NewtekOne Inc (NEWT) 2003 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Newtek Business Services second-quarter conference call.

At this time, all participants are in a listen-only mode.

My name is Mike and I will be your conference coordinator today.

As a reminder, this conference is being recorded.

I would now like to turn the program over to your host for today's conference, Mr. David Waldman with Lippert/Heilshorn.

Thank you.

Good afternoon, everyone, and welcome to the Newtek Business Services' second-quarter conference call.

This afternoon on the call with us we have Barry Sloane, Chairman and Chief Executive Officer, and Brian Wasserman, Chief Financial Officer of Newtek Business Services.

The Company issued a press release today containing second-quarter financial results; this release is available on the Company's web site, www.NewtekBusinessServices.com.

However, if you'd like a copy of the release or any other information other information about Newtek, please contact Lippert/Heilshorn at 212-838-3777 or Dave Gentry with Aurelius Consulting 407-644-4256.

Before we begin, let me caution everyone that this call will contain forward-looking statements.

Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today.

These risk factors are explained in detail in the Company's filings with the Securities and Exchange Commission, which are also available on the Company's Web site.

Newtek Business Services does not undertake any obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

I would now like to turn the call over to Barry Sloane.

Please go ahead, Barry.

Good afternoon, everyone, and welcome to Newtek Business Services' second-quarter shareholder call.

We're very pleased with the results from our second quarter of operations in 2003.

Our goal and mission statement is to become the premier provider of quality business and financial services to the small and medium-sized business market.

We've made great strides towards that goal in the second quarter of 2003.

As many of you know, we greatly talk about the importance of small business in the economy.

This segment of the economy continues to grow up and be fairly strong, even though other segments of the economy are soft.

We've made great strides in the second quarter, particularly in the area of hiring and picking our leaders of the future for Newtek Business Services.

In the Newtek Small Business Finance area, in addition to John Cox, whose 30-plus years of SBA lending experience running the SBA lending business out of Washington from '94 to '97 and Mike Dowe (ph) (indiscernible) lending experience -- when he left the SBA, he was Director of Lending.

We are proud to announce, in the second quarter, that Newtek brought in Peter Downes (ph) to join Newtek Small Business Finance as the President.

Prior to joining Newtek Small Business Finance, Peter Downes (ph) spent the last 16 years in various small-business lending roles within the banking industry.

Since 1990, he was employed with European-American Bank where he had various positions, including New Business Development Officer for small-business lending, Group Manager of Retail Small-business Lending, which encompassed the underwriting and servicing in the bank's small-business loan portfolio.

After EAB was acquired by Citibank, Peter Downes (ph) was asked to run Citibank's SBA lending portfolio in New York and was most recently named as the national director of SBA lending, coordinating Citibank's SBA underwriting and sales efforts in all Citibank marketplaces across the country.

Peter brings to us tremendous commercial experience in the origination and underwriting of small-business loans.

We are also happy to announce that Carmen (indiscernible) has joined our company and will begin working with us next week.

Carmen (indiscernible) served as the National Operational Support Manager for SBA Lending and Citibank for the last six years.

Specifically, her responsibilities, including establishing policies and procedures, (indiscernible) processing, pre-underwriting and a documentation division (sic).

Carmen is an absolutely terrific addition to our talented staff.

In the near future, we hope to announce one more big-name hire which hopefully will come out over the next week or two in the small-business lending area.

Brian Gagnon (ph) also joined us in the second quarter and Newtek Small Business Finance.

Brian is head of Strategic Alliances for the lender and has six years worth of experience at the ESB (ph) in Washington.

We have recently added some additional executive talent to the Newtek Merchant Solutions brand.

Jeff Rubin, the President of Newtek Business Services Inc., has joined Newtek Merchant Solutions on almost an exclusive basis to help them recruit, market and train all our feet on the street reps to deliver Newtek Merchant Solutions brand into the small to medium-sized business market.

Some other highlights, looking at Newtek Small Business Finance, our important lending business -- as we have previously mentioned, we just opened up the doors to the lender in the first quarter of 2001.

