NCO Group Sees Q1 Profit Fall on Systems Restructuring and Acquisition Integration

NCO Group, Inc., a leading provider of business process outsourcing services, announced today that during the first quarter of 2006, it reported net income of $10.5 million, or $0.32 per diluted share; $0.41 per diluted share before special charges of $3.4 million, net of taxes, or $0.09 per diluted share. This compares to net income of $15.3 million, or $0.45 per diluted share, in the first quarter of 2005. Guidance for the first quarter was $0.17 to $0.22 per diluted share, including special charges of $0.18 per diluted share, or $0.35 to $0.40 per diluted share before special charges.

The special charges are associated with the previously announced restructuring of the Company’s legacy operations to streamline the Company’s cost structure, and the integration of recent acquisitions. The restructuring charges are included as a separate line item under operating costs and expenses, and the integration charges are included in payroll and related expenses and selling, general and administrative expenses. The Company continues to evaluate the timing of the activities associated with the special charges in order to maximize the benefits to the Company. While special charges during the first quarter were lower than expected, the Company still anticipates a total of approximately $6.1 million, after taxes, or $0.18 per share of special charges for 2006.

NCO is organized into four divisions that include Accounts Receivable Management North America (“ARM North America”), Customer Relationship Management (“CRM”), Portfolio Management, and Accounts Receivable Management International (“ARM International”).

Overall revenue in the first quarter of 2006 was $311.7 million, an increase of 19.7%, or $51.4 million, from revenue of $260.3 million in the first quarter of 2005. Included in ARM North America’s revenue for the first quarter of 2006, was $32.3 million of inter-company revenue from Portfolio Management, as compared to $16.5 million of inter-company revenue from Portfolio Management for the first quarter of 2005. All inter-company revenue is eliminated in consolidation.

For the first quarter of 2006, ARM North America’s revenue was $229.1 million as compared to $198.4 million in the first quarter of 2005. The increase was primarily attributable to the acquisition of Risk Management Alternatives, Inc. (“RMA”), which was completed on September 12, 2005, and an increase in inter-company revenue from Portfolio Management. During the quarter, this division recorded approximately $2.6 million of restructuring charges and costs associated with integration of the Company’s recent acquisitions, net of taxes.

For the first quarter of 2006, CRM’s revenue was $59.3 million as compared to $47.6 million in the first quarter of 2005. This $11.7 million increase was primarily attributable to new clients ramping up business during the second half of 2005 and the first quarter of 2006. While these new contracts will allow this division to expand its revenue base in 2006, the deployment of large numbers of seats on an expedited schedule adversely impacts near-term profitability because the operating expenses are incurred in advance of the revenue growth. Partially offsetting the revenue from new clients was the previously discussed reduction in revenue from a major client where NCO ceased providing certain services when the client exited the consumer long-distance business due to changes in telecommunications laws. During the first quarter, the planned ramp-up of new business in this division was partially delayed as a result of changes in client requirements and the decision by the employees in one of our call centers to be represented by a union. During the quarter, this division recorded approximately $169,000 of restructuring charges, net of taxes.

For the first quarter of 2006, Portfolio Management’s revenue was approximately $50.1 million compared to $27.8 million in the first quarter of 2005. The increase includes additional revenue from portfolio assets acquired as part of two business combinations during the third quarter of 2005. Additionally the quarter’s results reflect strong collection performance during the quarter, as well as $4.9 million of revenue from the sale of portions of several older portfolios with little or no remaining carrying value.

For the first quarter of 2006, ARM International had revenue of approximately $5.5 million compared to $3.1 million in the first quarter of 2005. The increase in revenue was primarily attributable to the acquisition of the international operations of RMA. During the quarter this division recorded approximately $615,000 of restructuring and integration charges, net of taxes.

Commenting on the quarter, Michael J. Barrist, Chairman and Chief Executive Officer, stated, “I am extremely pleased with the progress we have made during the first quarter towards achieving our operating objectives. During the first quarter, ARM North America and Portfolio Management exceeded their expectations both in revenue and profitability. Our ARM International division met its expectations and our CRM division made meaningful progress with 25 percent year over year and 10 percent sequential revenue growth. While our CRM division navigated through several profitability challenges during the quarter, they have revised their forecast and we believe they will begin to operate at a profitable level in the second half of the year. As we move through 2006, we will continue to focus on careful execution of our business plan so that we can meet our overall goal of providing our investors with consistent growth in both revenue and earnings.”

NCO also announced that it continues to expect earnings per share to be approximately $1.52 to $1.72 per diluted share for 2006. This range includes approximately $6.1 million, after taxes, or approximately $0.18 per diluted share, of restructuring and integration costs. For the second quarter of 2006, NCO currently expects diluted earnings per share to be approximately $0.26 to $0.31. This range includes the effects of the approximately $1.5 million, after taxes, or approximately $0.04 per diluted share, of restructuring and integration costs.