ASTA FUNDING INCORPORATED
Moderator: Steve Axelrod
08-09-05/9:30 am CT
Confirmation #8395599
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Exhibit 99.2
ASTA FUNDING INCORPORATED
MODERATOR: STEVE AXELROD
AUGUST 9, 2005
9:30 AM CT
Operator: Good morning. My name is (Meredith) and I'll be your
conference facilitator. At this time I would like to
welcome everyone to the Asta Funding Incorporated Third
Quarter and Nine Months Financial Results conference call.
All lines have been placed on mute to prevent any
background noise.
After the speaker's remarks there will be a question and
answer period. If you would like to ask a question during
this time, simply press star then the number 1 on your
telephone keypad. If you would like to withdraw your
question, press the pound key. Thank you. I would now like
to turn the conference over to Steve Axelrod, Managing
Partner of Wolfe, Axelrod, Weinberger Associates. Please
go ahead sir.
Steve Axelrod: Thank you (Meredith). Good morning everyone and
thank you once again for joining us for Asta Funding's
Quarterly conference call to discuss the results for the
third quarter and nine months ended June 30 2005.
Again, hopefully by now, all of you have seen the press
release and have had the opportunity to review it and
discuss the financial results. But if you have not, please
call Wolfe Axelrod Weinberger Associates at 212-370-4500
and we will immediately send it to you either by fax or
email.
ASTA FUNDING INCORPORATED
Moderator: Steve Axelrod
08-09-05/9:30 am CT
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Before I ask Gary Stern, CEO of Asta Funding to host the
meeting and to discuss the current results, please let me
take a few minutes to read the forward-looking statements.
Except for historical information containing herein or
contained herein, the matters set forth in this conference
call are forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995. Although
Asta Funding believes the expectations reflected in such
forward-looking statements are based upon reasonable
assumptions, there can be no assurance that its
expectations will be realized.
Forward-looking statements involve certain risks and
uncertainties that could cause actual results to differ
materially from Asta Funding's expectations. Factors that
could contribute to such differences include those
identified in Asta Funding Incorporated's Form 10K for the
fiscal year ended September 30, 2004 and those described
from time to time in Asta Funding Incorporated's other
filings with the Securities & Exchange Commission, news
releases and other communications including that Asta may
not be able to purchase consumer receivable portfolios at
favorable prices or on sufficiently favorable terms or at
all and may not be able to continue its quarterly dividend
program.
Asta Funding Incorporated reports with the...Exchange
Commission are available free of charge through its Web
site at www.astafunding.com.
ASTA FUNDING INCORPORATED
Moderator: Steve Axelrod
08-09-05/9:30 am CT
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Having dispensed with that necessary chore, please let me
turn the call over and discussion over to Gary Stern,
President and Chief Executive Officer of Asta Funding.
Gary?
Gary Stern: Thank you Steve. Good morning everyone and thank
you for joining Asta's quarterly conference call to
discuss the three and nine months ended June 30, 2005. I'm
very pleased to report another quarter of record results.
Asta's revenue and net income showed excellent growth for
the third quarter of fiscal 2005 growing 58% and 51%
respectively. The growth is a direct result of the
superior management of our book of business which we built
upon especially over the last two years.
During the third quarter ending June 30, 2005, we
purchased consumer receivable portfolios with aggregate
charge-off balances or face value of approximately $481
million and aggregate costs of $20.2 million for a blended
rate of 4.2% that was financed primarily through cash
flows from operating activities and our credit facility.
For the nine months period we purchased a face value of
approximately $2.3 billion for a purchase price of $93.5
million or a blended rate of 4,1%.
Asta's acquisitions going forward will be based on
portfolio availability, pricing and our financial
resources. Although credit card and telecom debt remains
the bulk of our business, we continue to review new
opportunities that fit into our disciplined purchasing
criteria.
During the third quarter, the majority of the portfolio
purchases were from telecom receivables, only 60.8% of the
total purchases while credit card receivables accounted
for 39.2% of the total purchases.
ASTA FUNDING INCORPORATED
Moderator: Steve Axelrod
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We continue to seek opportunities to make strategic
acquisitions, but only those that fit our strict criteria.
When looking for acquisitions, investors can be confident
that management is as disciplined and diligent in this
matter as if the company were buying a portfolio of
distressed receivables.
As Asta outsources 95% of it's collections and has low
fixed overhead expenses, the company remains pressure free
of making acquisitions of portfolios or companies and will
do so only knowing that any users of our capital will meet
our desired IRR goals.
Our balance sheet continues to be strong. At the end of
second quarter, our capital structure remained very sound
with $136.4 million in shareholder's equity. We believe
Asta is adequately capitalized with approximately $57
million of our $80 million credit facility current unused.
This leaves Asta with the necessary resources and
flexibility to move swiftly and opportunistically as may
be necessary.
