Popular Inc (BPOP) 2004 Q4 法說會逐字稿

Good morning, and welcome to the E-LOAN Fourth Quarter 2004 Earnings Conference Call. All participants will be able to listen only until the question-and-answer portion of the call. This conference is being recorded. I would like to introduce your first speaker for today's call, Mr. Chris Larsen, Chairman and Founder. Sir, you may begin.

Thank you for joining us today. With me on the call are Mark Lefanowicz, our President, and I'm proud to say, our newly named Chief Executive Officer, and Matt Robert, our Chief Financial Officer.

Let me begin by giving you a brief overview of the quarter and the year, followed by Matt, who will review our financial performance, followed by Mark, who will review our operations and business strategy.

I am very pleased with our fourth quarter results, which showed revenue growing 36 percent from the same period last year to $36.2 million, with income of $1 million or 2 cents per share. Revenue also grew from the previous quarter, even though the fourth quarter is typically a seasonally weak period. For all of 2004, we reported total revenue of $135 million with earnings of 1 cent per share, surpassing our forecast for breakeven results. Looking back on the full year, 2004 can be characterized by a fast-changing interest rate environment. For example, since the third quarter of 2004, it's safe to say that markets have been surprised that long-term interest rates have declined even as short-term interest rates have continued their steady increase.

Obviously, this has resulted in a change in consumer credit demand over the last several months. For example, with HELOC's and first mortgage rates converging, consumers looking to extract equity from their homes are often better off with a cash-out first mortgage. This is a very different conclusion than we saw in Q3, when HELOC's were clearly favored by consumers. Despite these changes, E-LOAN's overall business has remained stable and growing, which gives us even more confidence that our diversified model is exactly the right strategy. For example, in Q4 we were able to seamlessly adjust our mix of HELOC's into cash-out first mortgages as our customers wanted, while still growing our overall revenue and earnings.

Looking at our major accomplishments for the year, clearly our diversification efforts were a major strategic success, which will benefit the Company with more predictable growth going forward. For the year, over 73 percent of our revenue, nearly $100 million, came from our diversified businesses. That's up from 53 percent or $80 million in the prior year. We expect our diversified businesses to show similar growth in 2005.

We also made substantial tactical improvements in our three key leverage areas -- capital markets, process reengineering, and customer acquisition. For example, in capital markets, our revenue per HELOC loan increased approximately 25 percent compared to last year, while we maintained aggressive pricing to the customer. Our capital markets efforts also allowed us to grow our cash balance to over $55 million at the end of the year. That's up from $34 million at the end 2003. In process reengineering, we made good progress in our efforts to reduce costs and cycle times. During 2004, we built out our ECS subsidiary to control third party costs, and launched our offshore facilities in India and the Philippines to reduce costs overall. Both of these efforts continue to scale.

Finally, our marketing team has done a much better job measuring the results of our specific campaigns, allowing us to respond more quickly to market changes. Because we like the marketing results we are seeing, we will be increasing our marketing spend in 2005, and launching a major new advertising campaign beginning next quarter.

Much of the success in the key areas is directly attributable to the leadership and skill of our President and COO, Mark Lefanowicz, who has been on the job for over one year and has been a director of the Company for nearly two and a half years. Accordingly, the Board and I are very pleased to announce effective today the promotion of Mark to the role of CEO and President. Consistent with many companies, we will be eliminating the position of COO.

As founder of the Company, I am excited to continue to serve E-LOAN as an active Chairman and to help Mark and the Company remain as focused as ever on our pro-consumer values, which are all about making the lending experience more honest, affordable, and enjoyable.

And with that, let me turn the call over to Matt to discuss our financial results.

Thanks, Chris. Before I begin the financial review, I'd like to remind you that during this call we may make forward-looking statements based on current expectations that involve risks and uncertainties. E-LOAN's actual results may differ from the results described in the forward-looking statements. Factors that could cause actual results to differ include, but are not limited to general conditions in the lending industry, interest rate fluctuations, and the impact of competitive products. These and other risk factors are detailed in E-LOAN's filings with the Securities and Exchange Commission.

