PRA Group Reports Fourth Quarter and Full Year 2015 Results, Revenue, Income Fall

Yesterday, PRA Group (PRAA), a global leader in acquiring defaulted receivables, reported its financial results for the fourth quarter and full year 2015.

Fourth Quarter Highlights

• Cash collections of $369.4 million, non-GAAP cash collections of $380.3 million.
• Revenues of $230.2 million, non-GAAP revenues of $236.7 million.
• Income from operations of $71.2 million, non-GAAP income from operations of $87.4 million.
• Net income of $41.0 million, non-GAAP net income of $49.0 million.
• Return on average equity, annualized, of 19.8%, non-GAAP return on average equity, annualized, of 27.5%.
• $225.9 million in investments, ($135 million of buying in Europe)

Full Year Highlights

• Cash collections of $1.54 billion, non-GAAP cash collections of $1.56 billion.
• Revenues of $942.0 million, non-GAAP revenues of $954.4 million.
• Income from operations of $310.3 million, non-GAAP income from operations of $363.0 million.
• Net income of $167.9 million (vs. $176.5 million in prior year) , non-GAAP net income of $207.9 million.
• Return on average equity of 19.9%, non-GAAP return on average equity of 24.6%.
• $963.8 million in investments.

The company also announced the acquisition of certain assets of Recovery Management Systems Corporation (RMSC). Per that company’s website, RMSC is a “leading specialist in bankruptcy process reengineering, bankruptcy account control and asset recovery to facilitate compliance and maximize recovery.”

The transaction also includes the hiring of most RMSC employees.  Mike Petit, president of PRA Insolvency Investment Services, commented on the acquisition: “We are extremely impressed with RMSC’s technology platform supporting its bankrupt account processing and recovery management business. This acquisition strengthens and broadens our ability to offer bankruptcy processing services to our clients and complements our existing Insolvency business.”

During the earnings call Steve Fredrickson, PRAA Chairman & CEO provided additional rationale for the acquisition as well as data on the decline in purchases of Bankruptcy/insolvency portfolios:

“As recently as 2012 and 2013, we purchased $263 million and $243 million of insolvency accounts in those two years respectively. In 2015, we purchased $65 million. Our insolvency operations are generating returns that we are pleased with. We simply cannot buy enough of it.

To that end, we have continued our goal of diversification by acquiring certain assets of RMCS earlier this month and have hired most of their team. RMSC has an impressive technology platform that includes bankrupt account process and recovery management, which will strengthen our ability to offer processing services to our clients, and fits perfectly with our existing insolvency business. Some modest existing and flow portfolio volume comes with that purchase. We feel this purchase strengthens our ability to compete for insolvency assets and servicing relationships in the U.S. under virtually any scenario.”

Frederickson also discussed the current U.S. purchasing environment: “To my disappointment, we began 2016 with a number of large sellers still out of the market. With charge-off rates and bankruptcy filings continuing at historic lows, albeit showing some signs of an uptick recently, the lack of volumes has affected inventory levels in the U.S. This is a situation which we hoped would rectify itself months ago, yet still continues into the new year with no concrete end in sight. “

Future Guidance

Management was not optimistic about 2016. During the earnings call Frederickson noted: “Without a pickup in bankruptcy sale volume in the U.S. or an even larger increase in U.S. core and European portfolio sales, we’ll have to adjust downward our long-term internal growth rate goals to single digits until the situation changes. Our internal goals on return on equity should remain achievable.”

On the other hand, Frederickson remains positive for the long-term: “One thing remains evident for our future long-term results: the industry consolidation in the U.S. Core market remains a critical positive for us.” The CEO apparently believes that, as soon as supply of receivables in the U.S. starts to increase, PRA Group will be in a good position to pick up market share.

insideARM Perspective

Yesterday we reported on the earnings announcement from Encore Capital Group (ECPG) and suggested that the best way to review the current state of the debt buying industry was to review the earnings announcements from ECPG and PRAA at the same time.

Both companies reported investments during the quarter and the full year.  PRAA reported $225.9 million in portfolio purchases in Q4 and $963.8 million in purchases for the full year. ECPG reported $293 million in portfolios purchases in Q4 and $1.02 billion in purchases for the full year.

Unfortunately, the companies do not report all of the same “highlights”.  For example, ECPG always highlights Estimated Remaining Collections (ERC).  PRAA does not highlight that information. Both companies utilize both traditional call centers and legal activity to generate collections. ECPG reported that legal channel collections accounted for 43% of total collections. PRAA does not highlight the sources of their collections.

Both companies are active internationally. Though to obtain comparative data on the international operations one needs to dig through the earnings announcements.

Finally, it is interesting that PRAA announced an acquisition at the same time ECPG announced a divestiture. ECPG’s rationale was to divest a business that did not produce margins consistent with the rest of the business. PRAA announced acquisition will provide additional revenue opportunities.