Popular Inc (BPOP) 2005 Q1 法說會逐字稿

Good morning and welcome to the first quarter of 2005 earnings conference call. All parties 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. Thank you, sir, you may begin.

Thank you for joining us today. Before I turn the call over to Mark for a full review of our business I wanted to comment on two important developments over the last quarter. First, as many of you have seen, E-LOAN just launched a major new advertising and branding campaign with new ads, a new website look and feel, and new tag line called Radically Simple.

As you know, we founded E-LOAN on the idea of creating the right combination of technological efficiencies to make us fast, low cost, and hassle free, as well as human values that eliminate conflicts of interest, embrace transparency, and respect our customers' privacy. With the launch of this new campaign, we believe that for the first time our marketing methods clearly communicate these values and clearly differentiates E-LOAN from our competitors.

Secondly, I wanted to personally thank our outgoing CFO, Matt Roberts, who has served the Company for the past 6 years, from before our IPO, through the Internet bubble, through the refinance boom, and most recently, navigating through the tough new Sarbanes-Oxley review, which E-LOAN just successfully completed. As we mentioned in our press release, Matt will continue his employment with the Company to ensure a smooth transition and I personally wanted to wish him all the best in his new venture.

We're also very pleased to announce that Darren Nelson, who has done a spectacular job heading E-LOAN's capital markets group during the last year, will now be promoted to CFO. In addition to his track record at E-LOAN, Darren has over 10 years experience in capital markets and controller duties at several national financial companies, including GreenPoint Mortgage, Provident Funding, and U.S. Bank, and holds both CPA and CFA designations. Mark and I are absolutely confident that Darren will make an outstanding CFO.

And with that, let me turn the call over to Mark, who will review our financial results and business strategy. Mark?

Thanks, Chris. As Chris discussed on our previous calls, I was hired to accelerate our progress in three key areas: capital markets, re-engineering our lending process, and capitalizing on the strong brand we have already established. I am pleased to report substantial first quarter progress in all three areas.

But first let's talk about first quarter results. I am pleased with our first quarter results. With a cash position of over 65 million and substantial revenue and earnings growth over the comparable quarter of 2004, we are well positioned for the remainder of 2005. Revenue grew 25% from the same period last year and 7% versus Q4 '04 to 38.4 million. Income of 2.2 million or $0.03 per share improved versus 1.0 million in Q4 '04 and a loss of 1.1 million versus Q1 '04. These results beat average analysts' estimates break-even earnings per share.

Now, let me dive into a discussion of our recent marketing efforts. Under Catherine Muriel's leadership, we have developed and implemented a new marketing campaign. As Chris mentioned earlier, we believe this campaign is the first time we have succeeded in communicating through all mediums our core values of speed, affordability, ease, transparency, and privacy. This new advertising and branding campaign unveiled the Company's new tag line: "E-LOAN: Radically Simple." The campaign, created by Merkley & Partners, was inspired by ELOAN's pro-consumer values and the revolutionary ways in which we continue to improve the consumer lending experience. You can see our new ads on E-LOAN.com/TV.

The integrated campaign is designed to strike a chord with consumers who are fed up with the lending industry's confusing and misleading sales tactics and will appear on local and national cable television, radio, on-line, and outdoor bill boards, and at select music and community events. We are confident this campaign will enhance our image as the leading consumer advocate in the business, further differentiating us from the competition and strengthening our brand.

Turning to Capital Markets: the highlight in capital markets in the first quarter was the sale by E-LOAN Auto Fund One, our qualified special purpose entity or QSPE, of approximately 650 million of auto loans. This sale resulted in increased earnings of approximately $2.65 million, and helped improve our March 31, 2005, cash position. By liquifying the retained interest in our QSPE, we have eliminated any material interest rate and credit rate risk on our balance sheet. Additionally, the sale continues to prove the success of our diversified model in an increasing rate environment.

In Home Equity, revenue per loan improved by 21% in Q1 '05 over Q1 '04, as we continued to improve our secondary marketing relationships. We expect full year 2005 revenue per loan to exceed 2004 revenue per loan by 25%.

In First Mortgage, we were successful in reducing our warehouse line borrowing costs by over 25 basis points. Additionally, revenue per loan improved over Q4 '04 and Q1 '04 by approximately 4% and 18%, respectively. Again, due to improved secondary marketing relationships and the addition of new investors. We expect First Mortgage revenue per loan to remain strong during the remainder of the year as we add additional investors and products and improve our pricing model.