Now I'd like to review a summary of our financial results for Q4 2004. Our earnings press release includes a detailed presentation for your review. Revenue totaled $36.2 million, an increase of 36 percent compared to $26.6 million in the same quarter of 2003. Our diversified revenue, comprised of total revenues excluding prime refinance mortgage, grew 33 percent and totaled $25.2 million or 70 percent of total revenues. Demonstrating the significant progress that we've made in growing this more stable revenue base, in 2004, diversified revenue comprised 73 percent of total revenues, compared to 53 percent in 2003.

Now I'll walk you through the revenue on our three primary product lines -- mortgage, home equity, and auto. Starting with mortgage, there are two primary buckets to our mortgage business -- refinanced mortgage and diversified mortgage. Diversified mortgage is comprised of purchase and non-prime mortgage revenue and is a more stable revenue source under various interest rate environments. Of the total Q4 mortgage revenue, 55 percent or $11 million was refinanced mortgage, and 45 percent or $8.8 million was diversified mortgage. Refinanced mortgage was up 45 percent and diversified mortgage was up 10 percent compared to the same quarter of 2003. Our overall conversion rates on Q3 mortgage applications and to close (ph) loans were up 9 percent compared to Q2 rates. This was driven primarily by the increase in refinanced mortgage conversion rates.

Next is home equity. We posted $12.3 million in home equity revenue during Q4, an increase of 53 percent compared to Q4 2003. Home equity sold loan volume increased 17 percent and revenue per loan increased 45 percent compared to Q4 of ‘03.

And now, turning to auto, our auto revenue totaled $2.8 million in Q4, an increase of 8 percent compared to the same quarter in 2003. Auto sold (ph) loan volumes decreased 10 percent compared to Q4 of 2003, but was offset by a 10 percent increase in revenue per loan. Net income was $1 million or 2 cents per share on 66.7 million diluted shares. Direct margin, which is defined as revenue minus variable and fixed operating expenses, totaled $18.4 million, an increase of 58 percent compared to the same quarter of 2003.

Sales and marketing expenses totaled $11.9 million, an increase of 24 percent compared to Q4 2003. General administrative expenses totaled $3.3 million, an increase of 85 percent compared to Q4 2003. The majority of the $1.5 million increase compared to Q4 2003 is due to expenses related to Sarbanes-Oxley compliance efforts.

As for our balance sheet, total assets at the end of the quarter were $118.3 million, which includes cash and cash equivalents of $55.1 million, and loans held for sale of $17.5 million. Total liabilities at the end of the quarter were $31.4 million and included $14.7 million in borrowings related to mortgage, home equity, and auto loans held for sale. Our total stockholders equity at the end of the quarter was $86.9 million or $1.36 per share on 63.8 million basic shares outstanding.

Turning to our 2005 guidance, we expect total revenue of approximately $165 million, representing a 22 percent improvement over 2004 results. In 2005, we anticipate that diversified revenue will grow to approximately $122 million comprising 74 percent of total revenue and representing a 25 percent increase over 2004 diversified revenue. We expect 2005 pre-tax EPS of approximately 13 cents per share, compared to EPS of a penny per share in 2004.

Some of the key assumptions in the forecast are that the 10-year treasury rates will be in the 4 to 5 percent range for the remainder of the year, our total 2005 sold loan volume will be approximately $5.8 billion, marketing spend will be approximately $58 million, the combined technology and G&A expense will be approximately $20 million, and our average diluted shares outstanding will be approximately 68 million shares.

And now, I'd like to hand the call over to Mark.

Thanks, Matt. To begin, I'm thrilled with my added responsibilities and am excited about continuing to work with Chris on executing our radically pro-consumer business plan. I'm going to spend the next few minutes talking about (1) our fourth quarter operations, (2) the progress we have made in each of our three key lines of business, and (3) sharing some of my excitement about the future of E-LOAN.

Let's first review our auto platform performance. A recent article in the American Banker discussed the challenging auto loan environment resulting from recent increases in the two-year treasury rate of over 50 basis points. This increase has had a substantial negative impact on both our revenue per loan and unit volume. Although we anticipated that rates would increase during Q4, we did not expect that such increase would impact revenue per loan and especially unit volume to the extent that it did. However, given that the short-term rates have increased close to 200 basis points since December of 2003, we were pleased with overall revenue growth of 8 percent versus the fourth quarter of 2003.

