, during October thus far, we believe things are back on track, but it took a little bit of the wind out of our sails.

So is it possible that this -- or is it even likely that the record productivity you saw in this quarter was partially boosted by those under performers leaving, and you might not see that in the coming months?

Well, you know at the same time as those people leave, we have also have cubes that are built that are unmanned, and that is not a good productivity event for us either. So I would -- I'd hesitate to characterize a high turnover quarter as one that would necessarily enhance our productivity numbers.

But the net of the collectors going from 679 to 630 was due to the departures, not so much your inability to hire?

Oh yes, absolutely. And you know, part of it was, just we really do manage the company long-term, not conference call to conference call. And as we feel we've got people in our collector work force that need to be weeded out, as I mention in my prepared remarks, that's the action we take. And, you know, if it results in lower than anticipated staffing, and likewise, collections, we'll deal with that. Because it's very critical to maintain the moral and the productivity of a large call center to make sure you've got a high quality work force. And if you let it deteriorate, it can be something that you live with for a long time.

So we feel very strongly that as we get bands of recruits in that just don't match up to our standards, we move them through. And we do see from our numbers that the people that were responsible for the high turnover are really just the short-termers. As you know, we supply the investment community with some work force breakdowns by one year and less than one year. I think Kevin can give you a sneak preview on those stats just so you have a little bit of the feel for where the turnover was.

Yes, I can do that. If you look at the -- if everybody's familiar with the collector by tenure table. It has the one year plus people and the less than one year. One year plus people were about 324 people. The total again of FTEs is about 592. So you can see that the less than one year people is 268. So, it showed a pretty dramatic story there, being that we've actually increased our one year plus people.

Right. So the drop in -- the sequential drop in employment there is not based on your core amortization figures. You're expecting to collect about the same multiple of purchase price in the future as, say, a year ago, and the drop in collectors is not because you are expecting a lower collection environment?

No, no, we felt as though the staffing for the end of last quarter was about where we needed it. We felt we were understaffed during the quarter. And obviously, I just shared with you our current staffing is 708, which we feel is back in line with where we need to be. So the staffing was as much happenstance as anything (inaudible).

Right. No, I'm just saying, the devil's advocate, so to speak, or the bear's advocate, so to speak, argument tomorrow will be, well, they're lowering collections because PRC is going down and collections are going down. But, I think we cleared it up. Thank you.

Charles, one more thing. Just to give you some numbers. You asked what the intangibles were and I said about $750,000 a quarter, but we only had two months of Alatax amortization there. The actual number in the quarter was about 650.

It was 650 of amort of intangibles?

In Q3, right.

Okay, perfect, that's exactly what I needed. Thank you.

Your next question comes from Dan Fannon, with Jefferies. Please proceed.

Thanks guys. When you look at the pricing environment, are you guys optimistic that it might turn more favorable for you in the out years of the coming quarters, or is this something you think is more of a permanent shift in pricing in which you're trying to find a way to operate in now?

Good question. You know, we feel as though in terms of really both supply and demand characteristics that ‘05, latter part of ‘04, you know, it's had some tough statistics shaping up. We've seen sellers in many cases because of delinquency rates be in a situation where they don't need to sell. That's been offset somewhat by retrade volume and also new products coming to market. But there has been some historical product that's been sold that we didn't see in the market and at the same time, I think more so in 04 than 05, we've seen new entrants or at least people with plenty of capital coming into the market. So it's been kind of a squeeze from both sides. We've seen less of that -- it's felt like less of that as the year has worn on. And Q4, from at least a supply side seems to be starting off strongly. So you know, with what’s happened with bankruptcies, with things like the minimum payment increasing, you know, we're interested to see what Q4 and ‘06 brings us in terms of supply.

Is it safe to say that, you know, this quarter might have been impacted from the supply side because you said supply was down sequentially from the previous two quarters was maybe impacted by the closing of the acquisitions with MBNA, Providian, and Metris. A couple are still pending, but some of those maybe people weren't selling as much in the market from a credit card perspective?

You know, it could be. I think as much though, it was overall the industry in pretty reasonable shape from a delinquency standpoint. And you're just seeing some of the on-vacation, summer volume slowdowns that you see in a lot of industries these days. And we anticipate that people are, you know, back at it and looking at a number of developments along with maybe some year-end cleanup selling in Q4.

