NewtekOne Inc (NEWT) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter one 2006 Newtek Business Services, Inc. earnings conference call.

My name is Tanya, and I'll be your coordinator for today.

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

We will conduct a question and answer session towards the end of this conference.

If at any time during the call you require assistance please key star, followed by zero, and a coordinator will be happy to assist you.

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today's call, Mr. Barry Sloane, CEO and Chairman.

Please proceed, sir.

Thank you very much.

Welcome, everybody, to our 2006 first quarter shareholder conference call.

We appreciate you attending.

For those of you who would like to follow along, we do have a PowerPoint presentation, as well as an excerpt of our income statement and balance sheet that is positioned on the home page of our web site at www.newtekbusinessservices.com.

My name is Barry Sloane.

I'm CEO and Chairman of the Board, and I also have with me today presenting, Michael Holden, our Chief Financial Officer.

I'd now like to read the Safe Harbor Statement.

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

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 or operating problems with its operating business projects, and their impact on revenues and profit margins, and additional factors as described in Newtek Business Services' filing with the Securities & Exchange Commission and available through [http:www.sec.gov].

We also need to point out that our CAPCOs operate under a different set of rules in each of the eight different jurisdictions, and these place varying requirements on the structure of our investment.

And in some cases, particularly in Louisiana, we do not control the equity or management of a qualified business, but that cannot always be presented orally or in written presentations.

In beginning our presentation, I'd like to go over some Q1 2006 financial highlights.

Web hosting revenue increased from Q1 '05 to Q1 '06 by 42 percent.

Electronic payment processing revenue increased Q1 '05 to Q1 '06 by 58 percent.

Web hosting EBITDA increased by 38 percent from Q1 '05 to Q1 '06.

Electronic payment processing EBITDA increased over 600 percent from Q1 '05 to Q1 '06.

Total non-CAPCO revenue, all revenue accumulated from non-CAPCO activity, increased by 38 percent Q1 '05 versus Q1 '06.

We also had cash per share on our balance sheet of $1.59.

That cash is cash, cash equivalents, and Treasury securities, all short-term in nature.

Our 10-Q filing, which is anticipated to be made tomorrow, July 14th, 2006 will be for Q1 2006, will bring us back into compliance with all requirements for continued listing on the NASDAQ global market, which is, of course, subject to confirmation from the NASDAQ Listing Qualification Panel, and we anticipate making that filing tomorrow.

In addition to our first quarter financial highlights, our balance sheet also demonstrates Newtek Business Services' financial strength.

As of 3/31/06 we have $55 million in cash, cash equivalents, and short-term securities on our balance sheet.

Also, as of 3/31/06 we had approximately $85 million in shareholders equity.

And as of 3/31/06 we had $2.43 in book value per share.

Many investors look at Newtek, they look at the asset size of $256 million in assets at the end of 3/31/06, and they question as to whether the company is over-levered or not?

One thing I would like to remind our investors is to take a look at some of the assets which effectively offset one another and which are non-cash in nature, such as tax credits receivable of $106 million which would be offset against notes payables in lieu of cash from 91.2 million, and small business loans of 31.9 million which effectively offset against our lending facility of 23 million.

We should effectively take out approximately 140 million, 150 million of these assets, you actually can see a balance sheet that really isn't very levered at all.

In looking at Newtek financially we do see the diversity, excuse me, a diverse set of businesses, cash flows from different assets.

However, in looking at Newtek there is an important theme and goal to keep in mind.

Newtek is a major play in owning a distribution company whose target is the national small, medium-sized business marketplace, with over 23 million potential clients which represents 51 percent of GDP and nine out of ten businesses in the United States.

Newtek is achieving its goals quickly and becoming a premiere provider of business and financial services, with over 65,000 customers using one or more of our products.

Newtek has developed a business model which makes it a low cost provider of products and services and a low cost acquirer of small and medium-sized business customers.

How is Newtek accomplishing its goal?

Primarily through technology.

We use state-of-the-art web based proprietary technology.

Our web based referral system allows referrals from alliance partners, giving them a window into our BackOffice operation.

Our web based applications are used as an in-house tool to make our employees and associates efficient, smart, and productive.

Along with these applications, we offer a fairly high quality of service and we have a very streamlined operation.

We don't want our clients to type in data or handwrite applications, we want them to basically conduct telephonic interviews and have satellite type service.

Who are the customers that use our technology?

And who has endorsed its use?

Companies such as Merrill Lynch, [CUNA], which is a trade association for all credit unions in the United States, with over 9,600 credit unions underneath it.