Costs per loan increased primarily due to the decrease in funded units as well as start-up costs associated with the hiring of 20 customer service representatives in the Philippines. We expect the prior period trend of decreasing auto loan cost per loan to continue in 2005. The highlight of Q4 in the auto platform was the launch of partnerships with both Edmunds and eBay in December of ‘04. These partnerships combined with other marketing initiatives should help offset the continued impact of rising interest rates in 2005.

In summary, 2004 was a successful year for our auto platform as we increased gross margin from $400,000 in 2003 to over $4.4 million in 2004. We continue to believe that our auto platform is an important aspect of our overall strategy. In addition to contributing to diversified revenues and margins, it is also the first time a significant number of our customers are exposed to the E-LOAN experience. The speed, ease, and openness of our auto loan experience, especially for younger auto buyers, can lead to a customer for life. We believe these customers will eventually use E-LOAN to finance their home loan purchase, then refinance their home, and finally, take out a home equity loan.

Now let's talk a little about home equity. Q4 represented our home equity group's second largest revenue and direct margin quarter in our history. Revenues were up 53 percent over Q4 of 2003. While home equity volume increased in Q3 versus Q2 due to increasing first mortgage rates, volume decreased in Q4 versus Q3 as first mortgage rates decreased, driving some customers back into our cash-out refinance product. However, continued refinements in how we sell our home equity loans to the capital markets resulted in the highest revenue per home equity loan in the Company's history.

Q4 home equity costs per loan increased due to a reduction in funded units, as well as costs incurred related to increases in outsourcing initiatives. On a year-to-year basis, our home equity platform revenue, without interest income, increased over 74 percent, and we improved direct margin by over 118 percent as conversion percentages, revenue per loan, and efficiencies improved.

Q4 is seasonally the slowest quarter for home equity loans and the first and second quarters of the year are the strongest. We anticipate Q1 ‘05 home equity approved applications to be approximately 5 percent higher than in Q1 ‘04.

Turning to first mortgage, as Chris and I both mentioned earlier, the decrease in both long-term rates and the increase in short-term rates drove customers from home equity lines of credit to first mortgages. This helped first mortgage post a 27 percent increase in revenue, including interest, versus the last quarter and also Q4 of 2003. Q3 conversion rates, which impact both Q3 and Q4 revenues increased from 13 percent to 14 percent. We expect Q4 conversion rates, which impact both Q4 and Q1 ‘05 revenues to increase to 16 percent. As stated in the third quarter call, we began actions to improve first mortgage capital market's execution. These efforts, adding new investors, and taking advantage of market niches, began paying off in Q4 as our revenue per loan increased approximately 5 percent versus Q3.

On the business development side, recent agreements signed with realtor software providers and others have resulted in a number of realtor alliances that should begin producing results in Q1 ‘05. Two of the first three of these alliances signed involved local broker/realtors each with over 350 agents. Specific process reengineering efforts helped reduce Q4 to Q3 costs per loan by almost 12 percent. These initiatives range from negotiating lower vendor costs, document production and storage, to using technology to replace tasks people previously performed.

As discussed on past calls, we've formed a new subsidiary, Escrow Closing Services, or ECS, to reduce costs, increase revenue, and by eliminating third party vendor services, improve the customer experience. Just last week, ECS started its second line of business, performing first mortgage appraisal services. We also expect to kick off our first mortgage title business in Q2 of ‘05. Revenues from both of these businesses should contribute positively to ‘05 revenues and direct margin.

Now, turning to marketing. In early 2005, we engaged Bill Holiday as our media purchaser and Merkley as our advertising agency to continue to improve the effectiveness of our marketing. These companies have worked with well-known brands, such as Mercedes and Jet Blue, and are both actively involved in our new ad campaign. We expect the combination of these new resources, our improved marketing analytics, and our new ad campaign, to reduce customer acquisition costs and continue to establish ourselves as the only true upfront lender.

I would now like to wrap up by talking a little bit about how excited I am about the future of E-LOAN. Consumers continue to want and need open, honest, and unbiased advice when getting a loan. As the sole mortgage loan and home equity lender that doesn't compensate their sales force based on the interest rate they charge, we believe we are the only true up front lender.

Internet usage in this country continues to grow. Currently, 50 percent of all U.S. households have Internet access in their home. This number is expected to grow to 70 percent by 2007. According to the MBA, approximately 35 percent of homebuyers use the Internet to apply for a mortgage and according to Jupiter Research, over 75 percent of auto purchasers research information on cars prior to purchasing a vehicle. People using the Internet expect open, honest, and unbiased advice. E-LOAN has built a unique culture to take advantage of the consumer's increased use of the Internet to obtain an auto, home equity, or home purchase loan.

