NCO Group Reports Expanded Loss in Q3, But Bullish on Opportunity

NCO Group, Inc., the world’s largest accounts receivable management firm, reported Monday a net loss of $33.5 million in the third quarter of 2010. But the company’s CEO told insideARM.com that current and new clients have indicated there will be plenty of opportunity for NCO in 2011 and beyond.

The Horsham, Pa.-based provider of ARM and other BPO services reported a net loss attributable to NCO of $33.5 million for the third quarter, an expansion of the $24.6 million loss it reported in the year ago period. Adjusted EBITDA was $33.3 million in Q3, down from $49.3 million in the third quarter of 2009.

NCO said that company-wide revenues were flat in the quarter at $370.5 million. The ARM division – which includes first and third party debt collection operations – accounted for $310.9 million of the company’s revenue in the quarter, up 1.1 percent from the same period in 2009. The company incurred $7.4 million of restructuring charges and a $7.1 million non-cash allowance for impairment of purchased accounts receivable portfolios in the quarter. The debt buying unit, Portfolio Management, reported revenues of $3.3 million, up from $2.3 million a year ago. But the CRM unit saw its revenues fall 17.4 percent to $65.5 million on a decrease in volume from clients.

“I think everyone in the industry, both on the ARM and CRM side, felt some pressure on volume (in the quarter),” NCO CEO Michael Barrist told insideARM.com. “But I think the good news is that we feel like we’re at the bottom of this right now. We’re seeing some good traction on the sales side and a level of stability in both volume and collectability.”

Barrist noted that most of the volume issues related to work in first party collections. Creditor clients did more insourcing of ARM functions in the second and third quarters of 2010 while undergoing a draw down of their lending portfolios, mainly due to increased credit standards and a cutback in consumer spending related to the recession. But Barrist believes that trend will reverse in the near term and into 2010. “Clients have said that they expect growth in their portfolios in 2011, leading to volume stabilization in 2011 and growth into 2012,” he said.

The Portfolio Management unit reported debt purchases of only $1.9 million in the third quarter of 2010, compared to $15 million in the year ago quarter. Through the first nine months of 2010, NCO’s debt portfolio purchasing activity has declined 77 percent when compared to 2010.

“We made a decision very early in the year that purchased portfolio was not going to be one of our lead markets going forward,” said Barrist. “Prices weren’t coming down enough to compel purchases. To go out and compete in the market with the pure play debt purchasers really doesn’t make a lot of sense for us.”

Barrist noted that Adjusted EBITDA, the best marker of the firm’s performance, will be stronger in 2011 than in 2010. But NCO is “cash flow positive in a pretty strong way” he said, noting that the company’s debt paydown for 2010 is ahead of projections.