NewtekOne Inc (NEWT) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter and 2005 Newtek Business Services Inc. earnings conference call.

My name is Maria and I will be your audio coordinator for today.

At this time, all participants are in a listen-only mode and we will be facilitating a question-and-answer session toward the end of the conference today. (OPERATOR INSTRUCTIONS).

At this time, I will now turn the call over to Mr. Barry Sloane, CEO and Chairman of the Board, and Mr. Mike Holden, Chief Financial Officer.

Please proceed, sir.

Good afternoon, everyone.

My name is Barry Sloane, CEO, Chairman of Newtek Business Services.

I wanted to introduce Michael Holden, our Chief Financial Officer, who will read our Safe Harbor statement.

Thank you, Barry.

The statements in this slide presentation, which is up on the website, may contain forward-looking statements relating to such matters as anticipated future branch performance, business prospects, legislative developments and similar matters.

The Private Securities Litigation Reform Act of 1995 provides a 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 the anticipated results expressed in the Company's forward-looking statements, such as intensified competition and/or operating problems on its operating business projects and their 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 CAPCOs operate under a different set of rules in each of the eight jurisdictions and that these place varying requirements on the structure of our investments.

In some cases, particularly in Louisiana, we don't control the equity or management of our qualified business, but that cannot always be presented orally or in written presentations.

Newtek has previously announced that it expects to file its Annual Report on Form 10-K late, but no later than April 17, 2006.

Despite this, the management of Newtek believes that the financial information disclosed in the document represents the financial position of the Company as of December 31, 2005.

However, this information has not as yet been finally reviewed by our independent auditors and could change before it is released in final form.

Now I'd like to turn this back to Barry.

Thank you.

We realize that the press release, unfortunately, has not hit PR Newswire yet, so what I will do is read it to you, and hopefully, by the time we are finished here, it will be out.

The headline -- Newtek Business Services Inc. reports record revenue of 96 million, 36% increase over 2004.

Newtek Business Services, Inc., a provider of business services and financial products to the small- and medium-sized business market, today announced earnings of $0.22 per diluted share for the year ended December 31, 2005, and after-tax net income of 7.4 million on revenues of 96 million.

The Company previously announced and anticipates filing its 10-K with the SEC on or before April 17, 2006.

The Company will also give its guidance for 2006 operating segments during its shareholder conference call this afternoon at 4:15.

For 2005, the Company will report three primary segments, as it has done historically -- merchant payment processing, web hosting and small-business funding.

Our merchant payment processing segment earned 33 million of revenues, earned 2.3 million pretax and 3.4 million of EBITDA for 2005.

Our Web hosting segment on 10.7 million of revenues earned 3.6 million pretax and 6 million of EBITDA.

Our small-business lending segment on 10.7 million of revenues lost $30,000 pretax, with EBITDA of 2.1 million.

Going forward, the Company will break out the traditional CAPCO and other segments into three components -- the CAPCO segment, an all other segment, and a corporate activities call center.

The Company, in giving its 2006 guidance, will forecast is business in these six components.

Barry Sloane, Chairman and CEO, stated, Newtek continues to successfully transition out of our CAPCO-dominated business model, balance sheet and income statement.

Our core businesses of merchant processing, Web hosting and small-business lending are growing and high rates and in aggregate drove up 11.7 million of EBITDA in 2005.

We anticipate that these three businesses will create in excess of 15.7 million in EBITDA for 2006.

We are optimistic about the Company's ability to pay down debt -- recently paid off 4 million in notes from Technology Investment Capital Corp., -- increase its cash flow through operations and grow dominant companies that market to the small- and medium-sized business market.

We have great technology that forms the basis for our current client base, now in excess of 60,000, which we'd expect to continue to grow rapidly.

We will use our proprietary technology to build a quality brand of financial and business services in the small- and medium-sized business space.

Now, our presentation, which is on our home page of our website, and also, PR Newswire should ultimately be putting out a 10-K on the PowerPoint, so it will be available to the public.

Page 3, Newtek Business Services Financial Highlights for 2005.

We had record revenues on a consolidated basis of 96 million, up from 72 million in 2004.

We had record revenues in the merchant processing segment of 33 million, up from 19.1 million in 2004.

We had record revenues in the Web hosting segment of 10.7 million, up from 4.4 million in the six months that we had audited financial statements, due to the acquisition of CrystalTech in 2004.

We had record revenues in SBA lending of 10.7 million, up from 10.3 million in 2004.

We had record pretax net income in the merchant processing segment of 2.3 million, up from 1.2 million in 2004.

We had record pretax net income in the Web hosting business segment of 3.6 million, up from 2.1 million in 2004.

And earnings per share in 2005 was $0.22 on 34.3 million shares outstanding.

Newtek Business Services Financial Strength -- we reported on our balance sheet at 12/31/05 58 million in aggregate of cash, cash equivalents, short-term treasuries and marketable securities; 87 million in shareholder equity; $2.51 in book value per share.