I'd like to now open it up for questions.

(Caller Instructions.) Todd Halky of Sandler O'Neill, you may ask your question.

Hey, guys. How's it going? Good. Just on the capital markets business. Can you just give a little more color? I mean, we saw the interest income on really all three products just increase dramatically even sequentially as some of the gain on sale revenues were down, at least within the home equity side. So can you just kind of walk us through what you are actually doing there in order to generate that fairly impressive growth within the interest income?

Yeah, Todd, this is Mark. I'll start. There's really two factors. One of the factors, as you know, is last quarter we were required to restate in terms of how we categorize some of our interest income. So that had some of the impact. But the majority of the impact comes from the fact that we've done a better job about managing our interest spread. Which means that we can hold loans longer, pool them up in larger sizes, and then sell them appropriately at the right time so we can take advantage of the interest spread without hurting revenue per loan when we sell the loan.

Now, is that introducing any kind of credit risk or exposure to the model that wasn't previously there? Like if the time lapse that you are holding a loan is increasing dramatically or is it --?

No, it's not, I mean it doesn't increase any actual risk because we have the -- well, two things. One, for home equity lines of credit, it's a variable rate product. So, that takes the interest rate risk out of the equation there, and we also hedge the production as well. And it's all fully hedged once we fund the loan.

Okay. Then on a couple of things on guidance. First thing is, you know, you're looking for a substantial increase in marketing in ‘05, it's about 22 percent based on where you guys came out in ‘04, and that's pretty much right in line with your revenue expectations of a 20 -- I think it's 22 percent actually, revenue growth. So I guess my question here is I understand you have some new marketing campaigns in place. But, you know, are you seeing -- where's the leverage here, I guess is my question. You know, you have to increase marketing basically in line with the increase in revenue on a percentage basis anyway. Is that due to increased competition at least on the home equity front given that as people anticipate, you know, a slow down on the first purchase of mortgages? Or kind of –- do you have a little more color there?

Yeah, I'll try to walk you through that. I mean, effectively, we're focusing on in ‘05 growing the business in terms of the top line. So whenever you are having that as your primary focus, the other way that you can do it is try to more focus on optimizing every dollar of marketing spend. So the incremental dollars in marketing spend to provide that extra dollar of revenue aren't going to be your most efficient dollars spent, because you are going to continue to drive the volume and you're going to have --– obviously, most of that drops then to the bottom line as you build the business. So that's our focus on growth in 2005. We also have some investments that we have in marketing spend. As Chris mentioned, we're going to be doing a new marketing campaign which will include some production costs for television advertising and things along those lines. So we are going to be making some adjustments from a structural perspective to continue to make the marketing side more and more efficient. But it's really also about driving the growth on the top line.

Okay, and maybe, Mark, can you just address kind of --.

--And also, just one other thing . And we will be spending -- effectively the model says we're going to be spending another $9 million in marketing to drive another $30 million in top line growth in terms of revenue.

Yeah, absolutely, I understand. I mean, the other fixed costs -- I mean, if you can hold the G&A in check at $20 million, basically flat, that's phenomenal and that does show you some leverage on the operational front. I'm just on the marketing side, the competition I guess is the biggest question here.

Well, Todd, the only thing I would to add, I'd reinforce what Matt just said, is, you know there is a substantial increase in revenue versus the increase in the marketing spend. But even more important than that, you know, the $9 million to the $30 million. But you've got to remember some of that marketing spend, you take -- we've engaged some, what we believe, very, very good entities, Bill Holiday and Merkley, to help us. And shooting a new ad campaign, which we believe is going to be far better than our current ad campaign, is expensive. So a lot of that cost in marketing is basically production costs and infrastructure costs that we don't expect will continue, you know, in the future. We think it's kind of like a one-time thing that'll happen sometime during this year.

Okay, that's fair. Just a couple final ones. Just, on taxes, I mean, we're talking about pre-tax guidance here of 13 cents. I guess, I mean, you guys have been profitable for three years at least on a reported basis, or I think even on a GAAP basis. You know, at some point don't you even, even if you have the NOLs, don't you have to start accruing taxes? When would you anticipate that happening and what are the NOLs as they stand right now? And just a little bit of color on the tax situation. Is it an ‘06, ‘07, ‘08 story?