As many of you are aware, Credit Suisse First Boston is a strategic equity investor with a $2 million minority interest in Newtek Small Business Finance.

We launched our Web-based loan application in the first quarter, started taking in loans in March of 2003.

So far, as we sit here today, we currently have 45 million of prequalified loans in-house.

We are finding that approximately of ten applicant submissions, one in ten are likely to be prequalified, which should lead to a funding.

We have added a few new alliances, sales alliances to the pipeline, and we've also recently are about to announce (sic) that we've approved the first Ford minority dealership program with a minority essentially buying 100 percent of the Ford dealership, and that was done with Bernie Valley Ford in Arizona.

We believe that the alliances that we have out in the market, Veterans Corps, (indiscernible) and (indiscernible), have just barely begun to start to happen.

We think that we will get some hockey stick opportunities out of those alliances.

An additional strategic alliance that we announced in the quarter was the addition of IBM Global Business Partners to allow us to market and sell IBM software, hardware, networking equipment and services to the small-business market.

In the Newtek Merchant Solutions arena, we had, over the last nine months, nine percent sales growth month-over-month sequentially.

If you looked at absolute processing volume, that growth would be 11 percent over the last nine months.

We've increased our sales staff to 85 reps and we're still projecting 150 reps the end of the year.

We are projecting six million of revenue growth in 2003 for Newtek Merchant Solutions, and we're very, very comfortable with that forecast.

We have also said we would cross over the path to profitability in 2003.

Newtek Merchant Solutions has approximately 1800 small-business customers, and we picked up approximately 360 new customers in the second quarter.

With respect to revenue growth, in Q2, 2003, we had revenues of 1.077 million; that was versus 770,000 in Q1 of 2003.

Looking at the two important business lines of Newtek Small Business Finance, our lender and Newtek Merchant Solutions, our merchant processing company, we had an operating loss of approximately $300,000 in the first quarter of 2003 on Newtek Small Business Finance.

That loss was reduced to a little over 100,000 in the second quarter of 2003.

As we have said, we believe that we will cross over the path to profitability on the lender; we're very happy with the improved operating results from the lender and feel very, very comfortable with our $6 million revenue forecast and the fact that we will cross over the path to profitability in the lender.

In the merchant processing vehicle, we had a first quarter loss of 137,000 approximately.

The second-quarter loss in the merchant processing vehicle was approximately 210,000.

The increased loss from Q1 to Q2 was based upon increasing our infrastructure.

We added significant amounts of body count and resources to our sales, marketing and technology function.

We also poured a lot of dollars into various strategic alliance expenses.

We are still confident that we will cross over the path to profitability with Newtek Merchant Solutions in calendar year 2003.

As we recently announced today, we are proud to state that we made an acquisition of Automated Merchant Services.

This is a merchant processing company that is based and headquartered in Florida.

The acquisition brings Newtek an additional 2100 existing small to medium-sized business clients, as well as ten sales representatives covering the Florida marketplace.

This particular company for the past year has added 60 to 70 new small-business client every month.

In addition to gaining a significant foothold in the Florida small to medium-sized business market, Newtek is going to use this acquisition to cross-market other Newtek products and services, including its small-business lending service, outsource bookkeeping service and tax service.

We (indiscernible) plans on growing AMS beyond the Florida market and expanding its product base.

This acquisition will be accretive to earnings; it is a cash flow/EBITDA positive acquisition for us and this particular company is currently processing approximately $250 million worth of merchant processing.

This basically doubles our current position very, very conservatively.

It is also synergistic with Newtek Merchant Solutions, Wisconsin where this company will be riding business and putting it on the Newtek Merchant Solutions platform.

This will also give us a significantly deeper penetration of our brand in the Florida market.

What is important to keep in mind about Newtek is what we're doing with respect to creating a cost-effective marketing and distribution channel into that small to medium-sized business market.

In the quarter, our feet on the street marketing reps grew through the Newtek Merchant Solutions brand as well as the acquisition of AMS.