Now, on to process re-engineering. Process re-engineering efforts resulted in an 8% decrease in our Home Equity costs per loan. Most of the benefit was derived from the 50 underwriters and funders we now employ in India. In January, we hired approximately 15 home equity sales professionals in the Philippines. Since these loan consultants spent the vast majority of Q1 in training, they negatively impacted Q1 costs per loan. However, in Q2 we expect incremental direct margin of approximately 200,000 relating to the Philippines Home Equity operations.

In First Mortgage beginning in March, we began performing appraisal services utilizing our wholly-owned subsidiary, Escrow Closing Services or ECS. I will talk more about that later.

Additionally, both First Mortgage and Home Equity will continue to benefit as we begin drawing our own closing documents in late March. By Q3 of this year we expect this to reduce our costs by approximately $20 per loan.

Now turning to our operating platform highlights, I will start with Auto. Even though industry car sales were down approximately 7% in the first quarter versus the fourth quarter of 2004, and two- year interest rates were up 65 basis points during this same quarter, both unit volume and revenue were relatively flat when comparing these quarters. Recent partnerships with eBay and Edmonds were the main contributors in offsetting the negative impact of reduced auto sales and higher interest rates.

We expect the recent settling in two-year interest rates, expected improved auto sales, and the continued seasoning of our new partnerships to increase auto units and revenue in Q2 '05 versus Q1 '05. The above expected increased fundings and the March launch of our proprietary auto underwriting engine are expected to reduce cost per loan in Q2 '05.

Turning to First Mortgage. Even though First Mortgage rates increased 25 basis points during Q1 '05, we were able to improve volume by 4.5% over Q4 '04 and maintain flat revenue growth. This volume growth resulted in our first mortgage market share, using recent mortgage bankers' association statistics, improving by over 10% when comparing Q1 '05 versus Q4 '04. Actual conversion rates improved to 15.4%, as recent call center initiatives began to show positive results.

Q1 '05 cost per loan increased versus Q4 '04 by approximately 6%, as we increased our investment in our realtor business development efforts. We now have alliances, including Zip Realty, with independent real estate brokerages allowing us access to over 300 independent real estate agents.

Now turning to our Home Equity platform. Although Home Equity volume increased 8% in Q1 '05 versus Q4 '04, the flattening of the yield curve negatively impacted revenue per loan and total revenue decreased approximately 4%. The previously mentioned capital market initiatives and improved application volume should result in improved Q2 '05 revenues.

Costs per loan decreased 8% due to new technology initiatives and our previously discussed outsourcing initiatives. Although conversions were stable, this is impressive as we spent more time focusing on lower converting, lower FICO borrowers.

Finally, ECS enjoyed its most profitable quarter ever, increasing direct margin by over 209% to 338,000. A good portion of the increase related to the start of our inhouse appraisal business on first mortgage loans. The remainder related to increased home equity loan closings.

In summary, as we continue in 2005 we are more convinced and excited than ever that we have the right strategy, the right resources, and the right leadership to take full advantage of the enormous opportunity that lies ahead.

Now I will turn it over to Matt Roberts for a more detailed financial review.

Thanks, Mark. Before I begin the financial review I would like to remind you that during this call we may make forward-looking statements based on our 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 & Exchange Commission.

Now I would like to review a summary of our financial results for Q1 2005. Our earnings press release includes a detailed presentation for your review.

Revenues totaled 38.4 million, an increase of 25% compared to 30.8 million in the same quarter of 2004. Our diversified revenue, comprised of total revenues excluding prime refinance mortgage, grew by 25% and totaled 27 million or 70% of total revenues.

Now I'll walk you through the revenue in our three primary product lines: Mortgage, Home Equity, and Auto. Starting with Mortgage: there are two primary buckets to our mortgage business: refinance mortgage and diversified mortgage. Diversified mortgage is comprised of purchased and non-prime mortgage revenue and has a more stable revenue source under various interest rate environments. Of the total Q1 mortgage revenue, 59% or 11.4 million was refinanced mortgage and 41% or 8.1 million was diversified mortgage.

Refinance mortgage was up 27% and diversified mortgage was up 5% compared to the same quarter of 2004. Our overall conversion rates on Q4 mortgage applications into closed loans were up 6% compared to Q3 rates, driven primarily by the increase in purchased mortgage conversion rates.

