On Monday, November 7th, PRA Group (PRAA) reported its financial results for the third quarter of 2016. The company reported diluted earnings per share of $0.74 versus $0.36 in the third quarter of 2015 and non-GAAP diluted earnings per share of $0.68 for the third quarter of 2016 compared to $0.85 for the year-ago quarter.


It also hosted a conference call for investors.  PRAA is one of the largest purchasers of defaulted receivables worldwide.


Second Quarter 2016 Highlights

  • Cash collections of $371.7 million, currency adjusted cash collections of $377.0 million, versus $380.8 million in the prior year period.
  • Cash collections for the first nine months of 2016 were $1,143.2 million versus $1,170.1 million in the prior year period.
  • Total revenues for the quarter of $222.0 million, currency adjusted revenues of $224.2 million, versus $229.4 million in the prior year period.
  • Income from operations of $67.5 million, non-GAAP income from operations of $69.8 million.
  • Net income for the quarter of $34.3 million, non-GAAP net income of $31.7 million, compared with $17.4 million in the prior year period.
  • For the first nine months of 2016, net income was $102.7 million, compared with $127.0 million in the prior year period and non-GAAP net income was $109.5 million, compared with $153.6 million in the prior year period. 
  • The net income margin in the third quarter of 2016 was 16.5%.
  • The net income margin for the first nine months of 2016 was 15.7%
  • $161.3 million in investments.
  • Estimated remaining collections of $5.25 billion. 

In the press release that accompanied the earnings announcement, Steve Fredrickson, Chairman and Chief Executive Officer, PRA Group, commented on the quarter:


“We continue to evolve the Company in a number of areas including normalizing operations in the U.S. legal collection channel despite increased documentation requirements.  From an investment perspective, we also continue to deploy capital at good returns, especially in the US and Brazil, and maintain strong relationships with global sellers of nonperforming loans, providing them with a compliant and responsible global partner.” 


insideARM Perspective


insideARM suggests that parties interested in PRAA also review the quarterly earnings announcement for Encore Capital Group (ECPG) to get a broader picture of the debt buying industry. insideARM also wrote about the ECPG quarterly earnings report today.


As usual, the earnings conference call provided more interesting information and perspective than the press release and written reports. It is interesting to compare the PRAA comments on the various issues with those articulated in the ECPG call.


Regulatory Environment/Supply/Pricing


It was interesting that the regulatory environment and U.S. supply and pricing were not significant topics on the PRAA call.  

Steve Fredrickson did comment:

“The regulatory environment in the US has been an operational headwind especially over the last few years but it has helped drive the substantial consolidation we've seen in the US market, creating what we believe is now a significant competitive advantage for PRA. It has been fulfilling to see our diversification strategy that included a number of significant strategic moves over the past few years or so, allow us to deploy capital globally directing it to opportunities where we see the most attractive returns. Now more than ever we feel geographic and product diversification are absolutely necessary for our long-term success. As demonstration of the success of the strategy our third-quarter results show the increasing importance our non US investments.”


However, a couple issues discussed on the ECPG call were also prominent in the PRAA call.


Increased Disputes

Kevin Stevenson, Portfolio Recovery Associates, Inc. - EVP, Chief Financial and Administrative Officer, Treasurer and Assistant Secretary, commented on this issue.

“We mentioned on the first quarter call that the increase in our dispute rate was impacting productivity and generating a cash delay. Wanted to share with you some more color on the impact since we have more experience now and a better understanding of the process on a go forward basis. So first, dispute volumes have grown given the new requirement to treat verbal disputes the same way as written disputes, along with the higher volumes of disputes coming through the credit bureau process. As such, our cost to investigate and process them have increased compared to prior years.

We do expect the excess cost to taper off in the longer term as we implement and refine systems and processes, which for at least the next few quarters we will be operating in this fashion as we smooth out the process. Second, the dispute process is causing delays that have impacted value. Coding an account as a dispute causes all proactive collection efforts until the dispute is resolved. The increased volume of disputes combined with a new process meant that disputes resolved in PRA favor have not been returned to the collection floor as quickly as we had hoped. As we said before this is causing cash collection delays but now that we've had some time and some experience with this data we believe it is also causing some loss in value as well.”

Legal Collections

Stevenson also discussed the legal process:

“We have been able to make significant headway on the backlog of legal accounts but we are not completely caught up. Sellers are now in a better position to comply with the requirements of providing account documentation upfront and are generally delivering in a very timely fashion.

Just like disputes it is now a matter of us normalizing this process and streamlining operations. The number of documents that we are receiving has significantly increased when compared to the past. We have invested very heavily in implementation of new document systems and processes over the past four quarters. Beyond the brute force applied to the high volume of documents and systems there's a great deal of nuance that goes into this process and we're adjusting accordingly. We continue to deal with the regulatory environment that is constantly changing in regards to legal collections.

For example, during the quarter we had two states change the requirements around lawsuits and another implement an e-file process. It takes time to adapt and comply with each of these requirements and it slows the process and our current quarter, as we and our external firms, change accordingly.”

Per Zacks Equity Research, both PRAA and ECPG missed analysts estimates revenue and net income for the quarter. PRAA missed Consensus Estimates by less than 5%.  ECPG missed Consensus Estimates by 88%.

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