And now Mitchell Cohen, our CFO will take you through
Asta's Financial Report.
Mitchell Cohen: Thank you Gary. I'm pleased to announce that Asta
Funding has continued its outstanding performance for the
fiscal third quarter reporting record revenues and
earnings for the quarter ended June 30, 2005.
Asta recorded - reported record revenues for the quarter
of $19 million -- a 58% increase over revenues of $12
million for the third quarter ended fiscal 2004. This was
driven by strong cash collections of 43.5 million in the
quarter -- an increase of 67.1% for the prior year quarter
of 26 million.
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Revenues for the nine months increased 36.2% to 49.5
million from 36.4 million. Cash collections during the
nine months ended 6-30-2005 were 122.4 million -- up 43.6%
from 85.3 million from the prior period.
Total expenses excluding interest increased to 4.2 million
-- up from 2.5 million the same quarter a year ago. The
majority of the increased cost were from higher salaries,
processing costs, delivery cost, postage, payroll taxes
and benefits, professional fees including expected costs
from Sarbanes-Oxley and telephone and travel costs.
Expenses in the third quarter ran approximately 1.4 per
month and we don't expect these levels to climb during the
remainder of fiscal 2005.
Interest expense increases 200,000 to 500,000 during the
quarter as compared to the same period of the prior year
and included an increase in the average outstanding
borrowings by Asta under its credit line which stood at
approximately 30.7 million at quarter's end and was 22.6
million on August 2, 2005.
As results of excellent revenue growth and continued
expense controls, Asta's pre-tax income reached 14.4
million in the quarter -- up 52.7% from the prior year
results of 9.4 million. Asta's tax rate is aligned as
approximately 41% and was likely to remain inline with
those expectations during the remainder of fiscal 2005.
Net income was 8.5 million during the quarter increasing
52.2% to 5.6 million in the third quarter of fiscal 2004.
We reported fully diluted earnings per share of 59 cents
-- an increase of 50 - of 39 - a 50.1% increase I'm sorry,
over the prior year of 39 cents per share.
ASTA FUNDING INCORPORATED
Moderator: Steve Axelrod
08-09-05/9:30 am CT
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Additionally, I'd like to mention that our results were
obtained without adjusting any (pull) from the upside or
on the downside.
As Gary mentioned, Asta's balance sheet continues to
remain financially strong. At June 30, 2005 shareholder's
equity totaled 136.4 million -- up from 108.3 million one
year ago. Tangible book value per share was 10.05 or
$10.05 at the end of the third quarter -- an increase
sequentially from 9.45 per share at the end of the second
quarter of 2005 and up from approximately $8.06 per share
at the end of the third quarter 2004.
That concludes my formal remarks. And now I'd like to turn
it back to Gary.
Gary Stern: Thank you Mitch. Asta's unique business model
whereby we outsource 95% of our receivables enables us to
maintain a streamlined infrastructure affording us
tremendous operating leverage, flexibility and scalability
as we continue to grow as seen in today's reported
results.
Our disciplined approach continues to prove itself each
and every quarter. In fact, the return on average equity
during the quarter was 25.7% on an annualized basis. We
believe that our business model is highly successful and
we will continue to remain patient when making portfolio
purchases.
Our business model thankfully offers us the flexibility to
bid on portfolios of substance that will continue to meet
our desired internal rate of returns and grant
shareholders high growth as experienced in the recent
quarter and nine months ended June 30, 2005.
ASTA FUNDING INCORPORATED
Moderator: Steve Axelrod
08-09-05/9:30 am CT
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To summarize, I am very proud of the great strides we have
made over this period by producing record revenues and
earnings, expanding our book of business by purchasing
$481.4 million of face value, increasing our total
portfolio purchases to $12.4 billion since 1999,
continuing to purchase portfolios at attractive prices,
issuing a quarterly dividend and keeping our capital
structure properly positioned for additional purchases
that may arise.
I am very pleased with the results. And at this time I
would like to thank all of the people who work at Asta for
contributing to these results. It is with their hard work
that we can continue to drive the future.
Now I would like to open the discussion to any questions
you may have. Thank you.
Operator: At this time I would like to remind everyone, if you would
like to ask a question, press star then the number 1 on
your telephone keypad. We'll pause for just a moment to
compile the Q&A roster. Your first question is from Joe
Chumbler with Stephens Incorporated.
Joe Chumbler: Hey good morning. Great quarter, Gary.
Gary Stern: Thanks. Good morning.
Joe Chumbler: Hey, deal flow in the quarter, given your
liquidity, I thought it might be a little more. Can you
just talk about what you're seeing? Are you being a little
more disciplined or what's going on on the purchasing
side?