Next is Home Equity. We posted 11.6 million in home equity revenue during Q1, an increase of 16% compared to Q1 2004. Home equity sold loan volume increased 11% and revenue per loan increased 21% compared to Q1 '04.

And now turning to Auto. Our Auto revenue totaled 5.5 million in Q1, including a 2.65 million benefit from the QSPE auto loan sales. This compares to 3.1 million auto revenue in Q1 of 2004. As we previously discussed, Merrill Lynch Bank purchased substantially all the auto loans held by our QSPE in March. The proceeds we received in a 2.65 million increase in the fair value of our retained interest in those purchased auto loans. This adjustment to fair value is included in current period income as a component of Auto revenue.

Net income was 2.2 million or $0.03 per share on 68 million diluted shares. Direct margins, which is defined as revenue minus variable and fixed operations expense, totaled 20.8 million, an increase of 33% compared to the same quarter of 2004. Sales and marketing expense totaled 13.4 million, an increase of 20% compared to Q1 2004.

As for our balance sheet, total assets at the end of the quarter were 134.2 million, which includes cash and cash equivalents of 65.2 million and loans held for sale of 26.2 million. Total liabilities at the end of the quarter were 45.3 million and included 25.2 million in borrowings related to mortgage, home equity, and auto loans held for sale. Total stockholders' equity at the end of the quarter was 89 million, or $1.37 per share, on 65 million basic shares outstanding.

Turning to our 2005 guidance, we continue to expect total revenue of approximately 165 million, representing a 22% improvement over 2004 results. We also continue to expect 2005 pretax EPS of approximately $0.13 per share compared to EPS of a penny per share in 2004.

Before I wrap up, I would like to thank E-LOAN's employees and investors for the opportunity to serve them over the past 6 years. I am confident that you will find Darren to be an excellent Chief Financial Officer and I look forward to working with him to ensure a seamless transition.

Thanks, Matt. I am excited about my new role at ELOAN and I'm looking forward to this great opportunity.

Mark again. Before we open it up for questions, I do have a correction to make in my previous discussion. We actually have relationships and alliances with 3,000 real estate agents. I believe I said 300 real estate agents. Now I will open it up for questions.

Thank you. We will now begin the question and answer session. [Operator Instructions] Our first question comes from Rich Repetto of Sandler O'Neill. Your line is open, sir.

Yes. Hi, guys. Can you hear me?

We can.

First, just want to say good-bye to Matt. He has done a great job for E-LOAN.

Anyway, the question -- first, on the qualified ST -- the 2.65 million: what would it have been if there was no sale -- we went through this once before, but -- if there was no sale that 2.65 would have been recognized over time; is that correct? Or about that? [Inaudible] a gain as well as what would be recognized over time.

I think if what you're asking, Rich, is what would our normal revenue have been from -- that we would have earned from that retained interest asset over time, the answer is it was the value of the asset before the transaction, because it represented what our expected cash flows would be from those loans over time. That's why it was the value that we had in our books.

We would not have expected a larger value than what we had on our books at any given balance sheet date. The market environment was such that -- and Darren did such a great job from the capital markets perspective, to take advantage of that -- that we had an incremental benefit in the period when Merrill Lynch purchased the auto assets.

Right. So, if you didn't sell the assets, then there would not have been any revenue generated out of the QSP this quarter if you didn't sell it. But I understand you've got incremental value over what it was carried at, but if you didn't sell it there would be no incremental -- there would be no revenue recognized?

There would perhaps be adjustments to the fair value that would come from differences in assumptions as you -- as we went -- in the past, we had some adjustments to the fair value based on assumption changes, for example, prepaid speed and the like. Absent that, there would not have been any incremental move up or down on the retained interest asset. There is of course the normal revenue from sales of loan production that takes place in the quarter.

Okay. And then the other question I have is the revenue per mortgage loan, we know from other industry participants that there is pressures on margins. Do you feel like -- at least, we've gotten some indication from some other companies that things are improving -- Q, from their perspective, may have been the bottom -- that things are improving, actually from both a volume and possibly from a margin standpoint? Is that a fair view of the industry here?