Yeah, I -- you know, the reason we present guidance on a pre-tax basis, Todd, is because of the fact, as you know, we've had substantial net operating loss carry forwards which drive through a deferred tax asset, which mostly is reserved for at this moment. And we need to at some point, along with our auditors, make a determination as to the realization of that deferred tax asset. And when we do that, then you will have -- effectively, you'll have a one-time event for the income statement where you recognize the deferred tax asset, and then, you go on a more normalized tax rate for book purposes.

We didn't guide to that happening in ‘05. We're not sure that it won't happen in ‘05, and that's why we've focused on doing it on a pre-tax basis. So as far as —to answer your specific question about what year will we recognize the deferred tax asset, I think that as we continue to post increasing earnings here, obviously, it becomes more imminent that we will recognize the deferred tax asset. That's probably as far as I can go in terms of timing because we haven't made the determination yet.

Okay. That's fair. And then on the relationships with eBay and Edmunds, what do you think the financial impact on 2005 could potentially be from these relationships? If you can kind of try to quantify the impact there?

Well, Todd, I'd answer that. This is Mark. The early results so far on both eBay and Edmunds are very promising, but it's really too early for us to give any specific numbers due to a variety of reasons, including nondisclosure agreements, etc. What we're really excited about is on something like eBay, they sell close to 40,000 cars a month. When they sell those 40,000 cars a month, you know, they need a finance provider. We're going to be one of their finance providers. We're an easy finance provider for them. Our reputation of being fast and easy is even better on something like eBay, because of the fact that for us you don't need to get your car inspected, you don't need to get your car valued or appraised. And since many of eBay's cars sell across state lines -- and that's probably close to 70 or 80 percent of them that do go across state lines, that's a huge advantage for us. So we think our model -- open, honest, treating the consumer really fair -- is a perfect mix with their model.

And part of the same thing happens with Edmunds. You know, Edmunds is a leading provider of open and honest information on auto vehicles. And as more and more people go to Edmunds, and they are the leading site where people go to look for info on cars, more and more people are going to be looking for financing on those cars. And as the sole provider of financing, we're going to continue to see more and more attraction. As more and more people use the Internet, they'll look for information on the vehicle to purchase. More and more people will use the Internet to look for information and eventually obtain their financing.

Thank you. And Chris, just wanted to say good luck with anything you choose to do. Hopefully, we'll stay in touch. Thanks, guys.

Thanks, Todd. And I should just say, you know, first and foremost, I am here with E-LOAN. We're going to be working very actively as the Chairman and making sure that we're sticking to all the great things that we know we can be doing. But, thanks for the comment, Todd.

George Sutton of Craig-Hallum, you may ask your question.

Hi, guys. Congratulations on the great results. I wanted to poke at the outsourcing side of what you're doing, and just get a sense of when should we start to see the real benefit there. If I look at your guidance and the increase in marketing spend, obviously, one big offset looks like you're going to get continually more efficient. And I think part of that is driven by outsourcing. Can you just address those specifics?

Sure, George. It's Mark. How are you today? What I would say is each quarter that happens you'll see a little bit more of an incremental impact -- a positive impact in terms of our outsourcing. As you know, we are outsourcing in the Philippines for sales type functions for both our auto group, as well as for our home equity group. The home equity group really just kicked off in January. You know, there's a lot of infrastructure cost incurred in December and even in November getting them up and running. But we now have close to 15 people doing home equity sales of our more difficult products, believe it or not, in the Philippines and so far, it's been very, very successful. So, it's going to take a while since those 15 people are a small percentage of our total HELOC's headcount, but we totally intend to grow that throughout the year.

The other thing that I would say that we're really, really excited about is the back office outsourcing that we're doing in India relating to home equity and eventually some of our other functions in some of our other platforms. That's very exciting, because in order to make that work, what we had to do was go paperless for the portions that they're working on. Obviously, for them to do anything over there, we can't ship them paper. We have to make sure that they see it on the computer here just like we see it. And so far, that's been very, very cost effective. So, so far, we're really, really happy with the results and we expect every quarter for the increase or slash -- you know, increase in productivity associated and decrease in cost per loan to improve as time goes by.

