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Metris Fattens Up on Fee Growth

Did Metris (MXT), the credit card lender to tainted borrowers, speed up recognition of fee revenue in an effort to goose second-quarter earnings?

Wednesday morning, the Minnetonka, Minn.-based company reported 63 cents in per-share profits in the second quarter, 19% ahead of the 53 cents in the year-ago period and 3 cents more than analysts expected. The stock jumped $1.60, or 4.3%, to $38.50.

Those earnings were aided by an unexpected jump in revenue from Metris' fee businesses, known as enhancement services. Revenue from enhancement services totaled $82.9 million in the second quarter, 6% above the $78.3 million in the first quarter. Enhancement services are particularly important because they are so lucrative, carrying a pretax profit margin in the region of 70%.

On the Rise
Metris' stock in 2001

So what happened in the second quarter that smells strange? Well, in the previous nine quarters, enhancement services revenue has been equivalent to between 31% and 35% of the previous quarter's deferred income, which is a balance sheet item that represents money received but not booked as revenue in the income statement. In the last four quarters, that ratio has been steady, between 31% and 33%.

However, in the second quarter, enhancement services revenue amounted to 39% of the previous quarter's deferred income. It's possible that Metris has changed its product mix to allow for speedier recognition of revenue. Maybe that'll be the company's explanation on its conference call, scheduled for 11 a.m. EDT. (Metris didn't return a call seeking comment.) The other explanation is that Metris, fearing that it would miss earnings forecasts, decided to recognize as sales a greater share of its deferred income than before.

The increase in enhancement services in the second quarter doesn't make much sense, because deferred income has been falling this year. The second quarter's $211 million is down sharply from the fourth-quarter level of $236 million. And the number of people who use enhancement services also dropped, to 5.9 million in the latest period from 6.1 million at the end of last year.

How much could this change have added to earnings? Possibly around 6 cents. By going to 39% from 33% of deferred income, Metris booked an extra $12 million in revenue. Let's assume 70% of that, or $8.6 million, flowed through to pretax earnings. Adjust for taxes and Metris' net income was boosted by $5.3 million in the quarter, which is about 8% of net income.

Look out for an update after the call. Detox examined Metris last month.

Know any companies that the market may be misvaluing? Detox would like to hear about them. Please send all feedback to peavis@thestreet.com.

In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

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