Updated from 11 a.m. EDT: 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, the Minnetonka, Minn.-based company reported second-quarter earnings of 63 cents a share, up 19% from last year and 3 cents more than analysts expected. The stock jumped $1.81, or 4.6%, to $38.81. Earnings were aided by an unexpected jump in revenue from Mertis' 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%.
So what happened in the second quarter that smells strange? Well, in the previous nine quarters, enhancement services revenue has equaled between 31% and 35% of the previous quarter's deferred income (a balance sheet item that represents money received but not booked as revenue in the income statement). In the last four quarters, the ratio has been steady at 31%-33%. But in the second quarter, enhancement services revenue jumped to 39% of the previous quarter's deferred income. One 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.
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