Encore Reports Weak Quarter, Year as it Expands Legal Collections

Debt purchaser Encore Capital Group (Nasdaq: ECPG) announced late Tuesday a decline in revenues and net income for both the fourth quarter and full year 2007. The San Diego-based company also reported it took full ownership of a call center in India, gave an update on its cost-saving initiative, and provided numbers on its shift to legal collections.

In the final quarter of 2007, Encore reported net income of $4.8 million – a decrease of 27 percent from Q4 2006 – on revenues of $58.7 million, down nearly 14 percent from the same period a year ago. The company also said it spent $74.6 million to purchase $1.8 billion in face value debt in the quarter, up from the $1.4 billion it bought in Q4 2006.

For the year, Encore had revenues of $254 million, down slightly from the $255 million it reported for 2006. The company reported net income of $15 million for 2007, down nearly 38 percent from the $24 million it earned in 2006. Encore spent $209 million on $6.9 billion in face value debt in 2007 ­­– including $188 million for credit card accounts – compared with spending of $144 million in 2006 and $195.5 million in 2005.

Encore detailed its results in its 10-K annual report with the Securities and Exchange Commission Tuesday. In the filing, Encore revealed that legal collections last year became its primary liquidation strategy, accounting for more gross dollars collected than call center collections.

Gross legal collections amounted to $169 million in 2007, compared with $118.7 million collected through litigation in 2006. The company collected $159 million between its own call centers and outsourced collection agency activity in 2007, compared to the $179 million those channels provided in 2006. Encore said the cost of legal collections increased 51 percent in 2007.

Encore provided an update of its cost-cutting plan launched last September, when it eliminated 115 jobs in Phoenix, San Diego and Arlington, Texas and left the healthcare debt buying and collection sector (“Encore Capital to Cut Jobs, Exit Healthcare Sector,” Sept. 18, 2007). The plan cost Encore $4.5 million in 2007, most charged in the third quarter. Operating expenses in the fourth quarter were 2 percent lower than in the same period in 2006.

Encore also said that in the fourth quarter it had acquired full ownership of a call center in India it opened in late 2005 under a joint venture. Encore in October paid its undisclosed partner $2.3 million in cash to acquire full interest in the 29,000 square-foot site in Gurgaon, India.

Although the company saw declines in its major financial metrics, earnings per share for the fourth quarter, $0.21, and revenue results were in-line with analysts’ expectations. Investors cheered the news sending Encore’s stock 1.25 percent higher in after hours trading Tuesday and up more than 5 percent in early trading Wednesday.

The company did not hold a conference call to discuss results.