Okay, and lastly, when we think about this doubling of the minimum payments and how it seems as if that's a benefit for long-term supply, but near term from a collection perspective, I mean, when you look at your typical account that you're trying to collect on, are they still -- do they still have credit cards in their hands? Or are they fully charged off and levered up to where they aren't actually going to be affected necessarily by that because they've been charged off? Or are these -- you know, that debt has already been sold off. Or are they -- do you think they have outstanding credit cards also where they might be affected on a monthly discretionary income basis due to this increase?

Well, there are some percentage of our customers that have access to credit cards. And, you know, we even get some payments in via the credit card channel, but it's tiny. So the customer -- the typical customer that we're calling is not saying, what card can I put it on, my Visa or my MasterCard? Typically, they are out of credit and they don't have available, at least with the guys that we're typically talking about.

Okay, thanks a lot.

Your next question comes from line of Joe Chumbler, with Stephens, Inc. Please proceed.

Thanks, most of my questions are answered. But Kevin, on the legal collections, I think -- did you give it as a percent of total cash receipts as you normally do?

Yes I did?

And was 34.8%?

It should be on total cash. 34. -- on collection 34.8 did I say? I've got to find that in my script.

I believe the number is off of cash collections as opposed to cash receipts, but let us--

Yes, 34.8 of cash collections, that's correct.

Okay, in the queues, do you normally break it out as total cash receipts or collections?

I'm almost certain it's collections, based on the fact the legal activity is related to cash collection activity. The cash receipt activity includes the fee for service business, which has nothing to do with legal, and so I think the more appropriate relationship is legal to cash collections.

Okay, and that's how you're giving it today?

Yeah. And then again, it was 32.4% of total cash receipts. So you know, probably the confusion is that we've talked about it on the calls a couple of different ways, but there you go, its 32.4 of total cash receipts.

Okay, and then, how should we think about zero basis going forward? You know, it grew pretty robustly for the last couple of years and it’s kind of flattened out in the last few quarters. Any insight as to what's causing the slow down in growth there?

One of the things is that it is still growing. So the concept, I think that will help – hopefully, help you begin to understand is under SOPO3-3, we can now aggregate deals that have common credit profiles. So, what's happening I think over time is that the bigger those deals are, the more accounts are in an individual pool from an accounting basis; the easier it is for us to make more accurate projections. And hopefully, you know, again, remember my goal is not to have zero basis bad debt(ph). My goal, from an accounting perspective, is to keep these things on my books and literally, the last dollar of collections should amortize off that last dollar of financed receivables. So hopefully, over time, we will get better at that and 03-3 will help us do that.

And so, just to follow up on that, when we look in your 10-Q at the accretable revenue table, should we see the additions to revenue from purchases trending upward as a percentage of expected collections? Would that indicate that you're trying to get more accurate on the zero basis front?

I think that what you would see, hopefully, would be movements from accretable -- or non-accretable differences into accretable yields over time. I think that if I understood your question correctly, that should be a fairly accurate statement.

Okay, thanks.

Your next question comes from the line of John Neff, with William Blair. Please proceed.

Hey, guys. A question on the infamous blended rate. Obviously, it was the highest in this quarter than we've seen in awhile. And obviously, I know that doesn't mean anything about pricing in absolute terms but I was wondering if you could just comment on the mix of what you're buying. Were there more purchases at the fresher end of spectrum maybe in particular with concerns about -- in otherwords, were you finding some good deals on the fresher end of the spectrum with BK filings spiking during the quarter?

We bought as we have been pretty well across the spectrum throughout the quarter. And we had, you know again as we usually do, a pretty substantial range of purchase price. We were sub-cent(ph) and we were, you know, in some larger numbers for especially bankruptcy deals. So we were across the board. And you know again, I can't pin a lot of anything on that blended rate number, so I guess I find it a hard one to expand on for you, John. Other than to say, we bought across the spectrum as we typically do, and I guess I characterize it as we had perhaps a little bit more waiting on fresher accounts.