Slide number 5 shows how our shareholders' equity has grown significantly down through the years from 2002, up from 22 million, to 2005, 87.2 million, taking into effect the secondary stock offering that was done in 2004, as our book value per share has grown from $1.07 in 2002 all the way to $2.51 in 2005.

On slide number 7, we would like to call your attention to our balance sheet, which is available on the third page of our press release.

Two key areas I'd like to point to, which are pointed out on slide number 8.

Number one, credits in lieu of cash, 108 million.

Credits in lieu of cash is an offset against notes payable on the liability side in credits in lieu of cash.

Hastening that is the delivery of our CAPCO tax credits against the interest expense on the notes, which is non-cash.

The other item, I think, to look at is SBA notes receivable of 32 million, which is against our GE, CIT and Signature bank line of 21 million.

A lot of people look at Newtek's balance sheet and think the Company is overleveraged.

Against $87 million worth of equity, if you basically consolidated or collapsed these items, you take 140 million in assets and liabilities out of the equation, which would give us a balance sheet of approximately 120 million against the 85 million, we think that our income statement and balance sheet tends to be distorted by our CAPCO activity, as well as the offset in our SBA lending activity.

What is Newtek?

Newtek is a major play into owning a distribution channel whose company's primary target is the national small- and medium-sized business market, a very significant marketplace in the U.S GDP.

Approximately 51% of GDP in the United States come from small-business B2B.

There are 23 million potential clients, and nine out of 10 businesses in the United States fit into this particular segment.

Newtek is achieving its goal to quickly becoming the premier provider of business and financial services for those 60,000 small- and medium-sized business clients in its portfolio as of 12/31/2005.

We're a low-cost provider of products and services and a low-cost supplier of small- and medium-sized business clients, and that is based upon how we do business.

How is Newtek accomplishing its goal?

Primarily by using state-of-the-art Web-based proprietary technologies.

Our Web-based referral system is growing by leaps and bounds in terms of its popularity and its attractive features.

By using this Web-based referral system, referral partners are allowed to basically have a complete window into our back-office operations.

Every communication, every activity, everything that we are doing with their client, they can see from day one that we touch the client to the end of the transaction.

It is very similar to how Federal Express puts a bar code on a package.

If you want to call up Federal Express at any point in time in the process, you could find out exactly where that package is.

We effectively are putting a bar code on business services and financial services for our alliance partners.

We use Web-based applications as an in-house tool to make our employees and associates efficient, smart and productive.

Instead of using six-figured salaried employees that a typical bank or an insurance company would use to market financial products and business services to small- and medium-sized business customers, we use very smart, efficient, high-quality technology.

This technology enables us to provide a high-quality service.

We don't ask our clients to type in data or handwrite applications.

We basically do that for them in a telephonic interview.

We have modeled our back-office and business operations after the successful Progressive and GEICO insurance operation model.

Who uses our technology?

Who has endorsed it?

Effectively, Merrill Lynch, the Credit Union National Association with its 9600 credit unions and 8 million members, the Navy Federal Credit Union, the [index works on], and on and on.

All of these entities has realized it is better to outsource their business services and financial products to Newtek than try to provide this product and service for their customer themselves.

All these entities have endorsed and embraced our technology.

As we have seen recently, trends such as Citibank selling off its insurance and annuity business, the same thing with JPMorgan, American Express spinning off its brokerage business, more and more outsourcing is going on from the large Fortune 500-type companies.

We think this is beneficial to our play in the marketplace.

New Technology Launches -- one of the things Newtek will be doing within the next quarter will be launching a new website.

Our website is intended to be more of an interactive tool and more of a business tool rather than just a billboard for Investor Relations.

We are also going to be rolling out our virtual salesforce offering.

What is that?

We're bringing our virtual salesforce offering to future users such as independent agents, entities such as insurance agents, CPAs, lawyers and accountants that might have relationships with small- and medium-sized business owners who would like to refer business to us.

We plan on giving them a website under a Newtek Business Solutions monitor, have their own picture on it, description of who they are, and gave them buttons that they could refer their customers to on their own website and give them the ability to pass a small-business loan referral, an insurance referral, a Web-hosting referral, a data storage referral, bookkeeping, etc., etc.

Essentially, we are creating a virtual franchise so the many independent agents all across the United States that have large books of small- and medium-sized business customers.

On slide 14 and 15, you can see of the operational highlights from just a rehashing of press releases that we've put out for this year.

The key variables for Newtek's successful transition out of the CAPCO-dominated business into our primary business model, which is to become the leading provider of business services and financial products to the SMB market -- as many of you know, our CFO, Brian Wasserman, resigned unexpectedly in April/May of 2005.

We are very fortunate enough to be able to hire Michael Holden, with 21-plus years' worth of public accounting experience, with the past eight being Chief Financial Officer of Pep Boys.

