NewtekOne Inc (NEWT) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter three 2005 NewTek Business Services Inc. earnings conference call.

(OPERATOR INSTRUCTIONS).

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

We will be facilitating a question-and-answer session towards the end of the presentation.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host for today, Mr. Barry Sloane, Chairman and Chief Executive Officer.

Please proceed, Sir.

Thank you very much.

My name is Barry Sloane, CEO and Chairman of the Board of NewTek Business Services.

I have got Michael Holden here with me today, Chief Financial Officer.

We would like to welcome everyone to the third quarter shareholder conference call.

I first would like to read the Safe Harbor statement.

The statements in this slide presentation may contain forward-looking statements relating to such matters as anticipated future financial performance, business prospects, legislative developments, and similar matters.

The Private Securities Litigation Reform Act of 1995 provides the Safe Harbor for forward-looking statements.

In order to comply with the terms of the Safe Harbor the Company notes that a variety of factors could cause the Company's actual results to differ materially from anticipated results expressed in the Company's forward-looking statements such as intensified competition or operating problems in its operating business projects or the impact on revenues and profit margins or additional factors as described in NewTek Business Services previously filed registration statements.

Also we need to point out that our capitals operate under a different set of rules in each of the seven jurisdictions and these (indiscernible) on the structure of our investments and in some cases particularly in Louisiana, we don't always control the equity or management of qualified business but that cannot always be presented orally or in written presentations.

Before we begin the presentation I would also like to add that there is a PowerPoint presentation on our web site, newtekbusinessservices.com and you could follow the presentation by clicking on to the homepage and clicking onto the PowerPoint.

NewTek Business Services is a direct distributor of business services and financial products to the small and medium sized business market.

We have historically used an example of a company like Amazon.com, that is also a direct distributor.

Amazon.com basically distributes other people's products and services but what Amazon does very well is they have a better way to acquire customers and process the business.

At NewTek, we do this on a cost-effective basis, using proprietary technology and great software tools.

Low cost to acquire, low cost to process.

We do this over an estimated 60,000 small and medium sized businesses and it's clearly one of the Company's strengths.

Because of the strengths we have been able to acquire major strategic alliance partners and access their customer base of entities such as Merrill Lynch, CUNA, Citibank.

When you look at these types of entities, Merrill Lynch -- the largest brokerage firm in the world by a number of brokers.

Citibank -- largest bank in the world.

Navy Federal Credit Union -- one of our alliance partners -- the largest credit union in world.

We are very proud of our results, very proud of our market position and look forward to growing our business.

Financial results and forecasts to the third and fourth quarter with deviations from expectations, we have recently reported our third quarter financial reserve results.

Our results came in at a negative $0.07 variance from street expectations and in the fourth quarter, we are letting the market note that we will also come in at a negative $0.03 variance from market expectations.

New annual guidance for NewTek Business Services for 2005 is $0.20 earnings per share at 34.5 million shares.

If you go to page 5 of the presentation, the reasons primarily for this decline are a $0.04 differential for a tax valuation for NewTek Small Business finance.

This is a deferred positive benefit to the Company, not loss.

Also there is $0.06 of differential that we can follow through on page 6 of the presentation.

Where did the $0.10 come from? 822,000 reduction of goodwill impairment from several Capcos. $200,000 reduction of a legacy investment in one of our Capcos. $122,000 reduction, a write-down of a loan in Slidell, Louisiana, that was owned by the Capco, not originated by the SBA lender.

SBA loans originated by NewTek Small Business finance -- our SBA lender that were affected by Katrina 300,000.

We've also elected to increase the general reserves of the SBA lender 600,000.

We currently have a historic high level of loan loss reserves against their portfolio.

We also underoriginated and undersold SBA insured and uninsured loans that will cause a $475,000 variance for the year; and also there is an impairment for the servicing asset due to prepayments in the portfolio of $155,000.

I might add, most of these negative differentials are in non-cash items.

Positive variances from the 2005 forecast, the Company has begun and will continue to cut costs.

In the quarter recently ended, the third quarter 2005, we cut $583,000 of cost for the quarter or $2.3 million on an annualized basis from the original budget.

We also anticipate a sale of our merchant processing portfolio with a specific alliance partner.

This sale should result in a $500,000 net gain that is expected to close in Q4 2005.