Gary Stern: Well we purchased $481 million. As we mentioned in
the press release, we anticipate closing on in excess of
$500 million in receivables within the next ten days to
two weeks. And we've been negotiating this - these two
transactions for about six weeks. So the timing was such
it was pushed back a little bit.
ASTA FUNDING INCORPORATED
Moderator: Steve Axelrod
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But I'll say that we're just staying disciplined. The
portfolios that we have purchased are at attractive
prices. So the IRRs are going to be very good and have - I
would even go as far as to say in the last six months, we
have purchased portfolios at more attractive prices than
previously - the previous six months. And they're all very
attractive, but we've - because of certain relationships,
we're able to buy this paper at an attractive price. And
we are just not going to go out and stretch by any means
on any portfolio.
And our model affords us as I have said many times, to be
very patient. So we are not concerned whatsoever that we
bought $481 million. We look forward to buying another 500
or a little bit more than $500 million that - because of
contractual just ironing out a contract to - for probably
two weeks longer or three weeks longer than we normally
do.
So...
Mitchell Cohen: Also Joe, it's (Mitch). We've also purchased
approximately $90 million worth of paper already. So here
we sit on August 9th having purchased almost $600 million
of paper already figuring the 500 million that'll close
within two weeks.
Joe Chumbler: Right. First two quarters were pretty strong.
Okay so you're not seeing any - you're not having to work
harder to find deals at this time?
Mitchell Cohen: We're not really working harder to find deals.
We're just making sure that these deals make sense. And I
just want to reiterate the portfolios we have purchased in
the last six months are - we expect higher returns than
previously which is counter to what people say in the
market that it's harder to buy good paper. We happen to be
fortunate enough because of call it longevity in the
business and certain relationships to purchase this paper
at lower price - better prices with better returns. And
part of that is having knowledge up front of assets that
are in the portfolios. We have pretty sophisticated
systems as I said before that identify assets up front
which is also part of this. So we're very happy.
ASTA FUNDING INCORPORATED
Moderator: Steve Axelrod
08-09-05/9:30 am CT
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Joe Chumbler: Okay, and then.
Mitchell Cohen: We've been out on the road with Gary and our
(legal) so tell people that getting the price is probably
99.9% of the business for us. So once we get that price
right, we can actually get these returns. And as you know,
because of our fixed infrastructure, we're not - we're in
good - we're in very good shape as far as purchases.
Joe Chumbler: Well that kind of brings me to my last question.
On the collection side you've got a unique model. Have you
done anything this year to tweak the way you manage
accounts, to maybe make it more efficiently or improve the
collection process as you manage your portfolio?
Mitchell Cohen: Yes we have. We've utilized more of a legal
strategy. And we also have, you know, I think what's been
very helpful is the call center because we utilize the
call center in a certain way which I'd rather not disclose
on the phone which has helped us really identify better
ways to collect.
But the primary driver - biggest driver is the legal
strategy and having excellent relationships, which I don't
want to minimize the value of, with attorneys and other
groups because of our longevity in the business. We happen
to do business with one legal network that we have for I'd
say in excess of 20 years been involved with. And it's a
very strong relationship among others. So when you have
that kind of relationship, people tend to go the extra
nine yards and make things improve and help them improve.
ASTA FUNDING INCORPORATED
Moderator: Steve Axelrod
08-09-05/9:30 am CT
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Joe Chumbler: All right. Thanks.
Gary Stern: You're welcome.
Operator: Your next question is from Charles Trafton with Americas
Growth Capital.
Charles Trafton: Hi thanks. Did you say you didn't have any
adjustments to your historical portfolios either up or
down in the quarter?
Mitchell Cohen: Correct.
Charles Trafton: Then how many portfolios are we talking about?
Mitchell Cohen: Many portfolios. These go back to as far, you know...
Gary Stern: It's in excess of 100.
Mitchell Cohen: It's over 100.
Charles Trafton: Right. And you didn't have any adjustments. So
you're collecting exactly what you thought you would
collect, no more no less.
Mitchell Cohen: That's the conclusion, yeah. We are collecting what we
believe is on our book, yeah.
Charles Trafton: Okay.
Mitchell Cohen: At least up until now.
ASTA FUNDING INCORPORATED
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Charles Trafton: How much zero basis collections did you have?
Mitchell Cohen: For the quarter we had about $4.7 million versus $2.6
million in the quarter before of last year.
Charles Trafton: Okay. And you mentioned a moment ago that the
returns you expect from purchases in the last six months
are higher than what you have had in the past. Higher than
what? Higher than a year ago, three years ago?
Gary Stern: I would say at least in the last six months.
Mitchell Cohen: Six to nine months for sure.
Gary Stern: Six to nine months prior period.
Charles Trafton: Then...
Mitchell Cohen: And again that's a driver of the price we are able to pay
for our portfolio.