Management must continue to focus on building the core businesses and reducing the non-core businesses.

The business model has worked, our client base is growing rapidly, and importantly, our share of non-tax-credit revenue is growing significantly.

I would like to point out on our press release, if you take a look at income from tax credits, in 2005 we had 35 million of income from tax credits across 95 million of total.

So 65 million of non-CAPCO revenue, almost a 36% number, and that is down from the 47% number, which was 33 million over 70 million in 2004.

Our core business lines created 11.7 million of EBITDA in 2005 and might 15.7 million of projected EBITDA in 2006.

Our Company's debt is manageable and can be paid off.

We recently made a $4 million payment with 4 million remaining against our [CICC] notes.

Our systems, product and technology are constantly being upgraded, and we are further developing this to be the number one provider of business services and financial products to the SMB market.

The overhead non-core business units are being pared back to continuously improve cash flow.

The business is in transition.

CAPCO business and market segment is being deemphasized.

Why is CAPCO being deemphasized?

Number one -- lack of state legislation to reduce product creation.

Mind you, CAPCO historically, from 1999 to 2005, created approximately 10 to $15 million of pretax cash flow a year.

We are replacing that pretax cash flow by growing the underlying businesses.

We currently have enough capital to accomplish our business mission without having to continue to draw on CAPCO funds to own and operate small- and medium-sized businesses where the statute prohibits.

CAPCO clearly has created confusing income and balance sheet issues for the Company.

The Company believes that there's a much greater value play in developing the number one leading brand of products and services for the small- and medium-sized business market versus continuing to create certified capital companies.

Take a look at slide 19, Income from Tax Credits.

You can clearly see that 2005 versus 2006, the income coming in from tax credits is on the decline.

And CAPCO Revenue as a Percentage Forecast, slide number 20, this is based upon our old segment basis of recording CAPCO revenue with a bunch of other businesses and legacy investments bundled in.

In summary, before we get into the financial performance for '05, as well as 2006 forecast, the business model is in transition and is a very good investment opportunity.

The small- and medium-sized business market is valuable and we are gaining a larger stake every day.

We are clearly becoming a known quantity as a direct distributor of business products and financial services into the SMB market.

We have demonstrated the ability to acquire clients at a low cost, and this is becoming increasingly valuable.

Looking at 2005 segment results, in the merchant processing space, 32.8 million of revenue, 2.3 million of net income, 3.4 million of EBITDA.

Web hosting -- 10.7 million of revenue, 3.6 million pretax, 6 million of EBITDA.

SBA lending -- 10.7 million of revenue, almost flat pretax net income and 2.1 million of EBITDA.

And the CAPCO segment, using our traditional CAPCO method done historically for evaluating that segment, 41.7 million of revenue, 8.7 million of pretax net income, for a total of 95.7 million in revenue, 14.6 million in pretax net income, which creates $0.22 after tax on a fully diluted basis.

Our 2006 Segment Forecasts -- we are on slide 23.

I will add that the Company will endeavor within the course of the next week to issue another PowerPoint presentation, which we will put out in the 8-K, which will further break down some of these items and give more specificity to what items are sitting within CAPCO, the all other segment, the overhead segment and the elimination segment.

Clearly, what we have tried to do is to offer greater transparency to the market, show the market that our operating businesses are cash flow positive and are growing significantly, and as we further in the future particularly, in '06 and '07, work on reducing corporate overhead in the other non-core businesses, we believe that our balance sheet and income statement will be very clear to the marketplace.

We are forecasting 45 to $47 million of revenue in our merchant segment and $3.8 to $4 million of pretax net income on 5.6 to 5.8 million of EBITDA.

Web hosting -- 12.5 to 13 million of gross revenue, 2 to 2.4 million of pretax net income.

EBITDA, 5.3 to 5.7.

Obviously, we have broken this out in a range.

SBA lending, 11.8 to 12.2 million in range of revenue, 700,000 to $1 million pretax net income, 5 to 5.3 million of EBITDA.

CAPCO segment -- 16.8 to 17.2 revenue range, negative 4.6 to negative 5 pretax net income.

All other -- 4.9 to 5.3 revenue, negative 1.6 to 2 pretax net income.

Overhead -- 5.8 to 6.1 revenue, 3.4 to 3.8 negative pretax net income.

And then we have an elimination, which is basically inter-Company elimination, for further clarification.

For 2006, we are forecasting 92 to $96 million of gross revenue on a consolidated basis and a pretax loss of 3.1 to 3.4 million.

We do believe that there is a reasonable chance in 2006 for the first time on a fully consolidated basis, operationally, the Company will be cash flow positive.

Slide number 24 -- part of our strategy for 2006 period of time is $10 million of targeted acquisition of merchant portfolios.

We plan on announcing shortly a $2.5 million purchase of merchant accounts with a follow-up purchase within the next 60 days of 7.5 million.

In both instances, letters of intents have been signed, due diligence is being completed on the first portfolio, and we are in the throes of closing -- almost done on the second portfolio.