You know actually, I'm looking at -- I've got a chart here. Over the past several quarters, again just doing the math in my head, it looks like we were in the fresh primary and secondary category. Again, this is based on face value, in the 10 to 11 maybe 12% of our buying. And in Q3, we had about 30% of our buying secondary or better. So there certainly was a move to a little bit fresher paper.

Okay, great. And then the unexpected turnover in the quarter was that in a particular call center?

We had more of it in Virginia than in Kansas. But we had a bit -- we had the same phenomenon to a lesser degree in Kansas as well.

Okay, great. And then you mentioned IGS Nevada, the placement volumes from the legacy clients still a little lower, but my question was are the relationships there still strong and intact?

Yes, the relationships are all intact. We haven't lost any clients. We're just dealing with some at lower volumes than we had historically.

Great, thank you.

You bet.

Your next question comes from the line of James O'Brien, with Brean Murray. Please proceed.

Yes, good afternoon and congratulations Kevin, on your promotion.

Thank you.

Can you tell us what the profitability metrics and growth rates of IGS, Anchor and RDS look like say relative to the your core business?

We haven't really broken it out in any degree, so, you know we'll -- I think just pass on that one for now.

Would it be fair to say that as they look somewhat similar to the core business?

I think that's safe.

Okay, is there a target that you'd like to see, you know, these fee-based businesses become a total or a percentage of the total revenues say next year at this time or a couple years out?

You know, we don't have a target, and again, we're dealing with the fee businesses as a -- definitely the tail on the dog at this point. And the dog is growing pretty nicely. So the new fee businesses have to grow rapidly just to keep up from a percentage standpoint. Over time though, we would like to see them make progress on becoming a larger percentage, albeit I think it's going to continue to be a relatively smaller piece of the overall pie, at least for the near to medium term.

Okay. What about beyond these three businesses? Is there any other types of perhaps acquisitions you may look into in terms of say getting into health care paper, say in a bigger way? Or perhaps other types of asset classes or businesses that you may be looking at? And can you kind of qualitatively tell us what you might be looking at beyond the horizon?

Sure. You know as we've said really dating back to 2002 when we first came public, we will continue to look at acquisition opportunities that we feel gives us a wider platform. So, additional skills to get into other parts of the account receivable management business.

No buying for scale unless it was a very unusual situation. We'd much rather acquire a platform; a management team, and then help them grow further organically. We think that's the biggest bang for the buck.

All right, great, thank you.

You bet.

Your next question comes from line of Brian [Guneck] with [Corsair Capital]. Please proceed.

Hi, good evening. Can you tell us what the estimated remaining collections were at September 30?

I think I've got it right here. Let's dig it out real quick. You guys can confirm this too. I've got 350 million 024361.

350 million?

Yep.

And, what was estimated ratio for collections to purchase price for portfolios purchased in the quarter?

Purchased in the quarter?

Collection to purchase price.

Or the multiple?

The multiple.

For the quarter.

I don't think I have that.

All we provide is year-to-date, though.

Yes, all we have is year-to-date.

I think all we've ever provided is the year-to-date update.

I think the Q should be filed here, you know, within a week, I hope. That is certainly our goal, so you'll have those numbers pretty quickly.

Okay, great. Thanks a lot.

Yep.

You bet.

Next question comes from the line of [Kappa Ahmbret], with Millennium. Please proceed.

Hi, thank you very much for taking my question. I got on a little bit late. But I was just wondering if you could go through the growth rates on collections. It looks like they declined to 27%, which is down from 26%, which is down from 30%. Why is that again? Is that because of the attrition rate at the collector level?

Well, the attrition rate at the collector level certainly didn't help out our cash collection on a year over year basis, no doubt about that. The other piece of it, I think, is simply the size of the Company and the ability to maintain those very high growth rates into perpetuity. So, I believe it's a little of both.

So what is a fair growth rate then we should kind of think about in the terms of collections? Steve, I'm looking off on the dollar volume, and on dollars, it looks like this is the first quarter that actually had a decline sequentially. Is that right?

Do you mean from the prior quarter to the current quarter?

Yes, I think you collected 47.5 million this quarter versus 48.4 -- I'm sorry, 48.8 million last quarter?

Okay.