Charles Trafton: Right, so the returns in the last six months are
higher than ever, higher than two years ago? What are you
comparing it to?
Mitchell Cohen: I don't think ever. We believe that they are at least
higher than the previous six to nine months.
Charles Trafton: Okay.
Gary Stern: I think you'd have to go back to 1999 to see the types of
returns we expect on the paper we bought in the last six
months.
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Charles Trafton: Ninety-nine, huh? Are you guys benefiting at all
from prices declining on the contingency side the
outsourcers are using? Are you getting better terms from
them?
Gary Stern: Oh, no. We have - that stays constant. And we are a
firm believer of not lowering contingency fees because you
get what you pay for. And we have negotiated fees and we
have, you know, we want to be fair to people. And if you
push them too low then they say yes, okay, they're not
going to do a good job.
So as I've mentioned, we've had some long-term
relationships. And we believe everybody has to earn money.
And as long as - we feel we've already negotiated up front
very reasonably.
Charles Trafton: Okay.
Gary Stern: But if people are doing well doesn't mean okay, now
we're going to ask you to collect for less money. So we
think the fair thing to do is do what we have to do. We
think because of our model we're not leaving money on the
table.
Charles Trafton: Right.
Mitchell Cohen: And in fact the way we reward them is by giving them more
paper for their performance.
Charles Trafton: Are you guys considering any additional
disclosures or transparency in your filings that would
help investors understand the drivers of the business,
similar to what your competitors? (Diganalysis) for
example makes it pretty easy to analyze the companies in
the space.
ASTA FUNDING INCORPORATED
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Mitchell Cohen: The way to answer the question really is that we
always think about it. We always bring it up. And, you
know, we'll try to continue to give you guys more, but not
at the expense of, you know, exposing the business to a
point where it can be duplicated, where it hurts the
competitive advantage.
But the short answer is yes. We're always looking to
disclose more. Vintage portfolios is a particular
sensitive one for us but, you know, we'll continue to look
at it.
Charles Trafton: Do you think you'll have any additional disclosure in -
this is a new fiscal year for you.
Mitchell Cohen: Yes.
Charles Trafton: Ended September, right?
Mitchell Cohen: I would have to speak it over with our CEO, Chairman and
our Board of Directors.
Charles Trafton: Right. Okay and...
Mitchell Cohen: (Unintelligible) reasonable. We'll do what we can.
Charles Trafton: And your revenue recognition rate was up. Is - how much of
that was due to the zero basis increasing?
Mitchell Cohen: Approximately 2-1/2%.
Charles Trafton: Two and a half percent of it? Okay. And what was the other
portion of it?
ASTA FUNDING INCORPORATED
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Mitchell Cohen: Effective pricing.
Charles Trafton: Right, so...
Mitchell Cohen: Performing at...
Charles Trafton: Lower amortization.
Mitchell Cohen: Percentages higher than historic rates.
Charles Trafton: Just from last ix months purchase?
Mitchell Cohen: Yes. From portfolios purchased in the last six, seven and
in some cases eight months.
Charles Trafton: Last question, how much of your collections came from
those purchases?
Mitchell Cohen: I would have to get back to you on that. They have to
carve them all out. I could do that for you.
Charles Trafton: Okay, that'd be great. Thank you.
Mitchell Cohen: Thank you.
Operator: Your next question is from James Obrien with Brean Murray.
James Obrien: Yes, good morning. Last quarter you commented that
you saw some reselling of decent sized portfolios in the
market perhaps maybe from some inexperienced buyers. Have
you seen any more of that over the last three months or
so?
ASTA FUNDING INCORPORATED
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Gary Stern: Reselling of, I'm sorry. Could you repeat the question?
James Obrien: I believe last quarter you said that you saw maybe
some portfolios being resold by some people rather
quickly. And I was wondering if that may be an indication
that some inexperienced buyers who purchased relatively
recently have kind of maybe thrown in the towel or are
trying to get out of the business. Did you see any of that
per se in the last three months or so?
Gary Stern: We've seen a little bit of that. I think that
occurs on a fairly regular basis. So we haven't purchased
any. But we've seen some, yes.
James Obrien: Okay. Turning back to the, you know, the cash
collections. Obviously it was strong this quarter, strong
last quarter as well. And you mentioned, you know, more
effective use of your call center and the legal strategy.
But is there anything else, you know, driving that maybe
from a, you know, an economy standpoint with low
unemployment and decent job creation? Or you just don't
feel like, you know, the paper you buy is tied to how the
economy does and whether people are employed or not?
Gary Stern: It definitely has something to do with whether
people are employed or not. The economy plays somewhat of
a role.
What takes place more important of a role is our ability
to find (unintelligible) and locate assets. So that's
really an important driver. And ...