We also picked up 15 new reps in the quarter.

Cross-selling opportunities across all brands and the announcements of new sales in the suites of services to our customer base did very, very well in the quarter.

In our capital business line, which we have discussed as our financial engine and the ability to grow and finance small businesses and provide services in the marketplace, we sit poised to participate in approximately five upcoming capcos.

Texas is a $200 million program which we anticipate funding in the first or second quarter of 2004.

Louisiana has a $40 million program which we anticipate funding in the fourth quarter of 2003.

Alabama has a $100 million program which we anticipate funding in the first quarter of 2004.

Colorado has a $100 million program which we anticipate funding in the second quarter of 2004.

Georgia has a $40 million program which we anticipate funding in the second or third quarter of 2004.

Stifel, Nicolaus recently raised our earnings per share guidance to 27 cents in 2003 on an annualized basis.

They've also stated that our revenues will be up from 34 million last year in 2002 to 55 million this year.

They are forecasted 33 cents a share in 2004 and $68 million of revenue in 2004.

One of the financial highlights of our company was the increase in stockholders equity, up from 33 million -- up to 33 million from 27 million -- as well as Newtek being added to the Russell 3000 index.

In summation, we've made great strides in Q2.

We've made some terrific hires which will be the future leaders of Newtek Business Services.

We made a terrific acquisition In Automated Merchant services.

Our lending and M&S (ph) businesses are driving towards profitability rapidly and quickly.

With that, I'd like to turn the call over to Brian Wasserman, who will go over our financial highlights.

Thank you, Barry.

I am pleased to report our financial results for the three and six months ended June 30, 2003.

For the three months ended June 30, 2003, Newtek reported revenue of approximately 14,700,000 as compared to approximately 5,400,000 for the three months ended June 30, 2002.

Then after-tax income of approximately 2.7 million, as compared to a loss of approximately 545,000 for the three months ended June 30, 2002.

This resulted in diluted net income of ten cents per share for the three month period ended June 30th.

For the three months ended June 30th, Newtek's revenue predominantly consisted of the recognition of approximately 11,470,000 of tax credits earned from certified capital company subsidiaries, approximately 1,400,000 from Newtek's credit card processing operation, 1,085,000 from other consolidated operating subsidiaries and approximately 1,025,000 in dividends and interest.

The tax credit revenue recognized resulted from Newtek investment capital raised through certified capital company programs and accordingly, earning tax credits predominantly from the Louisiana capital program.

For the six months ended June 30, 2003, Newtek reported revenue of approximately 27,600,000 as compared to approximately 11,400,000 for the six months ended June 30, 2002, and after-tax income of approximately 4,500,000 as compared to a loss of approximately 440,000 for the six-month period ended June 30, 2002.

This resulted in diluted net income of 18 cents per share for the six-month period ended June 30, 2003.

For the six-month period ended June 30, 2003, Newtek's revenue predominantly consisted of the recognition of approximately 21,900,000 of tax credits (inaudible) from Certified Capital Company subsidiaries, approximately $2 million from Newtek's credit card processing operation, 1.7 million from other consolidated operating subsidiaries and 2.1 million of dividends and interest income.

Tax credit revenue resulted from Newtek investing capital raised and Certified Capital Company programs in both Louisiana and Wisconsin.

As we've previously indicated, we consider Newtek merchant's (indiscernible) credit card processing division and Newtek Small Business Finance our small-business lending division, to be Newtek's two most significant business operations.

Accordingly, for the six months ended June 30, 2003, after eliminating all intercompany transactions, Newtek Merchant Solutions reported revenues of approximately 1.8 million versus 211,000 for the same period ended June 30, 2002 and a net loss of 345,000 versus a similar net loss for the six-month period ended June 30, 2002.

For the six months ended June 30, 2003, Newtek Small Business Finance reported revenues of approximately $3 million, which includes application fee income, servicing fee income and interest income and a net loss of approximately $288,000.

Newtek did not own Newtek Small Business Finance during 2002, so comparative numbers are not available.