Okay, great. And the, on the new ad campaign, your traditional television advertising campaign has been what I would view as more of a brand building campaign than transactional. Can you give us a sense on the new campaign? Will it be more transactionally focused? And I believe it was you, Mark, that spoke at an industry conference recently and kind of chastised the industry about the lack of transparency. Is that the direction you are headed from a marketing campaign?

What I would say, Craig, is that what we're going to do is try -- oh, I'm sorry. What I'm going to say, George, is basically what we're going to do is a new ad campaign and I really can't share a lot of it with you right now because obviously it's still in development. But it is focused primarily and very, very heavily on what we believe we really stand for, which is, you know, it's fast for the consumer, it's easy for the consumer, and most importantly, we are open and honest with the consumer.

Okay. And then, lastly, you mentioned the new broker/realtors that you will start to work with. That is kind of the golden goose you haven't had much access to in the past. I know you've been more active at tradeshows. Can you just give us a sense of how you got these relationships and what that might mean from the perspective of future growth in mortgages?

I really can't give you a sense of how we obtained those relationships, just because I think it's something that I don't want another mortgage entity to copy or try to do what we're doing. But what I can tell you is that we're really excited about what can eventually happen, because we now have access to two realtor firms that are local firms. They dominate a marketplace. You know, one of them is in the Midwest, one of them is in the southwest. They have a local marketplace that they have a good, good chunk of the business. And we're working really closely with them to make them understand that using an Internet lender is actually a better solution for them than them using their local mortgage broker or the local, you know, WaMu or Wells Fargo or B of A across the street. So, we're excited about what we can do with that. We're in the very early stages.

In addition to the two that we have lined up, we have two more that we're close on. I would expect that once we get a little further down the line, you will see some, you know, press releases on this kind of stuff. But right now, we're trying to keep it low profile due to competitive reasons.

Perfect. Thanks, guys.

Mark Sproule of Thomas Weisel Partners. You may ask your question.

Thanks. On the account -- sales side, would you guys say, I mean, on a go-forward basis, that either maintaining or improving your gain on sales can be driven both by continued cost cuttings and the capital markets, or is one driving the other? I mean, as we look out on some of the other lenders across the sector, or across the mortgage market, most of these guys are seeing a lot more pressure on the gain on sales side of the business. So is there a reason or a way that you guys are going to be able to continue to push that in a positive direction?

Yeah, Mark, it's Matt. One, I'd say, is I think a lot of the positive movement that we say in the gain on sales side, already has been about Mark's involvement and some of the team that he brought in on the capital markets side. They've done a great job of both expanding the universe of investors that buy our loans, so that increases the competition, as well as just structuring the pools of loans in different ways to maximize the execution that we get when we sell them into the capital markets.

So I think some of the positive movement has just been more about execution, tactical execution in-house versus just broad markets. The other -- the broad market is positively impacting it, particularly on the ARMS side, adjustable rate mortgage side, and on the home equity side, where, as you know, there are a number of financial institutions that are liability rich for them, which they are heavy in deposits and are looking for assets to match against those in order to recognize a positive spread and drive their business. And we are an excellent source of high quality loans to fill into that need.

So I wouldn't say that you are going to continue, and nor does our guidance contemplate continued, you know, significant up ticks in terms of gain on sale. I think we're guiding effectively somewhat kind of steady state into ‘05 versus ‘04, with again, the acknowledgement that a lot of the great work that Mark and his team have already done has shown up in the ‘04, kind of as we exited ‘04, numbers in terms of gain on sales.

Are you guys seeing any kind of pricing pressure impacting gains or starting to impact maybe negatively going forward, like some of the other lenders may have seen last quarter?

Mark, this is Mark. Real quickly, just to reemphasize what Matt said, and also to add something different, what I would say is one of the advantages that we have that many of the other larger lenders don't have is we're much, much more nimble than they are. And there are many, many inefficiencies left in this market. And if you've been in the business for a long time, which I have, and if you have very good relationships with the people in the capital markets that are longstanding, which I have, you can take advantage of those little inefficiencies if you're nimble.

If you're large, you can't take advantage of them, or, even if you can take advantage of them, it has so little of an impact to you because you're so big that it's almost not worth it for you. So what we're really, you know, continuing to do is we have a list of probably at least 15 initiatives in capital markets that are based on our -- the fact that we're small and that we're nimble, and we're just chipping away at them, you know, one at a time.