Unfortunately, we will lose an alliance partner with that sale but we also have a very significant alliance partner lined up to back that up.

Moving forward to slide 8, Variance on the Different Segments.

For 2005, we've previously given guidance on the Web Hosting segment of 3.9 million for the year?

That is pretax net income.

That is now 3.7 million for the year.

However, EBITDA is the same.

The primary difference between the previous forecast and current is our Web Hosting company is delivering and selling much more product in the dedicated server market, which requires purchase of equipment and increased levels of amortization and non-cash items.

In the merchant processing segment, we are offering our guidance from 2.4 million to 2.6 million.

Unfortunately in the lending business, due to increases in loan loss reserves and other impairments, we are reducing our lending pretax forecast from 2.4 million for 2005 to a negative 300,000 for 2005, Capco also posting a slight decline of 7.3 million to 6.8 million.

Forecasts going out for 2006 in our primary business segments, Web Hosting 12 to 13 million of revenues 4 1/4 to 4 3/4 million of tax net income.

This is similar guidance that we given previously.

Electronic payment processing, 45 to 50 million in revenues. 3 1/4 million to 3 3/4 million, also similar guidance to what we have given.

In the lending business we are forecasting 10.6 million in revenues to 12 million in revenues for 2006, with a pretax gain of 200.000 to 1.2 million for the quarter.

We are taking a much more conservative position in our lending business going forward.

We believe that economic trends and conditions do indicate that in the small business market.

As a company, we do have concerns over the increased cost of gasoline, the increased cost of electricity, the increased cost of home heating fuel.

We are concerned also about collateral valuations in the residential market, as well as the commercial market, as well as the increased cost of health care in the small to medium sized business segment.

One of the benefits of having a diversified business line is, there are times when some businesses will be robust and others will not.

We plan on being in the lending business for many years to come.

We think it is a great business with great opportunity.

We think we have a great platform.

But we will take our foot off the gas in this provision for 2006.

Looking at comparable businesses in our segment to try to come up with various valuations I would point towards companies like I-Payment, Electronic Clearinghouse and Heartland Payment Systems.

All companies that actually focus on the small- and medium-sized business market in the merchant processing segment.

For those of you trying to put valuations on your stock taking a look at comparisons between their revenues versus ours, and putting multiples on that, as well as pretax net income, I think that you'll find our stock very interesting.

There is also a recent IPO done on a company called Website Pros, WSPI recently done.

The company just focuses on Web site development to the small- and medium-sized business markets.

Basically what it is showing is the small and medium-sized business market is a very attractive market segment to go after.

The Company has increased its emphasis in these different business segments, as we have historically said as decreased emphasis in some of our resources in the Capco area.

And that is paying dividends.

We have recently announced through an 8-K that the Company's lending division has signed an agreement with UBS, (indiscernible) Bank in Switzerland, to market through their sales force and their branches SBA loans.

We also have many other announcements that we will be making in the month of November and December so these are some pre-announcements.

An existing alliance partner has agreed to extend its two products they currently have with us for an additional three years.

An existing alliance partner has added NewTek's Technology Suite to it and will be adding digital storage and Web Hosting.

We will be announcing shortly a new alliance which is an alliance with professionals such as dentists, accountants, lawyers -- things of that nature. 5,000 members in the alliance for all products -- loans, merchant processing and insurance.

We also have a new product with an existing alliance partner that currently has two products and will be picking up a third product -- business insurance.

We have recently hired a new national sales manager for the SBA lender.

We believe that this will help us improve our loan quality, give us better looks, and penetrate our alliance relationships to a greater degree.

We have recently recruited, trained, and hired 10 marketing representatives for our alliance partners to work with our UBS, Credit Union, Merrill Lynch, and Citibank relationships.

We also are about to sign up a new 7000 client merchant opportunity that we anticipate closing in the fourth quarter.

We have also signed up a large strategic alliance with a nonprofit for merchant processing.

Looking at acquisition opportunities for 2006 we are currently in discussions with two different participants to purchase up to $10 million in the merchant processing segment.

We think this will be a very good opportunity to increase total processing that we have under management, reduce our costs, and increase our customer penetration.

We are also looking at an opportunity in the lending area, picking up a receivable finance company that provides financing to small- and medium-sized businesses, financing short-term receivables.

We are always looking for other businesses within this footprint.