Mitchell Cohen: It really is two fold. It is, you know, the
portfolios that we've purchased in the past and the
portfolios that we purchase in the future will be, you
know, laden with many more assets, jobs, homes. It's our -
it's up to us to go find those homes and assets and obtain
some judgments against them.
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James Obrien: Mm-hm.
Mitchell Cohen: But it certainly makes - the economy being somewhat
better does certainly add to the worth of our portfolio.
James Obrien: Okay. What about in the $500 million that you've
been negotiating? Can you give us a sense of the mix? Is
it tilted towards telecom?
Gary Stern: Yes, it's 60.8%.
Mitchell Cohen: No, no. The future buys?
James Obrien: Right.
Gary Stern: Oh I'm sorry. You know what? We'd love to. We just
don't want to say much before we close it.
James Obrien: Mm-hm.
Mitchell Cohen: But we'd be happy to talk about it after it's booked.
Gary Stern: Yeah, when we make the announcement we'll certainly
disclose in the announcement when it was.
James Obrien: And also are you looking at anything beyond say
credit card and telecom? Or it seems to - those two areas
seem to be the focus where you can get those attractive
IRRs or...
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Gary Stern: We've been looking at medical for a while and
utility paper. But as we've mentioned we're not going to
buy any new assets without being as close to 100% sure
that we'll do well. So we've looked at some portfolios,
passed on some, bid on a very, you know, few of the small
purchases. But we're very conservative. So we are looking
at those two asset classes and have been for probably six
months.
James Obrien: Okay.
Gary Stern: At one point we imagine - we would hope that we
will start buying some of those assets but we're going to
be very careful. We're perfectly content with what we are
doing now.
I just want to make another point to go back if I may to
the question about the economy. And as you all are aware,
the Fed is - there is an anticipation that the Fed will
increase, you know, interest rates slightly today. And we
do not believe that that's a major, major factor to us
although, you know, Wall Street would look at financial
companies and say it's a real negative.
But if one were to take an average of $30 million
outstanding on our credit facility, which at this point,
you know, we owe $22 million. We have pretty good cash
flow to lower, you know, to not keep the debt too high. An
increase of even a half a point in a year cost $150,000.
And if we were - assuming we had our debt up to $80
million that would only mean we invested more paper at,
you know, high yields. So if we owed another $50 million
and prime went up a half a point, it would cost another
$250,000 but we would - assuming that by having another
$50 million, the IRRs are so high that it's really an
insignificant number.
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So I think I need to drive that point home, that the
interest rate increase does not have a material impact on
us. And the bankruptcy law as I said before will certainly
help us.
Mitchell Cohen: The other thing (James) is as the interest rates go
up we might see some - we might start seeing some more
defaulting which might lead to some, you know, more paper
out on the street.
But one other point, we anticipate - think that there will
be more default because of recent banks - some of the
banks, many of the banks are changing their payments -
minimum payment structure so they're going to, you know,
have people pay more per month rather than having the
ability to pay interest only with a small payment. And
that might put pressure on more charges.
James Obrien: Okay. Well plus I think also following on that
with about a third of mortgages being ARMs, which is about
a ten year high in a rising interest rate environment, you
might see some people have trouble making their mortgage
payment so that could obviously create even more bad debt.
With that said...
Mitchell Cohen: Well we agree with that (James) without a doubt.
James Obrien: With that said, I just have one last quick
question, maybe kind of a - can you make a general comment
on, you know, with Washington Mutual and the Providian
announcement and Metris selling itself and, you know, the
Sears portfolio being sold to Citi, et cetera, et cetera,
does that change the landscape going forward in terms of,
you know, on people selling portfolios?
ASTA FUNDING INCORPORATED
Moderator: Steve Axelrod
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I guess what I'm trying to say is, you know, with less -
even though the deal flow is strong there will be less
sellers out there. Would that affect pricing or is it, you
know, companies such as yourselves who have long standing
relationships it will further strengthen your competitive
position because you have these long standing
relationships with, you know, as the sellers numbers
shrink?
Gary Stern: It will have no impact. We have relationships with
certain groups as you mentioned. And they are continuing
to do business as usual. It might even strengthen some of
the relationships. Some we mentioned we do not buy from.
So we anticipate absolutely no impact.
Mitchell Cohen: It might even give us a toe-hold into issues is that we
haven't dealt with in the past.
James Obrien: Okay great. Thanks so much.
Gary Stern: You're welcome.
Operator: Your next question is from Steve Delaney with Ryan Beck.
Steve Delaney: Congratulations on the quarter guys.
Mitchell Cohen: Thanks.
Steve Delaney: I wanted to come back to (Charles') point and dig
a little deeper on this revenue to cash collections. Your
ratio is 43.7 and it's consistently been around 40%, you
know, for the last year. So in this most recent quarter,
your peers, your three public peers averaged revenues to
cash of 77%. There was a high of 81% and a low of 74%.
