NCO Group Reports Lower Earnings in Q3 2005 on Restructuring, Acquisitions, Hurricanes

NCO Group, Inc. (Nasdaq: NCOG), a leading provider of business process outsourcing services, announced today that during the third quarter of 2005, it reported net income of $7.6 million, or $0.24 per diluted share, as compared to net income of $13.3 million, or $0.39 per diluted share, in the third quarter of 2004. These results are net of $3.5 million of charges associated with the previously announced restructuring of the Company’s legacy ARM operations, integration of the Company’s recently announced acquisitions and the impact of the hurricanes in the Gulf Coast region. The quarterly results are also net of start-up costs associated with several new large opportunities in the Company’s CRM division.

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 third quarter of 2005 was $246.3 million, an increase of 0.1%, or $278,000, from revenue of $246.0 million in the third quarter of 2004. Included in ARM North America’s revenue for the third quarter of 2005, was $21.2 million of inter-company revenue from Portfolio Management and included in ARM International’s revenue was $71,000 of inter-company revenue from Portfolio Management. Included in ARM North America’s revenue for the third quarter of 2004 was $16.1 million of inter-company revenue from Portfolio Management and included in ARM International’s revenue was $99,000 of inter-company revenue from Portfolio Management. All inter-company revenue is eliminated in consolidation.

For the third quarter of 2005, ARM North America’s revenue was $186.8 million as compared to $179.8 million in the third quarter of 2004. During the quarter, this division’s revenue was affected by several factors. Hurricanes Katrina and Rita caused a loss in revenue of approximately $2.5 million due to downtime in two call centers that are located in the affected areas and the Company-wide suspension of collection efforts into the affected areas. In addition, the Company experienced deterioration in the amount of payments it received from consumers, which the Company believes is consistent with the effects of higher than expected fuel costs on the broader economy. Partially offsetting these factors was $9.7 million of revenue attributable to the acquisition of Risk Management Alternatives (“RMA”), which was completed on September 12, 2005. In addition to the effects on profitability associated with lower than expected revenue, this division recorded approximately $3.0 million of restructuring charges and costs associated with integration of the Company’s recent acquisitions, as well as approximately $470,000 of direct costs associated with the relocation and housing of our employees displaced by Hurricane Katrina. The Company expects to incur a total of approximately $20.0 million to $25.0 million of additional restructuring charges during the fourth quarter of 2005 and in the first quarter of 2006.

For the third quarter of 2005, CRM’s revenue was $44.9 million as compared to $52.8 million in the third quarter of 2004. This reduction was primarily attributable to client transitions where we ceased providing certain services to a major client that decided to exit the consumer long-distance space due to a change in telecommunications laws. During the second and third quarters of 2005, this division began the deployment of several new client opportunities including its largest client to date in the CRM division, which has the potential to produce annual revenue of approximately $100.0 million. These new client contracts, which have begun to ramp-up in the third quarter of 2005, are expected to more than offset the revenue losses. 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 earnings due to incremental operating expenses related to the implementation of these new business opportunities.

For the third quarter of 2005, Portfolio Management’s revenue was approximately $32.3 million compared to $26.3 million in the third quarter of 2004. During the quarter, this division purchased accounts receivable with a face value of $17.4 billion for a total price of $128.1 million, including portfolio assets acquired as part of two business combinations. The Company believes that this division is well positioned for long-term growth in its legacy markets, as well as the new markets opened as a result of the recent business combinations.

For the third quarter of 2005 ARM International had revenue of approximately $3.5 million compared to $3.3 million in the third quarter of 2004. The acquisition of the international operations of RMA added approximately $550,000 of revenue during the third quarter of 2005.

Commenting on the quarter, Michael J. Barrist, Chairman and Chief Executive Officer, stated, “The third quarter was more difficult than originally anticipated primarily as a result of the Gulf storms and the effects of rising fuel costs on consumer discretionary spending. While these factors adversely affect our near-term earnings, we believe the positive business developments of the quarter meaningfully outweigh the near-term effects of these issues. In our ARM business, we began the integration of the RMA acquisition and the closure of several redundant legacy NCO sites. The net effect of this transition will be an increase in the scale of our ARM business by approximately 20 percent with minimal increase in our back office expenses. In our CRM business, we began the deployment of our largest client to date and the process of hiring and training staff in order to capitalize on this opportunity. We believe these two accomplishments in conjunction with the continued strong results within our Portfolio Management division will position us well as we enter 2006 in our core markets and create a position of strength from which we can explore other opportunities within the broader BPO space.”

For the fourth quarter of 2005 NCO currently anticipates fully diluted earnings per share between $0.10 and $0.16. This range includes the effects of approximately $10.5 million, or $0.18 per diluted share, of restructuring and integration costs, as well as the costs associated with the continuing implementation of new contracts in our CRM division.

NCO will host an investor conference call on Tuesday, November 8, 2005, at 10:00 a.m., ET, to address the items discussed in the press release in more detail and to allow the investment community an opportunity to ask questions. Interested parties can access the conference call by dialing 888-209-7450 (domestic callers) or 706-643-7734 (international callers) and providing the pass code 2061098. A taped replay of the conference call will be made available for seven days and can be accessed by interested parties by dialing 800-642-1687 (domestic callers) or 706-645-9291 (international callers) and providing the pass code 2061098. A transcript of the conference call will also be available on NCO’s website (http://www.ncogroup.com) and will be furnished to the SEC in a Report on Form 8-K.