Does that mean -- so, I understand the Company is getting bigger, so the growth rate should shrink, I understand because of the law of large numbers. But, I mean, is this company just going to kind of hover around 50 million collecting it per quarter, and the growth rate would just kind of continue to come in?

Well I don't -- we had in the 20s -- the mid-20s in year over year collection growth rates. So, I'm having a hard time making the leap from mid-20s growth rate year over year to a steady state. I would anticipate that the collections will be impacted over the long-term by the pace of our buying and the amount of raw material that we put in the top end. So, as we continue to buy over the long-term on the one hand and as we get better as a collection engine on the other, hopefully, we can impact that year over year rate of growth.

Okay. Thank you very much for taking my questions.

You bet.

Your next question comes from the line of Daniel O'Sullivan, with Utendahl Capital. Please proceed.

Yes, thank you for taking my question. Kevin, can you give us a break out of the collector head count at each center?

I can do that. These are again for owned portfolio only. I have about 322 people in Norfolk, 93 in Kansas, and 215 in Hampton.

Great, thanks. Just a quick question on IGS. Going back about a year ago when you made the acquisition. It looks like it's not performing as well as you guys had originally thought. Can you give us a little more background? Is there anything else kind of going on there, something we can sink our teeth into besides lower placements?

Take it from us, lower placements is plenty to sink your teeth into. We're pleased with the team out there. We think we've made a number of structural and technological changes to help make a good collection force even better, but it's a business that has a very quick flow through to it. And I think we talked about this a little bit last quarter, but just to update you.

On the buying business, when we buy a portfolio, the way we work it, we know we've got cash flow coming in on that thing for seven, eight, nine years plus. We're still collecting on portfolios we bought those the day we opened our doors.

In the Anchor business, the more traditional contingency collections business, typically we've got kind of a six-month inventory cycle there. So once we get a placement, we typically know what we've got for a six-month period. At IGS, we've got lenders that are looking for collateral, they're looking for automobiles generally, and they need them quickly. And so, we've got in some cases a 30 day or less inventory turn. So if placements drop there, there's not much cushion left to ride on. And you know, it's obviously bad when you lose them. The nice thing is, we've been able to through some accelerated marketing, also turn the other way fairly rapidly when you compare it to our other businesses. So, we remain optimistic that we're going to be able to make impact there and get things to the level where we think we need to be.

Okay, great. I think you mentioned also too, that you had signed up some larger relationships or some relationships that could obviously turn things around there. Are those fairly recent or will we see a meaningful impact there in the fourth quarter or will that be more of a first half next year thing.

What we've seen is, first of all, your notion is correct. We've signed up a number of relationships with people that could give us very large volumes. Typically, how we've seen new clients treat a vendor like us is they start out giving us fairly difficult and fairly low-volume work and as we perform on it, we're permitted to move upstream. And that can happen fairly quickly.

So, what we need to have happen now is, obviously, get those volume numbers up and getting work out on a little bit more liquid paper would also help our numbers. So, we think we've got the ability to have some further Q4 impact, but certainly we anticipate it'll follow through into ‘06. But we're not necessarily saying just sit back and it's going on an ‘06 thing. We think we can continue to make progress in Q4.

Okay, great. I mean, it sounds like that the previous owner, I mean, it sounds like you guys have done a lot of work on the biz debt (ph) side. And with Anchor, are you seeing lower fees in that business? How has the played out over the last couple of quarters?

Yes, I mean the traditional contingent fee collection agency business is very price competitive. We have stayed away, in many cases, from paper where we just didn't think we could make an appropriate profit margin, but you know, pricing pressure continues to be an issue in that industry.

Okay. And I mean, as far as the pricing pressure and owned portfolio. Any sense if you've seen that subside a little bit in the quarter or has it kind of been the same as it has for the last year or so? Any thoughts there would be helpful.

I'd characterize it as fairly steady state from what we've been seeing.

Are you guys seeing anybody who's bought portfolios, you know, less experienced buyers potentially exiting or blowing up? Seeing any opportunity there going down the road?

We haven't seen as much of that kind of activity as we saw the prior couple of quarters. Maybe it's happening and other people are seeing it. But we didn't see a lot of that going on.

And one last question. Can you give a little more background on why Peter's leaving the board?