Looking at the capital business for 2006, I should say in 2005, New York has a program five (ph) which is anticipated to close in November.

We have previously forecasted that we will participate in this program and we think it will raise us an additional 5 million of new cash, plus or minus.

As we have also announced there are currently no new fundings in Capco that we can see on the horizon for 2006 and 2007.

Clearly this has affected many investors that have purchased our stock.

Historically, the Capco business has generated 5 to $15 million of new cash per year since 1999.

Realistically speaking, as we announced this last March, when you take this out of your business model it has to hurt.

And there are some that, I believe, have sold their position in the stock because we are no longer adding this 5 to $15 million of cash flow.

However what we're looking for the market to observe is that the cash flows from our operating businesses are picking up and picking up very quickly.

We believe this year we will do about 55 to 60 million in revenues from the primary core businesses.

And I believe the gross revenue target for next year is 75 to 80 million.

We are quickly picking up cash flows from the underlying businesses.

Why aren't there new Capco programs?

Legislatively it has clearly become more difficult and the industry participants have ceased to try to promote the business within various states.

And at the end of the day for NewTek, this really isn't important.

It is not important because the Company's primary focus is to be the premier provider in business services and financial products for the small- to medium-sized business market.

It has had that focus for the last three-and-a-half years and looking at our 60,000 customers and our businesses that are gaining traction quite quickly I think we're been successful at it.

Why NewTek makes sense in the long run.

We are going after market demographic to small- and medium-size business owners that represent 50% of GDP, nine out of 10 businesses in the United States and represent 75% of net new job growth.

The big players want into this market but really aren't structured from a distribution or customer acquisition standpoint to participate in it.

The American Expresses, the Microsofts, the Bank of Americas of the world are clearly focusing on this market with a variety of different initiatives.

We believe that they will ultimately seek to work through us.

As many of you have seen by my examples earlier, there are very large multiples being paid on businesses such as merchant processing, Web Hosting and data storage.

All businesses that we have a position in.

Operating leverage, the servicing plants are built.

We have a first-class SBA lending operation, with PLT status which gives us designated underwriting authority with the SBA in over 53 regions.

The merchant processing business is built with a huge facility in Wisconsin that is operating at 50% of capacity.

The Web Hosting business, tremendous upside to add more customers on the existing operating infrastructure.

The alliances are rapidly developing.

You're going to see multiple announcements from us in November and December in this particular area.

60,000 client base, which will be announced by year-end.

The Company, we believe, is clearly reaching its inflection point in the transition for crossing over from Capco to its underlying businesses.

We are growing our cash flow from operations.

Restructuring is in place.

Cutting out non-essential business lines and certain investments.

Reducing accounting and legal costs.

The diminished effort on the capital business and capital infrastructure and utilizing our cash, more acquisitions within our footprint.

The Company has a goal to develop a true master database and true tools for cross market and cross selling.

We also plan on further developing our training manuals for processing to help lower our overall costs and to do this in low-cost areas in the United States.

We are also developing a real bilingual capability to go after 50% of the U.S. population Hispanic market that owns and operates small businesses which is estimated to be in place by 2010.

We do believe that this should be in place by 2006, all of our business lines for the Spanish-speaking personnel, Spanish-speaking applications and Spanish-speaking Web access.

Slides 18, 19, and 20 all further demonstrate that the markets we are in are growth markets and important markets.

I am sure many of you saw the recent article in the Wall Street Journal on the value of the data storage business.

Also according to Gartner the Web Hosting companies in the United States revenue will more than triple the $23.5 billion in 2008.

Recently according to a federal reserve study was 44.5 million of electronic payments taken in the U.S. versus 36.7, paid by check the first time.

Electronic payments have exceeded check and the trends continue.

That concludes this part of my presentation and I will now hand the presentation over to Mike Holden, our Chief Financial Officer.

First we will review the third quarter 2005 results as compared with the third quarter of 2004. then review our guidance by segment for the fourth quarter and update you on our guidance for 2006 in our three operating segments.

Total revenue for the third quarter decreased 5% from $21.6 million in 2004 to $20.5 million in 2005.

Included in 2005 revenue was 4.7 million of income from tax credits, predominantly from investing capital raised to our Wilshire, Louisiana partners for certified capital program.

Expenses for the third quarter increased 57% from 14.5 million in 2004 to 22.8 million in 2005.