These acquisitions will add additional processing platforms to our existing product menu to enable us to bring in more customers -- 6000 new merchant servicing customers, and almost $600 million worth of processing volume to get us close to an estimated 2.6 to $3 billion of total merchant service processing volume by the end of the year.

In further analyzing '05 versus '06 and looking at the EBITDA, you can clearly see that $11.7 million of EBITDA coming from the three primary businesses should jump to 15.7 million of EBITDA in 2006.

Slide number 26 is more of a statement that anything else.

In trying to value Newtek Business Services, it is very important for the marketplace to take a look at the individual businesses and value them for break up.

It's not to say that the Company is looking at spinning off, breaking up or selling any one of these valuable businesses.

But in order to be able to figure out what the Company can be worth going forward, looking at the growth of these individual segment and paring back historic embedded operating overhead and non-core businesses, we think that it is imperative for you to look at the value of each of these individual businesses separately and put some discount on the losses that are being driven by the corporate overhead, as well as non-core business operations.

We hope to give more clarity on this in the future.

Why is this measure more relevant than earnings per share?

If you just took a look at one of our businesses in the merchant processing space, and get some of the market multiples that are coming off of data processing outsourcing, at 22 to 23 times [client range] multiples for 2006 and 1.5 to 2 times revenue for these types of businesses and look at our merchant business, you can clearly see that the Company has a lot value and a great future.

With that, I'd like to turn the remainder of the call over to Mike Holden, our Chief Financial Officer, and then we will open it up to Q&A.

Thank you, Barry.

Barry covered a lot of the financial numbers.

I just want to touch on a few things -- first of all, the fourth quarter.

You don't have that, but if you did the math, I just want to go through segment by segment that situation.

First of all, in SBA lending, the revenue went from $2.9 million in '04 to $2.5 million in '05, which is a 14% decrease.

An important reason for that is -- and it also is significant for 2006 -- we did not sell any of our unguaranteed pieces of loans in the fourth quarter of '05.

We are actually going to hold those and earn interest on those loans through the fourth quarter of '06.

That's impacted the fourth quarter of '05, and also it will the first, second and third quarter of '06.

Electronic payment processing went from 6.7 million in revenue to 10.0, which is a 49% increase;

Web hosting from 2.2 million to 3 million, which is a 36% increase;

CAPCO and other went from 14.4 million to 20.4 million, which is a 42% increase, mostly due to hitting the hurdle in Texas in the fourth quarter.

So our total revenue for the fourth quarter went from 26.2 million to 35.8 million, a 36% increase.

SBA lending, as I mentioned, was a little bit less than the weight of sales of unguaranteeds.

There was actually no sales of unguaranteed -- went from 0.7 in income in millions to 0.6, which is a very slight decrease.

Electronic payment processing from 1 million to slightly less than that -- about 900,000.

And Web hosting went from 1 million to 800,000.

Part of that was due to a couple unusual items in the fourth quarter.

CAPCO and other went from 6.9 million to 12.2 million, which is a 77% increase overall pretax -- these numbers are all pretax -- from 9.5 million in '04 to 14.5 million in '05 -- 52% increase.

Barry went over some of the segment guidance for '06, and I'd just like to touch on that for a minute.

So if you turn to page -- I believe it is page 23 in the PowerPoint, just for the people that aren't familiar -- you are familiar with our merchant processing segment, Web hosting and SBA lending.

And as Barry mentioned, we are splitting out the fourth component, historical component, of CAPCO and other into three different items -- CAPCO, which is really everything that has to do with the income tax credit revenue, the writing off of the prepaid insurance and the interest accretion, all three of those being non-cash items, and then add on to that the fact that the CAPCO pays management fees to Newtek corporate and also incurs some professional fees.

All other are really all the businesses that are smaller in revenue which do not fit into the other categories, meaning merchant processing, Web hosting or SBA lending, and typically they are the more immature businesses or -- and CAPCO-related businesses.

That leaves your overhead, which our overhead -- it's not really a segment -- our cost center for overhead -- those have revenue, though.

It gets management fee income from the CAPCOs.

It also has some dividend income along with that.

And of course, it has all the expenses for the corporate office.

The elimination of 4.8 million is really what I just talked about, the management fee income that goes from the corporate -- from the CAPCOs to the corporate overhead.

So that gives you some of the ideas on what goes into that segment.

Just turning towards 2006, I would like to give you some numbers on the EPS guidance by quarter.

I will be sending -- as Barry mentioned, I will be sending out more information really breaking down the segments that I just talked about and the corporate expense by quarter.

In total, let me just give you the kind of the high and low range for quarter one, two, three and four.

And recognize when I give you these numbers, there are a couple of things that are driving this.

One is that we will be hitting the hurdles in New York 4 a little bit in the second quarter, 500,000 worth of tax credit income in the second quarter, about 1 million in the third quarter and about 2.8 million in the fourth quarter. [technical difficulty] would be about 1.2 million in the third quarter, [5.2] million in the fourth quarter.