ASTA FUNDING INCORPORATED
Moderator: Steve Axelrod
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Now, can you help us understand - I mean everybody's paper
is different and I'm sure everybody's models are a little
different but this seems to be a pretty glaring disparity
to me between just the, you know, the rate of amortization
of principle. Do you have any thoughts on that? You know,
obviously, you want to talk about yourself versus peers
but what's going on here and why is your revenue
recognition rate so much lower than the peers?
Mitchell Cohen: Well, let me start out by saying we have to gross ours up.
Steve Delaney: Yeah but it would be the same whether we, you know, we
could gross revs and gross cash. Agreed. But both would go
up, right?
Gary Stern: Right.
Steve Delaney: Okay. So the ratio should be generally the same.
Mitchell Cohen: The only conclusion that I can draw is that we're a
much more conservative company. When we established the
pools.
Steve Delaney: Well, I've had it suggested to me, you know,
there's a couple ways to get the same IRR. You can either
collect less money over a shorter period of time or more
money over a longer period of time. And it's been
suggested to me that you know, maybe the reason you do it
is that you are so conservative about writing principle
off faster is that in terms of your particular model and
your paper, you're going to get your IRR but you may not
have as long a tail, you know, on the portfolio in terms
of the aggregate.
You know, getting back to the issue about, you know, total
cumulative collections on history, that maybe you're
getting your IRR but maybe your approach to using legal
etcetera that, you know, you're going to get your payback
quicker and not have as long a tail. Do you think there's
any validity to that argument?
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Mitchell Cohen: I believe there's probably 40% validity to that
argument but our pools have historically and to this day
still have long tails.
Gary Stern: Steve, this is Gary.
Steve Delaney: Yeah Gary.
Gary Stern: They're much longer tails. We amortize over a five year
period.
Steve Delaney: Sure.
Gary Stern: And there are very long tails in that. We have many
judgments. And especially by utilizing the legal strategy.
So the cash does not come in so fast.
Steve Delaney: Right.
Gary Stern: You know, there's some variables. I don't know...
Steve Delaney: Well, Gary...
Gary Stern: And the other point is that as we've mentioned, we
micro manage all of the agencies and law firms as far as
settlements so we don't go for the quick (settlement).
Steve Delaney: Right. The discount.
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Gary Stern: The settlements. So we are very patient. We'd much rather
have a long tail. So I don't think that that is the case.
Steve Delaney: Well, it would seem to me then that if you have
been amortizing principle more rapidly that going forward
you're going to have a higher percentage of zero cost
basis portfolios. Okay? And that, you know, that at some
point obviously, the revenue we could expect this ratio to
go up. Because obviously, the, you know, you can have 100%
revenue to cash on the zero basis portfolios. Does that
seem reasonable to you that once you've amortized, you
know, such a significant amount of principle that the
ratio should go up?
Gary Stern: How about if I just say that I think your theory is 100%
accurate?
Steve Delaney: Okay. Well, we'll leave it...
Gary Stern: (Unintelligible) don't like to look forward
(unintelligible).
Steve Delaney: We'll leave it at that point. I mean obviously you did 58%
revenue growth with maintaining the ratio.
Gary Stern: Right.
Steve Delaney: So congratulations. Just one last thing, Gary.
There hadn't been much said about option cards since you
announced that. Can you give us a quick update? I think
you added about 25 people and two principles and you know,
maybe let us - how many people are still there? And how is
that working out for you? What does it say about your
appetite for future deals?
Gary Stern: Well, as you know, we purchased that option card
the same way we would have purchased any one portfolio.
And we have downsized the operation from 25 to about 6.
And the paper is collecting as expected and we would hope
to be able to find five, six, ten, fifteen other option
cards to purchase in the future.
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Steve Delaney: Okay. So down to about six people. Is that one reason you
think expenses will be flat in the fourth quarter?
Mitchell Cohen: Yes.
Steve Delaney: Okay.
Mitchell Cohen: The only debate on expenses in the fourth quarter
would be an Sarbanes-Oxley additions that are underway at
the moment.
Steve Delaney: Okay. And do you still have the two principles on board
that came over with option card?
Mitchell Cohen: Yes.
Steve Delaney: Okay. All right. Thank you very much.
Mitchell Cohen: Thank you (Steve).
Operator: Your next question is from Alex Trzesniewski with Granite
Pointe Capital.
Alex Trzesniewski: Yes hello. Could you tell me historically about
outsourcing 95% of the collections? I mean how -
what are the economics of that business? Is that a
business that - I mean did you go - I'm new to the
company. I'm sorry but did you go from doing more of your
own to less? Or how do you think that's going to develop
over time whether that's a business you might want to try
to capture more of the value in?