And there will be some more pressure. We haven't really seen the pressure yet, because of our nimbleness, I believe, and because of the quality of our product. I think the other thing people have to realize is that if you looked at the quality of our product -- and this information is in our 10-K and our 10-Q, you know, our average FICO is higher than the industry considerably, and our average LTV is lower than the industry on average. And people are -- even in a compressing, you know, environment like this, people are willing to pay up for those. So when you combine those two factors, one our nimbleness, and two, you know, the fact that our product is so good, that helps considerably.

Gotcha. On the -- well, you mentioned earlier, I guess, on the transitioning customers from the auto business into being kind of lifelong customers. Have you started to see customers kind of shifting across and using multiple products? And is there kind of a -- is there a method or kind of a plan to go about getting customers from the auto side into the home product and how has that been so far if there is one?

We do have a customer relationship management plan or a solid CRM on strategy, although it's in its very early stages. Catherine Muriel, our Chief Marketing Officer, has extensive experience in terms of doing that with other type businesses, you know, whether it be the insurance business or the banking business. So we're actively working on it. We do have good traction, but we think we can have much, much better traction.

Now, we continue -- Mark, we continue to have like last quarter about 15 percent of our loans that closed in the quarter were from customers that had done a loan with us in the past, so prior customers.

So 15 percent were repeats?

Correct.

Is that up from -- is that an increase historically or is that --?

That's an increase from the prior quarter, which is about 13 percent. The other thing I would say, Mark, is we did a study recently, and I can't divulge all the details, but the study indicated that on average, somebody that had a loan with E-LOAN had on average 2.4 loans with E-LOAN versus I'm not going to give specifics related to the other people in the study, but they're other large financial institutions. Their averages were far, far lower than what our average was.

Gotcha. On the marketing spend, and you know, it's only $9 million increase [indiscernible]. Is that all going to be related to your TV build out or is it continued expansion of what you were doing on the Internet side of the marketing expense?

Yeah, I think, what I would say, Mark, is that I think it's an appropriate assumption to use from a guidance perspective. It would maintain our marketing as a percentage of revenue at similar levels to 2004, when we are going to face more competition in 2005 versus 2004. And there is some acknowledgement that there are some price increases in some of our main areas of advertising -- for example, search advertisings -- some inflation that has happened and we anticipate will continue to happen on that -- in that category as well.

It's really, and then of course, there's the cost associated with putting the advertising campaigns together. And, as I mentioned, we're going to continue to test and learn on new initiatives and from a marketing perspective in order to drive the top line revenue and grow out market share. So we will try different types of media that we have either not tried before or we tried and we weren't as successful on it. But with Catherine's leadership, we feel like we can be successful in those medium again, so we're going to try them.

Is there a timing on when you think these will kind of flow out? I guess you'd said that the big marketing push will sort of launch next quarter. But is there an expectation of when the costs will hit? Is it -- will it be sort of even or close?

We're going to jump up the costs starting in this quarter. So I would say that you're going to start right away in Q1. We already jumped up our costs in the first quarter.

Your costs should be fairly even over the course of the year. You're not going to see sort of a big increase next quarter as this thing ramps up?

No, I mean, you will see some increment of -- and, you know, without getting specific in terms of quarter-to-quarter, but you'll see some increase in kind of the second and third quarter, because those are also seasonally high quarters for us. There is some seasonality to business and our marketing spend will acknowledge that. But you are going to see a big jump just in the first quarter alone. And just remember, there is a lag associated with the spend as well. So, you know, spending that happens in the first quarter really just as much benefits the second quarter as the first quarter.

One last question. And on the online stuff, you guys, obviously, track the site visitation data. Does that continue to show sort of not only increased visitation levels at your sites, but also, how many of these -- are you seeing better indications that people aren't just visiting a site to get either data on mortgage rates, etc., but are actually visiting the site and then continuing on through the application process?

Yeah, I mean, what we like is that there's a number of specific -- I mean, if you think about our businesses from a funnel perspective, we have people that visit the site and then the next main step in the funnel is for them to apply with us. And we have specific ideas and tactics that we're employing to get that conversion rate up. And we're pleased with some of those early results. And we think that there will even be better ones as we get further into the year.