So that's one of the reasons why the fourth quarter will be much different than the others.

Also, as I mentioned, we're not selling the unguaranteed in the SBA lending unit.

So that income will be all generated in the fourth quarter of '06.

So given that we have an estimate in the first quarter of a loss between $0.10 on the low side and $0.09 on the high side, second quarter would be a loss of $0.07 on the low side, $0.06 on the high side.

Third quarter would be a low of $0.03 loss in the third quarter, up to a high of $0.02 loss.

In the fourth quarter, we're expecting a profit of $0.10 on the low side, $0.12 on the high side.

So if you take the lowest in each one of those quarters, you'd have a loss of $0.10 a share for the year in 2006.

If you take the highest in each quarter, you'd have a loss of $0.05 for the year in 2006.

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

(OPERATOR INSTRUCTIONS).

Stephen Silk, Newtek Business Services [sic].

Did you just hire me?

My questions will probably be all over the place.

I tried to keep up, and I just got the report.

The loss on the CAPCO projected in 2006 -- are those cash losses, non-cash losses?

Could you talk about how they will proceed as the CAPCOs run their course?

Could we expect losses until it is finished?

Stephen, what company are you with?

C. Silk and Sons.

I didn't notice that you hired me.

I can answer that question.

If you look at 2006, the non-cash is a breakeven, meaning the income from tax credit revenue is offset by interest accretion and the amortization of the prepaid insurance.

So that is a cash loss -- it's a little bit misleading -- it is a cash loss for that segment for operating expenses and financial and the management fees.

Now remember, the management fees of 4.4 million go over to Newtek corporate, so that is used to offset the overhead in the corporate entity.

Okay?

It is a cash expense for the CAPCOs.

It is also income for corporate -- talking about the management fees -- and that washes out.

If you look back to going forward, of course, you have to anticipate there's going to be no new CAPCOs.

If there's no new CAPCOs, then you will have a situation where in 2007, you would not get the hurdles that I just talked about in New York 4 and New York 5.

So you would have a situation where you'd have a non-cash loss because of the income tax credit -- would not be enough to offset the amortization of the prepaid insurance and the interest accretion.

And we are looking to get that information.

We will probably be putting that information together most likely for the 10-K.

So when I'm looking at the pretax net income or the loss on the CAPCO of 4.6 to 5, there is income somewhere else to kind of offset that loss?

Right.

The 4.4 million of that loss is really management fees that are going to the overhead section in that.

And the rest of it, which is only 200,000 or 300,000, is actual cash expenses that are going outside to attorneys and for audits and things like that.

Let's move over to the SBA lending, then.

On the balance sheet, you have loans receivable of 32 million and some of those have come and been sold through.

So that would be a decline.

And then I am looking at the income -- the revenue and the income.

So how can you accelerate the amount of SBA loans that you're originating?

I would assume that's a goal.

Yes, it is clearly a goal.

And the ones thing that's interesting about the SBA lending business and the platform -- in the first year of our operations, in 2003, we acquired the business in January of '03; we made $750,000 pretax.

Last year, we made about 2.5, 2.6 million pretax.

This year, based upon Katrina and significantly increasing our loan loss reserves, we basically had a flat year.

The business has had tremendous operating leverage.

You add another 20, $30 million of loan originations onto the existing base, all of a sudden you are going to have a couple of million dollars of pretax net income.

We have put a lot of marketing effort into working with our existing alliance relationships.

Many of the credit unions, Merrill Lynch, we're about to kick off a plan of [leading them] back to Switzerland that we believe will give us significant amount of originations.

We have good capacity to do that business with the existing operation.

The nice thing about the SBA lending business is we think that we are currently operating at way under capacity.

We have a $75 million facility.

That can hold significantly more uninsured loan participations.

We've got the right talent, the underwriting people.

So I think as our relationships kick in, we should be in pretty good shape.

We have given guidance to the market almost flat to last year on terms of originations.

And we hope that those are exceedingly comfortable numbers.

And as always, we hope to beat them.

Aside from Katrina, how have the loans gone as far as failures or nonpayments?

Well, we increased our loan loss reserves.

I would say we almost doubled them during the course of 2005.

And the rationale for doing that is we believe that the market for the small- and medium-sized business market and credits will get weaker.

And we wanted to make sure that we had plenty of adequate reserves.

We believe that we are reserved through industry averages, and we are comfortable there.

We don't want to go out and create loans for the sake of doing it.

We want to stay within our credit box.

So we think the portfolio has been well-behaved.

We have a good portfolio.

Our currency rate is in the low 90s, which is an exceptionally high currency rate for an SBA loan portfolio.

And we believe it is above average versus SBA loan industry originations standards.

What is let's say a term on an SBA loan, typically?

Well, the minimum amortization is seven years.