Rich, it's Mark Lefanowicz. As you saw in our numbers, are actually -- in the Q1, we were actually, through various capital market initiatives, adding new investors, improving our pricing model, et cetera, we actually were able to improve revenue per loan in first mortgage. We're right now anticipating that that improvement rough [ph] stays relatively flat and obviously in terms of the volume numbers, we can't comment. That's baked into our guidance.

Okay. And the new marketing initiative, that -- you're saying it hits all mediums. Has that already been rolled out and have you seen the -- I am assuming that you get pretty instant results from your marketing efforts, and have you already seen a ramp or did I miss something? I didn't hear quite the launch date when you talked about it.

Rich, the launch date was May 2nd. So, somewhat earlier than that, a couple days before that, we launched the new website. On May 2nd the advertising on TV and radio went out, and somewhere in the middle of last week some of the billboards went up and some of the other things that are included in mass transportation statements, like BART and things like that.

So we have -- initially the results have been positive. but it's really too early to tell. When you're doing advertising in TV it takes an average of three to four times for somebody to see an ad before it clicks in. You don't get the feedback or the impact right out of the gate, but initial results have been promising.

Okay. I think that's all I have. Thank you.

Thanks, Rich.

Our next question from George Sutton of Craig-Hallum. Your line is open.

George?

I do apologize. We're experiencing technical difficulties. One moment.

George?

Yes.

Great. I guess they were having a little difficulty getting you on.

Well, it turns out it was Radically easy. [laughter] Matt, certainly sorry to hear of the change. There aren't many good public company CFOs. So really sorry to lose you.

Thank you.

With respect to -- just following on to the question of advertising and the new program, Mark, can you give us a sense of what the test results were like? You obviously did a lot of testing as you created these. Any indication of what sort of a change in posture from the customer you might see from that?

I think -- similar to what Chris and I said on the call earlier, is the fact that we think this is the first time, and the consumers actually showed this in terms of when we were floating this out there to make sure we were getting the right kind of feedback, this is the first time it really communicates all of our values: fast, easy, affordable, transparent, open and honest, and it's also very exciting to us that it does that plus in addition to that we think it is the first time it really differentiates us from the competition.

Because nobody else can really do that, in terms of say they're fast, easy, affordable, and open and honest, especially based in how they set up their sales models and in terms of how they compensate their loan consultants and last but not least, the position they've taken on privacy and sharing credit information over the years.

Okay. Super. Can you walk us through the quarter, the first quarter itself. We obviously had a period of time where rates really ramped up quickly and then pulled pack. Can you give us a sense of what the initial reaction you saw to that big rate increase was during the quarter and then what you saw after that?

First -- it's Mark again, George. Obviously, First Mortgage cash-out recites [ph] slowed down, and home equity picked up when that happened. And we did, though, what was actually positive to us, we did not see any decrease in our purchase activity as we continued to work hard in terms of developing these relationships with realtors.

Okay. And on the realtor side -- thank you for clarifying: 300 sounded different than we expected. With respect to now having 3,000 brokers that you're working with, can you just give us a sense of what that might mean over the next 12 months and what kind of objectives you might have for broker numbers over the next 12 months?

Again, I'd say we're very optimistic about what we can do, associated with these affiliations that we have. There's actually, including Zip Realty, we now have relationships with 5 major independent brokerages throughout the U.S. A couple in the Midwest, one in the Southwest -- two actually in the Southwest, and of course Zip, which is spread out across the country. Again, what I would say is we're optimistic that we can continue to improve our purchase mortgage funding, not only in an aggregate total but also as a percentage of our total fundings.

And then lastly, with respect to the real estate relationships, can you explain the process of getting them plugged into your system? What sort of time frame do you typically look for there?

Well, we recently hired -- in fact this week our last two what I would call real estate area managers have been hired, and they are now in the field -- or they will be in the field, they're getting trained this week -- by early next week, so by then we'll actually have some people in the field, training these real estate agents, making them understand the E-LOAN value proposition, making sure the realtors get their questions answered and making sure consumers in that area and realtors in those areas understand why E-LOAN is the better solution.

So we really, in the words of Bachman Turner Overdrive, we ain't seen nothing yet, from the real estate side?

That came from you. That's great. Is that it, George?

Our next question comes from Mark Sproule with Thomas Weisel Partners. Your line is open.

Thanks. I guess to go back to your new marketing campaign, did that roll out a little bit later than you've been expecting? I guess we'd been thinking it would come out kind of end of March, beginning of April. And did that -- if it rolled out later, did we see some of the costs associated with starting that kind of get pushed into the second quarter a little bit?