There were a number of unusual items this quarter.

Going line by line on our financial statement, our provision for loan losses increased from 59,000 last year to 1.1 million, due to a $300,000 provision for Hurricane Katrina losses and the balance increased to a general reserve which covers specific nonperforming loans.

You'll note another caption Goodwill Impairment Charge of $822,000, leading to our investments in the Colorado, Alabama, and Louisiana Capcos.

And included in the other expense category are impairments totaling $322,000 on two capital investments -- $122,000 of which relates to Hurricane Katrina.

Our loss before income taxes was $2.1 million as compared with income of 7.3 million in 2004.

Our income tax benefit was only $100,000 because we will receive no tax benefits for the goodwill impairment charge and limited benefits for our loss in the SBA lending segment.

This brings us to a loss of $2 million or $0.06 per share in 2005, as compared with net income of $4.3 million or $0.13 per share in 2004.

I would like you to now focus on our segment reporting for the quarter.

SBA lending revenue increased 7% from 2.1 million to $2.3 million.

The segment lost for the quarter was 1.1 million compared with a profit of $250,000 in 2004.

Over $1 million of that difference is due to the increase in the provision for loan losses.

Electronic payment processing revenue increased 64% from $5.1 million to $8.4 million.

Our segment income increased 112% from $156,000 to $331,000.

Web Hosting revenue increased 26% from 2.2 million to 2.8 million with EBITDA of $1.6 million for the quarter.

Our segment income decreased from 1.066 million to $881,000.

This decrease was entirely due to the $244,000 of interest expense that was not in the prior year quarter.

If you remember that is the PICC debt which is on the books of the Web Hosting company.

Capco and other revenue decreased 42% from $12.1 million to $7 million reflecting a 5.5 million reduction income from tax credit.

The decrease in income is predominantly from lower tax credit revenue and the impairment charges I previously described.

I would now like to give some guidance by segment for the remainder of 2005.

In total, we are projecting 2005 revenue of $94 million, including $34 million for the fourth quarter.

We are projecting 2005 pretax income of $13 million, including $12.9 million for the fourth quarter.

Our tax expense anticipated to be 6.1 million for 2005, including 5.2 million for the fourth quarter.

That would bring us to 6.9 million net income for the year which is $0.20 per share, including 7.7 million or $0.22 for the fourth quarter.

As to segment guidance, we anticipate SBA lending revenue of 2.8 million in the fourth quarter which would generate $400,000 of pretax income.

For the electronic payment processing, we project revenues of 9.9 million in the fourth quarter including 700,000 in revenue to be received from a contract buyout with pretax income of 1.2 million.

We are projecting Web Hosting revenue of 2.9 million in the fourth quarter with pretax income of $1 million.

As to Capco and other we anticipate revenue of 18.4 million in the fourth quarter including $17 million in tax credit revenue from our Texas Capco with pretax income of 2.3 million.

I'd like to give you an update on our guidance for 2006 SBA lending our electronic payment processing and Web hosting.

We will not be giving guidance on the Capco and other segments but anticipate that we will be available -- that information will be available in early 2006.

We have not changed our guidance for electronic payment processing and Web hosting.

Electronic payment processing, we anticipate revenue of between 45 and $50 million and income before taxes between 3.25 and 3.75 million.

Web Hosting we project revenue of between 12 million to 13 million and income before taxes between 4.25 million and 4.75 million.

For the SBA lending segment we have reduced our guidance on revenues to a range of 10.6 to $12 million and income before taxes to between $200,000 and 1.2 million.

With that, I would like to turn it back to the operator for questions.

+++ q-and-a.

(OPERATOR INSTRUCTIONS) Richard Serrano from Brean Murray.

Question regarding future potential services.

The small business market is obviously very fertile ground, I think and I think those relationships are very valuable, probably not being fully valued by the market.

Are there other services out there that you may contemplate providing to further leverage those relationships?

The answer to that question is yes.

One such service that we are going to be rolling out shortly is data storage.

We have a terrific lead into that market with our Web Hosting product and our CrystalTech facility.

We are going to be announcing a very large relationship and a large strategic alliance partner we already do business with for data storage for small- and medium-sized business.

We also will have a facility that already exists to be able to do disaster recovery for those types of entities.

So we are going to try to leverage our position.