The maximum is 25 years.

Our weighted average maturity is approximately 13 to 14 years.

And if you -- where would you like to see -- if we looked at the balance sheet in a year, where would you like to see the loan receivables be at?

And what would you like to be able to originate in the year, let's say?

Well, Stephen, at the end of the day, we have given guidance at about 60 to 65 million of originations for 2006.

I think if we increase those originations by about $20 million, we will have 2 to 2.5 million pretax net income.

And that really wouldn't expand the balance sheet much.

So in growing a business of this nature, you've got to work those distribution channels.

And that means working Merrill Lynch offices, getting more Merrill Lynch brokers to sign up as a user to our Newtek Referral System.

Same thing with credit unions -- we have 200 contracted credit unions.

We have focused a lot more of our efforts in drilling and mining the existing credit unions that we have rather than taking the number, say, from 200 to 300.

So, I mean, we are very focused on our marketing strategy.

And I guess one strategy is go from 200 to 400, or another strategy is get a couple of these credit unions to actually be big and significant players by teaching, training and educating the officers in those credit unions to offer SBA loans to their members and to help them identify who their business members are.

And finally, my last question, and I appreciate the time that you have given me.

Can you tell us about the cross-selling as you have started to go to the SBA loans that you have originated with the other services that you've been working?

How has that been going -- the difficulties you've been coming up against -- just a brief overview of that?

We believe that our organization is exceedingly well-positioned for the future to be able to cross-sell.

And that is because when we built our business silos, our divisions -- our lending division, our merchant services division, our Web-hosting division -- all the Presidents and Chief Operating Officers in each of these divisions are primarily incented by holding Company stock.

And we do not have fiefdoms.

And we have applications that when they are signed by small- and medium-sized business owners, they do permit us to share information back and forth.

One thing that we are concerned about is we do not want to give the impression to our small- and medium-sized business clients that we are expanding them or inundating them from a marketing perspective.

We clearly are cross-selling when it comes to our alliance partners.

For example, CUNA, which originally endorsed us for SBA lending and then took us on for merchant processing, recently re-upped our agreement for three years and gave us data storage, Web hosting, Web design and a few other products.

And now CUNA is going to launch its business suite to its members.

That's beneficial for us.

And with Merrill Lynch, we recently started off with SBA lending and they recently added us to merchant services.

With General Motors' Automobile Dealers Association, we originally just started off with merchant services and then we were endorsed for insurance and SBA lending.

So we are clearly cross-selling and executing at the alliance level.

On the small- and medium-sized business owner level, we have actually had quite a bit of success with CrystalTech without expanding their customer base, because the last thing a small- and medium-sized business owner wants is to think that they've done business in one segment and then you are hounding them to do business in another.

Our goal and our success will be based upon, on a quarterly basis or a semi-annual basis, to be able to reach our customers with a customer service call to see how their business is doing if they are lent the money maybe to talk to them about reducing their costs in the merchant services area, maybe to check on their insurance needs.

And the best way to be able to do that is, for us, which we are currently in the process of building a master central database.

So not to coin somebody else's business model, but when you look at total Merrill, it has a full menu of products and services.

We would also like to have total Newtek.

So when a Newtek customer gets his statement every month, we would like him also see the slots for all of the other businesses.

And every month, when our 60,000 clients get a statement from us, they'll have a reminder that we have other goods and services that we can offer them.

What do you get from that?

What you get from that is the churn.

If you're dealing with a small- or medium-sized business customer that all of a sudden has a dissatisfied relationship with its bookkeeper, its insurance broker, its bank, you're going to get that dissatisfied customer to finger snap and get an opportunity to sell them something else.

Secondly, to be proactive -- we are creating very interesting and unusual product offering.

We have recently launched a transaction through BankAtlantic -- I believe it is a 3 to $4 billion bank in Florida with over 50 branches -- BankAtlantic is rolling out a program where we are going to be offering a BankAtlantic customer a free website and we will give them an hour's worth of service to help them put up that website, a free shopping cart, and give them the ability to take electronic payment processing through Newtek, a couple of free months of Web hosting -- and obviously, we will have them sign a contract for Web hosting.

Those are some of the ways and ideas that we are in the process of cross-selling.

Financial institutions historically have offered things like toasters and computers and things of that nature.

We think by using some of our alliance partners to actually give them an Internet presence and an Internet interface using our tools and services, A., we'll help the alliance partner create a stickiness and an overall relationship with their customer;

B., we will help them sell several Newtek products at the same time.

You think I was extremely impressed on that question.

I appreciate the answer.

Good luck to you.

Stephen Golden, Riva Ridge.

It's a couple of questions here.

Your guidance on the merchant processing side -- does that include revenues you expect for this year from the portfolio you just bought?

And what's an idea of what kind of accretion based on the purchase price from that portfolio -- what's the sort of cash flow valuation of the cash flows you get there?

And then I have a follow-up on CrystalTech after that.