There's -- basically I would answer that there is two questions, Mark. The first question is, initially we had hoped to get it out by the last week of March, the first week of April. Due to the complexity of making it integrated, making sure we covered the web, making sure we covered all the mediums, it took us a little longer. In addition to that, we wanted to make sure that it portrayed what we needed it to portray. How it differentiated us from everybody else.

Some of the costs did get pushed a little bit into Q2. I can't comment on the specifics but I feel overall the success of the campaign will be well worth what it cost us.

Got it. But, we should see a little bit of an incremental uptick on the cost side, on marketing, going forward for the rest of the year?

That's true.

Okay. And on that -- we're looking at sort of numbers of people that have visited your site, are you seeing improved -- I know you don't publish conversion data from a visitation standpoint all the way to actually filling out the application and beyond that, but early indications were that your January, February, March numbers were fairly robust as far as visitors. Is there -- are you enacting new policies or trying to bring about new ways to not become sort of a site that just gets used to look at rates, et cetera, but actually draws customers a little farther down the pipeline?

Yes. Mark, it's Matt. We have always really focused on the thing that really drives the box, which is funding loans. The visitor is, from our perspective, a positive thing and we have -- the visitor level. We don't publish visitor levels because that's not really what drives the economics from either a cost perspective or a revenue perspective. We love people coming and visiting our sites. We wouldn't do anything to discourage that. We want to encourage that.

We have very specific tactical objectives to maximize the conversion from visitors into applications. I think we're making great progress in that regard. And so, hopefully, more of that visitor demand turns into application demand.

There are no incremental costs for us to have somebody come and apply. That's the benefit of our model is that we can provide all this rich information to consumers that allow them to shop and compare as part of our transparency model and it really helps to drive the value proposition of E-LOAN. So, where somebody might shop and compare the first time, they will shop and transact the next time. And that's really what we're focusing on.

Do you think some of the marketing benefit that you would have thought -- obviously, it takes a number of viewings before they actually come to your site in a concerted manner. But do you think some of the benefits from the marketing may get pushed out beyond Q2 into Q3 so we will actually see a lot of the incremental upside to your new campaign in that later part of the season as opposed to in this April/spring home purchase market?

Yes. There is definitely a lag to any new, as Mark mentioned, even just a kind of a consumption of a new message from an advertising campaign takes some time. There is also just a general lag between application and funding, so I think on both counts you are going to see a lag to the impact of our new advertising campaign, which we're very comfortable is going to have a positive impact as we move forward.

Okay. And just sort of a wrap-up, I guess, on the non-refi-related contribution on the revenue side was a little bit less than we'd been thinking. Do you think that will switch back to the trend that we had been seeing of the growth in both the diversified mortgage as well as the home equity, outshining the refi strength there, as we go throughout the rest of the year?

Mark, this is Mark again. That's consistent with what our guidance shows. So yes, I agree.

Okay. Lastly, if you net out the impact from the auto loan sales, it looks like the overall gross margins dip down a little bit. Is that sort of a one-time -- you see that as kind of getting a benefit coming out in the next couple quarters, especially as you have the -- some of the cost reductions in the Philippine initiative taking shape? Would that be a fair assessment?

Yes. I agree.

Okay. Thanks a lot.

Thanks, Mark.

Our next question comes from Dan Mazer with JMP Asset Management. Your line is open.

Good morning. Quick question just to clarify your guidance. Does the $0.13 include the first quarter gain associated with the auto loan sale?

Yes, it does.

Okay. And just kind of a follow-on to Rich's earlier question. What was the contribution? Was there a contribution implied within your original guidance associated with those auto loans that were sold?

Yes. And when we set up the original guidance which we issued in the last call, there was a number of positives and negatives that could impact that number and one of the positives was we saw the health of the market for auto loans and felt that there was an opportunity, not certain, but an opportunity that we could do something on the auto side, which we ended up doing. And there remains for the balance of the year both positives and negatives, which we factored in and feel comfortable that that leaves us with, reconfirming our guidance for the total.

Okay. Thanks.

You're welcome.

As a reminder, once again, if you do have a question, please press star, 1 on your touch-tone phone.

Well, thanks, everybody, for joining us, and we'll see you in about three more months. Bye-bye.