We already have a NOC center that is available to us and the capability and talent to provide this service.

So, an area like data storage is clearly one of those areas.

I did indicate we're also looking at opportunity that would be able to offer to our clients in the short-term business lending arena that fits into our skill set with SBA lending.

So we don't want get too much out of the footprint.

We have spent a lot of money and dollars in an infrastructure and operating plan and now we really have the opportunity to leverage them.

So I think in selected areas we will expand the footprint in these types of entities.

Selman Akyol from Stifel Nicolaus.

First of all, could you give what you thought your SBA pretax lending was for Q4?

I got the revenue number but I didn't quite catch the pretax guidance number.

Pretax for Q4? 400,000.

And that was on 2.8 million?

That's correct.

As you take a look at your loan portfolio have you written off everything I guess that would been affected by the hurricane?

Is there still laggards to come or can you describe how you went through that?

Basically, Selman, what we do is a very strict discipline of weekly meetings, monthly meetings to really determine the credit situation that impacted our portfolio.

I can't say for sure that there won't be further things from Florida; but at this point in time we do not believe that to be the case.

But we think that our portfolio is properly reserved, appropriately reserved, we have significant reserves against the portfolio, I believe.

Our general reserve is up to 4%.

We have a specific reserve of 2.5%, so we think we are very, very well-positioned for the future and portfolio is appropriate for the market and reserve for it.

I guess, does this -- given the outlook I guess in terms of your SBA licenses at all, anything of that, I mean taking things down, taking these reserves, writing off these loans, because I assume that means the government is going to be paying out something?

When you say the outlook, I mean, no, our relationship with the SBA is very strong.

We have run the business prudently, we plan on being in this business for a long period of time.

If you're smart, you play markets correctly.

There are certain times you step on the gas and other times you don't.

So, unfortunately, Hurricane Katrina came along and caused a modest amount of damage in our portfolio and a significant amount of damage in other people's portfolio.

And the SBA is extraordinarily sympathetic to these types of disasters and these types of problems.

So this is a non-event in terms of our relationship with the SBA.

In terms of our interest in being in this business and market, it's never been stronger.

We continue to add high-quality people.

We just added a national sales manager.

We just added a new alliance relationship with Union Bank of Switzerland.

We love the business.

We like the market.

It is just important when you do these things to be prudent and it's one of the benefits of having a diversified business line and diversified portfolio of products and services.

As we look into next year it looks like you -- I know you took your revenues down, but it also looked like you took your operating profit, if you will, or your pretax income coming out of there as a percentage.

Can you talk a little bit about what is going on there?

Just focus on the lender, you mean, right?

Right.

Correct.

I think at this point in time, to be frank with you and everybody else on the call, we have been so far off in our forecast in the lender I just wanted to adopt the most conservative position I could at this point in time.

It's no more difficult than that.

Sometimes you're right.

Sometimes you're wrong.

We believe we are more right that we are wrong.

We just missed this business and we are concerned about it, focused on it.

We are going to add the right people and we're going to be very good at this business.

(OPERATOR INSTRUCTIONS) Adam Rothenberg with Smith Barney Capital Client.

Do you see any legislative trends away from Capcos and, if so, how does NewTek plan to get funding in the future?

The Capco business clearly represents the Company's roots and the Company raised a significant amount of capital there.

Balance sheet in cash for the end of this quarter is about $53 million.

And we anticipate probably about the fourth quarter it's going to be up near about 60.

The good news is, we don't need any capital.

We have plenty of cash capital to grow and build our business from here.

So in terms of participating in other types of government-sponsored programs, I think that you are going to see less and less of that.

It's a diminished activity.

And management is going to focus the majority of its efforts and resources not in secondary stock raises, not in negotiating lending facilities but spending a ton of time focusing on its business, working with its customers and building the best brand name in the business.

That is the best investment we can make.

As someone that has spent a long history in the financial market, on the other side of the equation, financing is very debilitating to a company.

And the best news I can say for this Company is, it's out of the woods in that area.

So management can really spend a lot of its time focusing on its core business, growing its business, working with its customers, working with its alliance partners to really grow these operating businesses significantly.

That does conclude your questions for today.

Operator, thank you very much and I'd like to thank everybody for participating in the call today.

Ladies and gentlemen, thank you for participating in today's conference call.

This does conclude your program.