The guidance does include the two acquisitions.

The first acquisition we're estimating that we are going to own only for about eight months throughout the year.

The second acquisition we're assuming we are only going to hold for about six months.

So it is adjusted according to the time that we will own those portfolios.

In terms of the accretion, Mike, would you say it added about $1 million or $0.75 million --

About $0.75 million.

It adds about $0.75 million of pretax.

Obviously, the EBITDA is a lot greater because there's amortization of the portfolio.

But it adds that amount of pretax.

And on the CrystalTech side, can you talk a little bit about whether your guidance has in it the effects of some of your newer product offerings over there like what you were just talking about in the last question, plus the things you've mentioned on previous press releases such as data storage and your beta product in the Linux world and what you guys have seen in sort of trends '06 year to date and that kind of stuff, and what that might mean for your guidance going forward?

Yes, obviously, looking at CrystalTech, we have hosting.

We've also recently announced a new brand and a new distribution channel -- Newtek Web Hosting.

So we are going to be offering Web hosting for our Newtek shareholders.

We are going to continue to keep the CrystalTech brand open.

CrystalTech markets very successfully to professional IT developers, Web designers and really specialists in the information technology industry and market.

That is not going to be touched at all.

But we are launching a new distribution channel, Newtek Web Hosting and Newtek Data Storage, which really is going to be powered by CrystalTech.

So we are using a CrystalTech infrastructure to add a Linux product, to add a Newtek Web-hosting product and a data storage product.

Because of these launches, it clearly will put a bit of a drag on CrystalTech and the Web-hosting segment, which is a little bit of a misnomer, because frankly, we've got data storage costs in there as well.

We are anticipating almost a doubling of our payroll in 2006.

We have a NOC center, which is operating at about 40 to 50% of capacity.

So we have plenty of room to grow.

We made a decision in-house that the market for Web hosting and Web-hosting services is incredibly lucrative and very attractive.

Small- and medium-sized businesses are going to continue to use applications that require their Web-hosting company, and Web-hosting relationship also, to use a dedicated product instead of being in a shared environment, and also to store data.

We are very well-positioned for the future in this particular segment.

And that is slightly depressing some of these numbers.

The other thing I will add is that some of these numbers are depressed somewhat by the interest expense that is incurred by the CICC borrowing, of which -- was 8 million, is now 4 million, and we do anticipate paying down the other 4 million, probably within a quarter.

That will get rid of net interest expense on a going-forward basis.

And CrystalTech will be owned free and clear.

So you've got Web-hosting revenue, at least at the high end of your range, going from 10.7 in '05 revenue and to 13 in '06.

And I think you have EBITDA, actually, slight to flatly down, so the reason why revenues are growing, but EBITDA is flat to down is due to the incremental expenses you are wearing on for the new product mix?

That is correct.

I just did a little back of the envelope -- that appears to be about 20% growth year over year.

And so far, numbers, unaudited, that have come in for the first quarter, we have growth that is stronger than that.

And that's -- the first-quarter growth does not have in it really real impacts from some of these new product initiatives on the Web-hosting side.

Is that fair?

That is fair to say.

Absolutely.

So that 20% is where you're growing sort of without the new product initiatives, and hopefully anything from the new product initiatives would be above and beyond that?

Yes, I think that is a fair comment.

We've got 20% growth without any of the new products layered on top.

The old products, frankly, are growing faster than that.

But we do want to be conservative, and we have loaded all of the expenses onto the business.

And do you have any anecdotal color of what the take-up on any new products are to date?

I am not that familiar with what the exact launch dates of some of that stuff are.

It is still a little bit early.

We have done some testing with the Linux -- we have done some beta testing.

They have gone well.

But we are still in the testing phases.

I think our issues are, you know, you're always looking for more and more.

I am always looking for more and more.

Don't really have launch dates that I could discuss at this point in time.

What is important, particularly with CrystalTech, which has developed a reputation for excellence, is we run the business based upon what we consider best practices.

So we try to be conservative.

We don't want to put pressure on the operations and the management teams and say, you were going to be launching at this date.

So we are a little cautious in coming out and doing that.

CrystalTech has such a fine reputation in the marketplace for being able to add over 1700 customers a month with minimal amounts of advertising, I do believe what you are going to see from Newtek is spending more money in the marketing and advertising channel, which we think will grow the business significantly.

I think some of that things you're seeing -- some of the trends that you are seeing in the Web-hosting business I think are basically stating that we are in the right place and in the right spot at this point.

And my last question is you bought the two portfolios on the merchant processing side.

What do you see in '06 from a trend line?

I guess while you've got -- you've got revenue up it looks like almost up over a third from '05.

How are you seeing trends, and what do you think the driver of those trends are in that line?

Is that your alliance relationships just working real well?

Is that just overall payment volumes across the industry escalating?

What is driving 30-plus revenue growth rates?

And once again, what are the early returns from '06 anecdotally?