Newtek and its majority-owned subsidiaries currently have over 38 million in cash and assets of almost 174 million and equity of approximately 33,700,000.

Newtek's consolidated financial statements currently include ten certified capital company subsidiaries and 15 operating subsidiaries, not including the newly acquired AMS.

By way of guidance, we've recently interest our earning expectations for the year ended 2003 to 27 cents per share and continue to believe this will be achieved.

We believe that Newtek Merchant Solutions should contribute approximately six million of revenue and that Newtek Small Business Finance should also contribute over $6 million of revenue -- ,again in the form of application fees, servicing fees, gains on sales of government-guaranteed small-business loans and interest income.

During 2003, Newtek anticipates making investments out of the following Certified Capital companies -- Wilshire Colorado, Partners (indiscernible) will invest 30 percent of its capital.

Wilshire Louisiana Partners, three -- will invest 30 percent of its capital and Wilshire New York Partners (inaudible) will invest 50 percent of its capital.

The 2002 10-K contains a detailed table which indicates the nonpresent valued amount of revenue associated with each of those investment benchmarks.

We will now open up the call for any questions.

Mike Esposito (ph) with Greenwich Investments.

Two questions, and you can (indiscernible) give them to you both now.

The first is, what do you think a realistic volume of the small-business lending business you have will be for '04 and '05?

The second question has to do with I-Payments (ph).

How do you compare your business services business versus I-Payments (ph), the public company?

With respect to the small-business lender, we think it's very realistic to assume that we could do approximately $100 million worth of loan origination fundings in calendar year 2004.

Going out to 2005, I wouldn't be surprised if we could do 150 to 200 million, given all of these strategic alliances and relationships that we're picking up.

The reception that we're getting in the marketplace for the suite of products and suite of services is literally overwhelming.

I think that, at some point in time in the near future in instances where we've got one product into a strategic alliance, I wouldn't be surprised if you see us come out and say that the strategic alliance partners come back and take it all for the current items on the menu.

So we're very, very constructive about our ability to do volume in the SBA lending business and importantly, doing a volume without digging deep into credit.

We think we're making very, very good credit decisions in this environment.

With respect to I-Payments (ph), which is a public company that I think became public a quarter or two ago -- it was a Bear Stearns underwriting -- I-Payments (ph) has, I would say, a similar position in the market that we do with respect to Newtek Merchant Solutions.

However, I-Payments (ph) primarily is aggregating a lot of it's opportunities by making acquisitions.

It really, in my opinion, does not have the organic capability to put clients on like we do with our relationships with the cunas (ph) and the Veterans Corps and the Revelations of the world.

We recently attended two conferences through the Revelation opportunity and picked up 250 leads -- very, very exciting.

That's because these are smaller businesses owned by minorities that typically do not get offered these services.

By us participating in those particular conferences and more importantly, having local reps in the market that can service these customers, we think we are in pretty good shape.

No, I-Payments (ph) went public in a $250 million market gap.

It's up at o 500 million.

We think we're doing things that are very favorable to what they're doing.

Great quarter.

Selman Akyol with Stifel, Nicolaus.

Thank you.

Nice job.

A couple of quick questions -- first of all, Brian, could you go through New York (indiscernible ) how much you expect to do again this year?

In New York Three, we think we're going to hit the 50 percent (indiscernible due to multiple speakers).

Okay, and then turning to Automated Merchant Services, can you say how you financed it -- what you paid, that kind of thing?

Brian, maybe you could help me with this -- we're going to file an 8-K on that in the near future and that will have all that detailed information.

I would tell you that it was funded with primarily cash from the Florida-based capco and a modest amount of seller financing associated with it.

It was not done for stock.

With the new Sarbanes-Oxley provisions and our requirement to get an audit which has not yet been completed on the Company and the Companies need to get a quick close, we think we got the Company on favorable terms.

I think when the market sees how will we did as a EBITDA-positive acquisition for us (sic), I think the market will be pretty satisfied.