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Gary Stern: Alex I apologize. This is Gary Stern speaking.
Could you just repeat the beginning of your question
because it was a little bit low.
Alex Trzesniewski: Yeah. I'm sorry. I was just wondering about
could you not outsource 95% of your collections? I'm just
wondering the history of that and whether or not you would
consider which way you're kind of moving with that? And
whether there's an opportunity for you to capture even
more value by doing more of that yourself or if you've
actually been moving the other way with that?
Gary Stern: No, no. It's always been our policy and we
basically will not deviate from that, you know,
philosophy. Could it go to 90 or 85%? It could shift over
time but not really materially because we firmly believe
that our model is a great model. Our overhead, by and
large, is fixed. We do not think that by having many
collectors we can improve our bottom line. If we felt that
way, you know, we would hire many, many collectors.
So it makes a whole lot of sense for us to continue to
focus on buying portfolios and building scale. This is a
very scalable business. If we bought another, you know,
we're were fortunate enough to buy a billion, four
billion, $10 billion in paper, there would not be a
significant increase in our, you know, operating expenses.
Interest would go up somewhat but that should not be
material relative to revenue.
So we firmly, firmly believe that this is the best model
and the only model.
Alex Trzesniewski: So help me...
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Gary Stern: It's worked for us for many, many years. And part
of why it works is because we have some very strong
relationships with groups that we've done business with
for over 20 years. So one needs to know who they're doing
business with. Have, you know, good people on the other
side.
And you know, know what to send to what groups. Certain
groups specialize in small balances. Certain groups
specialize in certain areas. You know, there are many
different criteria that go into this and we monitor them
on a very, very close basis.
Alex Trzesniewski: And there haven't been any changes in the
capacity of the people you go to? You're saying in terms
of how much - you know, how much capacity there is out
there in the outside agencies.
Gary Stern: Oh no. Absolutely not. We - the people we are doing
business with can handle the capacity. And there are many
other groups that we know for many years that would love
to do business with us. So with that being said, we, you
know, have the best of both worlds. We have our people
we're doing business with. Others that want to do business
with. And it's our choice on who we decide to outsource
to.
So we've been in this business many, many years and we
don't think there will ever be an issue with capacity.
Alex Trzesniewski: Thank you.
Gary Stern: You're welcome.
Operator: Your next question is from Kara Murphy with Chilton
Investments.
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Kara Murphy: Hi.
Gary Stern: Hi. Good morning.
Kara Murphy: Good morning. I just had a question. You were
talking earlier about calculating IRRs on the portfolio.
When you do that do you consider the sale of portfolios as
part of the IRR?
Gary Stern: Yes. The sale is a cash collection component. Absolutely.
Kara Murphy: Okay. So in that respect then, higher prices for
portfolios would actually help the IRRs.
Gary Stern: You mean higher resale prices?
Kara Murphy: Right.
Gary Stern: Yes. Absolutely.
Kara Murphy: Okay. And then can you give us a sense of what the
breakdown was between cash collections and sales of the
portfolios?
Gary Stern: Yeah. We've never disclosed that but it's - we have not
disclosed that. And we continue not to disclose that.
Kara Murphy: Is there any way you could maybe give us a sense of how
that's shifted over the last couple quarters?
Gary Stern: How has it shifted? Has it shifted much? We can get that
to you.
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Mitchell Cohen: I can get back to you on that. It's, you know,
we're a receivable management company so we buy, sell,
manage, and liquidate through collections paper. So you
know, I could try to get back to you but I mean with the
business operating today the same way it operated a year
ago, three years ago, four years ago, and more.
Gary Stern: Right. I mean we - when we sell paper we sell paper
at a point that we feel we're selling it at an
indifference price. So we're not just selling paper for
the sake of just flipping paper quickly. We don't believe
we leave a lot of money on the table. And that's the way
we continue to do business. So to plan, you know, a way of
doing business. You know, a planned strategy we've had for
many years and will continue.
Kara Murphy: Is there like a typical duration that you'll hold onto a
portfolio?
Gary Stern: Quite a long time. Once in a while we might, might,
under very rare circumstance flip something very, very
quickly but that would be highly unusual. It's after
several years. After we feel we've done what we can do
with a portfolio and it's time to sell and make sense to
put paper out in the market.
Mitchell Cohen: As someone once told me, you know, you squeeze the
lemon so many times that you just can't squeeze it
anymore.
Kara Murphy: And then will you typically send one portfolio out
to multiple collection agencies or will it stay with the
same collection agency?
Gary Stern: No. Our strategy is we'll send paper either through
various law firms - well, I would say a combination of
three items. One is we keep certain accounts in house, in
our collections center. The other would be we would send
paper to agencies and law firms. We never send one entire
portfolio to one group.