I need you to ask that question again.

I apologize.

No problem.

I am just saying you've got merchant processing growth growing top line it looks like over a third.

And so I am wondering, is that your -- I'm asking, what are the drivers of that growth?

Is that your referral relationships and your alliance partners basically pulling in more every month?

Or is that existing relationships just getting better flow, i.e., the whole industry is growing?

What is driving those revenue growth rates?

And what's the early -- sort of anecdotally, the first three months of '06 sort of look like in that business to get an idea if things still look rosy?

Okay, first clarification, which I think is important -- the [technical difficulty] acquisitions have not closed yet.

We anticipate the $2.5 million acquisition closing within the next two weeks.

The second acquisition we anticipate closing in 60 days.

Both acquisitions, I believe, do not add to our revenue forecast.

Is that correct, Mike?

[Inaudible -- microphone inaccessible]

But it is de minimus, right?

They are net; they are not grossed up.

We are actually -- both of those acquisitions are on different payment processing platforms.

So the increase of 33 million of gross revenues to 45 to 47 in range is primarily organic.

It is not through acquisitions at all.

But it does seem like we're getting some bigger accounts, I would say, from the alliance partners.

That seems to be a trend in the back half of '05 and [technical difficulty] '06 also.

So there is some growth from the existing accounts and also some pretty sizable new customers are coming into the alliance partners.

That's great, guys.

And how is '06 looking in the first quarter?

On the merchant processing side?

I assume you would not be giving out this guidance if things had changed dramatically, but just looking for any additional color.

I think that the merchant business, Web-hosting business and the lending business are all tracking very, very well.

Just basic blocking and tackling the core businesses in terms of being able to put our customers at the right price with great margins looks terrific.

(OPERATOR INSTRUCTIONS).

Art Andrews, Blade Law, Inc.

Would one of you gentlemen please comment on the competitive pressure from Website Pros, symbol WSPI?

Are they a threat to the services that you provide?

Website Pros is a company I am vaguely familiar with.

I believe they create websites for small- and medium-sized businesses, host them and basically sign a contract with them going forward.

They are really not in our business, the way I look at it.

I think that they charge a fairly high price.

I think that companies like Microsoft and Google and Yahoo!, frankly, are the entities that they are competing against.

I think what we offer to the small- and medium-sized business client is more of a technology solution.

And effectively, what they are selling for a cost, we almost give away.

And our customer base are Web designers and Web developers that compete against them.

If we do Web design, we basically view it as a giveaway.

So we like our business model.

We don't think it's easy to replicate.

There are several companies that are around like -- I think it is called Website Pros.

The one thing we love about companies like Website Pros is the market is giving them huge valuations because of their belief that they can penetrate the small- and medium-sized business market and have a meaningful business line or product line.

So we hope companies like that continue to excel and command big valuations.

But we don't really view them as a competitor.

Second question, if I might.

A year from today, you'll be reporting your '06 results.

From the bits and pieces I have put together here, am I to assume that you will be reporting a loss for the full year of '06?

Yes, we have given pretax guidance of a little over $3 million of a pretax loss for 2006.

That is correct.

Adam Rosenberg, Citigroup Smith Barney.

Just more of an abstract question.

I'm trying to get a sense of what the client experience would be with Newtek as you transition to more of a virtual sales force and a virtual franchise.

Do you find clients demanding more face time, or is that something that they tend to appreciate, being able to do things remotely?

Well, I think that in our business model, we do have a capability, although limited, to get into a client's office and see and visit a client, provided that it is warranted.

What we find in our business model is small- and medium-sized business owners are totally receptive to doing business telephonically and remotely.

When you think of the small- or medium-sized business owner, think of someone that is very busy, typically understaffed, doesn't have time or really an interest in having someone pay them a visit or then going to somebody's office.

They want to be able to do the business on their time when they have it available or when they can make time.

That's really what we offer to them.

So what we found is there is a very large percentage of the SMB market that is totally willing, capable and enjoys doing business remotely with us for any and all of our products.

Our customer service representatives are incredibly smart, productive and efficient because we give them terrific software tools and enable them to really satisfy the client.

Importantly, we don't make that client handwrite information, type in data.

It is a much higher level of customer service than having a six-figured account executive that may actually know nothing about the particular business go pay a visit and buy breakfast, lunch or dinner, to frankly, a very busy business owner.

At this time, there are no more questions in queue.

I will now turn the call back over to Mr. Barry Sloane and Mr. Mike Holden.

Well, we appreciate the questions.

And what we will endeavor to do is over the course of the next week put out an additional PowerPoint presentation that will help further explain some of the breakdowns.

And obviously, most of this information will be explained in our 10-K, which we will be filing with the SEC shortly.

And I want to thank everyone for joining the call today.

And we appreciated the questions.

Thank you very much.

Thank you for your participation in today's conference, ladies and gentlemen.

All parties may now disconnect.

Enjoy your day.