He is a lead director on at least one other board that he's on and another board other than that one. If not the lead, he is very actively engaged. And in addition, he runs his own company. And you know, Peter really felt that he was getting to the point where he wasn't able to give it 100% and I don't think he does anything less than 100%. And so, it was one of those issues where I think he was saying, I'm having a difficult time devoting the time that I'd really like to here. And so we found what we thought was a real smooth transition. Penny Kyle, we think, is going to really help provide some interesting insight for us, especially with the Alatax RDS business, and working with the state governments.

Okay, great. Congratulations Kevin, have a good night guys.

Thank you.

Your next question is a follow-up from the line of Bob Napoli. Please proceed.

Good evening, gentleman. On Alatax, I wanted to get a little more color on there. You guys seemed pretty up-beat about how the integration went there. And I just was wondering if maybe you could give some big picture, long-term. Is that business of the three fee-based businesses you have, does it have the most potential? And what are your plans for rolling out that business over what time frame? Would you expect to see an acceleration in revenue out of that business, sooner than say some of the others? Or do you need a year of integration and systems work before you really start rolling it out?

Well, we've got, I think, three talented guys running three key businesses who all would like to be the standout in terms of producing growth.

Alatax RDS has really been focused in Alabama, historically, as we've commented. And they have just recently started expanding the offering of products to some nearby states. They are gaining traction and signing contracts in those nearby states, but it's a start from scratch proposition.

So, it's really a matter, Bob, of just how much traction we can get and how quickly we can sign this new business as it relates to what kind of growth Alatax is going to have for us. But, I certainly think it's got every bit the opportunity that the other businesses have.

It seems to me like scale-wise, it may have a lot more upside than say skip tracing for the auto finance industry?

Well, if you look at the total size of the market served, I think that the ultimate opportunity just from a sheer market size is greater with the government services and Alatax. You know, there are certainly different competitive dynamics there than there are in a business like IGS's and so, you've got to factor that in as well.

What does RDS stand for?

Revenue discovery systems.

Okay, great, thank you.

All right, thank you much.

Your final question comes from the line of Mark Hughes with SunTrust. Please proceed.

Yes, thanks very much. The collections multiple year-to-date for 2005, I think you didn't have the Q3 but do you have the year to date number? Again, what you expect to collect on the first portfolios acquired year to date?

You know again, we're going to be filing our Q in about a week. So, that's getting down into some tables that I'd rather just wait until we make sure we all get them chicken-tied (ph) and get them out there for you.

How about collection trends in September? Consumer confidence, gas prices seem to be impacted after the hurricane. Did you see any change in your collections at the end of the quarter?

Actually, of the three months and remember we do have days impacting this as well, because July was a short month for us in terms of the amount of days. But July was a lighter collection month than August or September. So, we didn't necessarily see that.

So, adjusted on a sort of normalized basis or seasonal basis, September wasn't necessarily different?

That's right.

Okay, and then finally, cash from operations in the quarter, I guess the Q is coming out but do you have that handy?

Yes, I've got it handy. Probably something that I can -- I'll find the right page here for you. Cash provided of operations, again in this classic format of a cash flow statements is 47,973,000.

Got you, thank you very much.

That's for nine months, obviously.

Right.

All right, okay?

There are no further questions in queue, so I will now turn the call over to Mr. Steve Fredrickson for final remarks.

Thank you operator. First, I'd like to thank all of you for participating in our conference call.

Before we go, I'd like to reiterate a few key points about our strong third quarter 2005 performance. Net income grew substantially in the quarter, increasing by 34% to $9.3 million. Per share earnings grew to $0.58, on a diluted basis. Total revenue rose 33% in the quarter to $37.5 million. This was driven by a 27% increase in cash receipts to $51 million. Portfolio purchases were a strong $16.5 million. Our cash balances finished at $67.4 million. This positions PRA extremely well to react to market opportunities as they present themselves.

Our performance in Q3, 2005 highlighted by near record productivity and strong cash collections, was made possible by our long established strategy of disciplined buying and consistent attention to the efficiency of our operation. Thanks again for your time and attention. We look forward to speaking with you again next quarter.

Thank you for your participation in today's conference. This concludes the presentation. Good day.