Mark, let me just add something really briefly to that. You know, online considers both, you know, getting a banner ad on a Yahoo! or an MSN and also doing search word advertising. You know, we are really, really good at search word advertising, and we are a major spender and it's very, very cost effective. Matt did mention that eventually, you know, you've got to slow this spending down because there's only so many words you can buy and eventually the cost goes up.

But what we have found is that it can be very, very effective. If you can get somebody through buying a search word, you know, the odds of them transacting are very, very high, because, obviously, that's exactly what they were looking for.

Sounds good. Thanks, guys.

(Caller Instructions.) Jordan Hymowitz of Philadelphia Financial, you may ask your question.

Hey, guys. A couple of questions, please. Can you break down for ‘05 what assumptions you are having on production, like by product?

Yeah, we're -- Jordan, it's Matt Roberts. We're not providing the mix in terms of a guidance for 2005 partially because the interest rate -- I mean, our model is set out to allow us to rebalance between predominantly, say, on the mortgage side, home equity and cash-out refinances. And so, there is an assumption that with interest rates moving, we're going to have some shift between home equity and tax-out re-fis. And then, to the extent that the interest rates on the long end start to rise, we'll see that shift back. So we haven't given a specific mix shift, is the short answer to your question.

In terms of profitability per product, is there anything all in that's disclosed with you guys?

Yeah, we do provide for mortgage, home equity, and auto for historical purposes. We provide direct margin. And direct margin is --.

I know the direct margin is given, but all I'm saying, is the direct margin after cost allocation as well?

It's fully loaded from an operations cost perspective, meaning, we reallocate, for example, facilities and other costs that are shared between product lines. The next main bucket of expense is sales and marketing. Sales and marketing isn't allocated. That's a group number that's shown on the financials. But you can get a sense for the profitability, I'd say, on a gross margin basis, if you will, which is you take the revenue less your operations expenses, which are your fixed and variable costs to process the loan transaction, and we provide that to you on a direct margin basis. In fact, we provide that in the press release as well.

Okay . I didn't realize it was that loaded. Now, the next question is, you know, with the flattening yield curve, the home equity product is (1) less attractive, because you can lock in with the fixed rate, and (2) Countrywide and other folks are now using zero percent teaser in home equity. What type of margin compression does your guidance assume for that product specifically?

I'll address that. Let me just- - the first thing I would say on that is we're really good at taking a customer -- if it turns out that a home equity loan isn't the right product for him, convincing him that a cash-out re-fi is. And the profitability on those products is similar. So, it doesn't really hurt us that much. The teaser rate margins, you know, we've tried, we've tested them, seem to have very little impact. What people really look at is they want to know what's the true cost once the teaser ends. And you know, we are very, very competitive right now at prime minus 50, that's about as good as you can get. So we feel that we've got the right strategy and we feel that if the yield curve continues to flatten, yes, it will hurt home equity some, but it does move, you know, people into our cash-out re-fi.

The second point I'd like to make, which I think is a pretty important point, is people will still get a home equity loan even if the best answer for them was to do a cash-out re-fi. And the reason is that people want to compartmentalize their debt. There's been numerous studies done on that. And many people, if they are going to do a home improvement loan, you know, basically want to say, I borrowed this money to do this home improvement, or if they are going to consolidate their debt, they want to say I borrowed this money to move my credit card into this component. So even though logically you would think why would somebody do a home equity loan when maybe it might be better for them to do a cash-out re-fi, they like to compartmentalize their debt.

Okay. And last question is the gain on sale margin as some other caller (ph) expanded very nicely. As you look forward to the March quarter, do you think it will be a flat type of margin or do you think it will go up or go down?

Yeah, as I mentioned, our assumption for, not for the quarter, but for the year, is for the gain on sale to stay at roughly the same levels as ‘04. So not to expand or contract significantly.

Let me ask in a different way. If gain -- does that assume -- a lot of lenders are assuming a much tighter gain on sale margin in the first and second quarter and then they're rebounding in the third and fourth. Is your model the same way, or is it kind of a level number?

Yeah, it's more of a level number.

Thank you very much. Congratulations on a good quarter.

At this time, there are no further questions.

Okay. We'd just like to thank everybody for joining us today. By the way, Mark and I will be on an investor tour next week and we look forward to seeing many of you on that trip. Thanks, once again.

Thank you and this concludes today's call.