So we're all going to need to wait for the 8-K to come out to get a little bit more detailed financial information.

Brian, anything else that you want to add to that?

Just that, clearly, we will be filing today's press release with a full 8-K filing, which will include December '02 audited numbers as well as June, '03 numbers and a Pro Forma regarding how it consolidates with us as well as all of the acquisition accounting.

So I guess the only thing I'll ask is just stay tuned and you all know the filing requirements on 8-K are pretty quick, so we're working on that quickly.

Let me just ask you then (indiscernible) specifically as to your line here in the press release -- you say you expect the total processing volume by December 31st to be 700 million in aggregate.

If you had to close this, what would you expected your processing volume to be in aggregate for '03?

That's 400 million.

So then you are hoping to stay at 300 million?

You got it.

Thank you.

Gregory (indiscernible) with Chicago Investment Group.

Yes, I've got one quick question regarding the guidance for 2003 fiscal year.

Is it still 27 cents per share?

Yes.

Okay, and for 2004?

We have not, as a company, given guidance yet for 2004 but I believe Stifel, Nicolaus has given guidance of 33 cents a share.

Okay, that's all.

Thank you very much.

Don Alexander (ph), private investor.

Nice quarter.

Are you contemplating or are you thinking of any other acquisitions at this point in time, or what's your thinking on that line?

I think that we are definitely looking for acquisitions where we can acquire large customer bases in the small and medium-size business space.

We prefer to stay within our current footprint of four different businesses.

We've recently indicated that we are looking to get into the insurance agency business, so there is a possibility there.

That's another attractive product lined offered to that small to medium-sized business customer.

I think the Automated deal we did was a good example of how we could utilize the capco funds to provide capital to a local business in a local market that has a very large small to medium-sized business customer base and to capitalize it, grow it, and keep distribution intact.

So, we're still looking for acquisitions that will be accretive to us.

The answer is yes.

Thank you.

We have a follow-up from Selman Akyol with Stifel, Nicolaus.

Could you just comment a little bit on the volatility of the interest rates since the quarter ended?

I mean, you seen the the ten-year come up very substantially.

How is that affecting your business?

Unfortunately, in the lending business, it doesn't really affect us because our loans are floating-rate loans without an interest rate cap based over prime, and our financing is also prime-based.

So, we have no basis risk and there's no cap on our instruments; it's an exact asset liability match.

With respect to the merchant processing business, you know, if rates are rising due to inflationary expectations being out there rising and the economy getting stronger, that's positive for the Merchant Processing business is because obviously people are spending, more sales are going up and prices are going up as well.

An increase in interest rates we do not think we'll affect any of our core businesses negatively or adversely.

The only thing I would add to that -- I agree with everything said.

The only thing I would add to that, Selman, is that an increase in short-term rates may be helpful to Newtek due to the large cash balances we're carrying -- 38 million in cash consolidated throughout all the operating businesses.

So, to the extent we could earn a little more on that, that would be helpful to us.

Then just as relates to the cash balances, how much of that is restricted?

I know most of it is.

Yes.

It's somewhere in the $36 million range.

Thank you.

William (indiscernible) with UBS Financial Services.

Gentlemen, very solid quarter!

A quick question regarding revenue mix -- do you anticipate with these next five capcos coming on-line that your revenue mix, at least percentagewise coming from the tax credits, will stay in that 70, 77 percent range?

We've forecasted for this year that we will be at least 80 percent.

I think that even though we're seeing good capco creation out in the future that the revenue mix will blend to a lower percentage from capco.

So I think positively and optimistically, we think that we're going to continue to have good revenue growth and more revenue contribution coming from the underlying partner companies.

Fantastic.

Again, great quarter, guys.

There are no further questions at this time.

Mr. Sloane, please proceed.

Great.

I appreciate everyone joining us for our call, and we look forward to many other good announcements and achievements in the third quarter.

Hope to see and hear from you all at the end of the third quarter or sooner.

Thank you.

Thank you.

This concludes your conference call.

Thank you for your participation today.

You may now disconnect.