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It doesn't - the effective collections strategy would not
work for two purposes. One is we don't think one group
would do as effective a job as spreading it around and
it's much easier for us to compare our results to other
people and you know, verify a long proven strategy of
which groups collect the best on certain assets.
Kara Murphy: Okay. Thanks.
Gary Stern: And then we - I don't think I answered your
question completely 100%. So it may stay somewhere for six
months and go to another agency or law firm for six months
or nine months. You know, various different strategies.
But we do not keep paper usually at a group for more than,
you know, six to twelve months because it becomes stale.
Kara Murphy: Okay. Thanks.
Gary Stern: You're welcome. With the exception, I apologize,
for judgments. Judgments we will keep at a law firm longer
than that.
Operator: Your next question is from Charles Trafton with America's
Growth Capital.
Charles Trafton: Hi. Thanks. What is your legal - what is your
legal strategy with the small balance telecom accounts?
You've been a lot of telecom paper and you mentioned legal
was going to be a bigger part of the mix.
Gary Stern: Well, legal on telecom is just evolving and we will
use a strategy depending state specific and balance
specific. Depending on costs. So we will use a legal
strategy. There are balances that are high enough on
telecom to utilize a legal strategy.
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Charles Trafton: Okay. What...?
Gary Stern: The number of accounts being sued will not be as high as a
credit card portfolio.
Charles Trafton: Right.
Gary Stern: But there will be definitely a legal strategy
utilized. And we've started that about three, four months,
five months ago on a small scale. Now we're going to ramp
that up.
Charles Trafton: And what kind of balance are you going after in that kind
of...?
Gary Stern: It varies. You know, we might go after a $500
balance where the state laws allow us because of court
costs to, you know, sue somebody for $500. There are other
states where it may not pay to sue unless they owe $1,500
to $2,000.
So I would generally say anything under four to $500
dollars might not make sense and you know, anything over
$1,000 to $1,500 would make sense, of course, with our
same knowledge of predictability of collectability. We're
not going to deviate from that.
Charles Trafton: You might have given this out earlier but what of
the 43.5 million in collections was sales?
Gary Stern: We haven't given it out. We just said we have not
done that or we've never done that. We've always viewed
that as, you know, regular collections.
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Charles Trafton: Okay. Okay. I don't want to beat this horse to
badly but going back to some of your earlier comments
about amortization rates, you said maybe yours is higher
because you're more conservative than other companies. Is
that really fair to say given that you only have $4
million of zero basis in collections? I mean in other
words, if you were very, very conservative over time
wouldn't you be collecting a whole lot more cash than you
assumed for accounting purposes?
Gary Stern: Well, zero - well, it takes time to get to zero basis.
Charles Trafton: Right. But you've been in this business a long time.
Gary Stern: Right. But we really started buying paper in the
middle of 1999. We bought a large portfolio then in 2000
by design because we had a portfolio we needed to digest.
We didn't buy hardly any paper and we really started
ramping up buying a significant amount of paper, I believe
in 2003, in the middle of 2003 so it's only been two
years.
Charles Trafton: So even still though, two years into it this
quarter for example, you didn't ratchet up any of the - I
mean you weren't collecting any more than you thought. As
you said earlier my question you're collecting exactly
what you thought you would two years later.
And if you were incredibly conservative two years into it
wouldn't you be collecting a little bit more than you had
conservatively thought?
I don't know it's just a thought.
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Gary Stern: Yeah, I don't think so. I think we're collecting what we
thought we would collect.
But we tend to be conservative. Now we don't also by using
a legal strategy its take longer to collect in other
words.
So we just started really ramping that up in the last six
to nine months.
Charles Trafton: And how much comes through that channel?
Gary Stern: Legal, (unintelligible), you know, (Charles) I apologize.
We don't have that handy.
Charles Trafton: yeah.
Gary Stern: But we can - maybe later you can call us and we certainly
will get that.
Charles Trafton: Okay, we'll go through it later.
Gary Stern: That has been increasing and should continue to increase.
But I would hope and, you know, over time that the Zero
basis would increase.
Charles Trafton: Right, I mean going beyond Zero basis regular
ratcheting up collections. I just don't know if it's
accurate to say you're more conservative than anyone else
just because you've been accurate. So that's all.
Thanks.
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Gary Stern: You're welcome.
Operator: Thank you. At this time I'm showing no questions.
Gary Stern: Okay. Thank you for participating in...
Operator: I'm sorry, you do...
Gary Stern: Our Third Quarter conference call.
As always should you have any additional questions please
feel free to call Mitch Cohen or myself. We look forward
to speaking with all of you again later this year to
discuss Asta's yearend and fourth quarter results.
Have a pleasant day.
Operator: Thank you. This concludes the Asta Funding, Incorporated
Third Quarter and Nine Month Financial Results conference
call.
You may now disconnect.
END