The largest credit union in the U.S., [U.S.

Credit Union], Union Bank of Switzerland, and others.

All of these entities have exclusive preferred relationships with Newtek, basically using us to outsource solutions to provide business and financial services to their customer base.

In the near future, Newtek will have several different technology launches.

We believe that in the month of September we will launch our new web site.

Our new web site will be very interactive, where our current web site is primarily a promotional vehicle, trying to explain what the company does, the new web site will be very interactive and will allow us to actually do business directly with customers, passing referrals directly into us.

We also plan on launching our virtual sales force offering, which will be done in the fourth quarter of 2006.

And we also have recently announced our launch with CUNA, cunasmallbusinesses.com.

I would suggest all of you go to that web site, take a look at it, and clearly how Newtek is positioning itself going forward.

Newtek is positioning itself not as a player in the merchant processing space, or a player in the lending space, or data storage or web hosting.

Newtek is positioning itself so that it all encompasses business and financial services provider to that small and medium-sized business client.

That small and medium-sized business client has a need, they come to Newtek.

In our first quarter Q we actually did a fairly thorough explanation of our various different segments.

We have now segmented our business into six different components: small business lending, electronic payment processing, web hosting, CAPCO, all other, and corporate activity.

If you have the opportunity to go through our Q, which I anticipate will be filed tomorrow, you will get a very detailed explanation of categories four, five, and six, that being CAPCO, all other, and corporate activity.

Small business lending, electronic payment processing, and web hosting are somewhat self-explanatory.

But I will try to do a brief explanation of CAPCO, all other, and corporate activity.

CAPCO activity represents our 15 CAPCO's, and the activity within that segment represents the non-cash components of tax credit income, non-cash interest expense [to come-up with CAPCO notes] and its non-cash insurance premium amortization.

Also within that segment we receive interest income that comes out of existing CAPCO.

All other is a category which represents all of the businesses underneath the Newtek umbrella, which are primarily qualified and owned by CAPCO that do not fall into the segment.

Corporate activity is our corporate overhead or expenses that are required to run the overall business: marketing functions, legal functions, finance, IT, as well as interest income and management fees that come out of the CAPCO.

I should remind you that management fees that come out of the CAPCO which are a revenue source for corporate activity are treated as an expense at the CAPCO segment.

Looking at the operational cash flow of Newtek, we do anticipate and are forecasting in 2006 that the company will be positive cash flow on an operational basis for 2006, the first time in the company's history.

Unfortunately, CAPCO, as we have discussed before, is being de-emphasized, and there are also no current products or programs on the horizon.

Historically, from 1999 to 2005 CAPCO had contributed $10 million to $15 million of cash flow, which wouldn't necessarily fit into this category.

Effectively, CAPCO is no longer contributing any cash to the company.

A little bit of a focus on our different segments.

Web hosting.

Web hosting highlights for the quarter.

From revenue growth, from EBITDA growth, the rollout of our new [Linux] based product, the rollout of data storage, the rollout of Newtek web hosting and Newtek data storage brand.

The [Crystal Tech] brand will continue to exist, and it's doing a great job in its own distribution channel.

Newtek, however, will rollout web hosting products and data storage products to its existing alliance partners, as well as through its own web site and Newtek direct [inaudible].

The web hosting segment had tremendously strong customer growth and increase in revenue per customer, demonstrated in the first quarter.

If we go to slide 14, we can see the EBITDA growth from Q1 '05 to Q2 '06 grew by 42 percent, from 1.2 million to 1.7 million.

Web hosting net income, Q1 '05 to Q1 '06 grew from 807,000 to 860,000, a 7 percent increase.

That particular increase isn't quite as robust because a larger percentage of our business has been coming from the dedicated side of the business, which has more of the CapEx aspect to it, [inaudible] amortization and non-cash [inaudible].

Our web hosting clientele grew from 37,000 in Q1 '05 to 49,000 in Q1 '06, a 33 percent increase.

Web hosting dedicated payments as a percentage of total payments, and this is on a cash basis, went from 24 percent last year in the first quarter of '05 to 31 percent this year.

And that's based upon cash payments in the first quarter of 2005 of 2.466 million versus 3.232 million in the first quarter of 2006.

Switching over to our Electronic Payment Processing Division, in the second quarter we closed on an acquisition of a $2.5 million portfolio which was previously announced.

We'd also previously announced a $7.5 million portfolio acquisition that we anticipated closing on 6/30/06.

At this point in time this portfolio had not closed.

And although we're very far along in the process there's no guarantee that this transaction will close.

However, this particular transaction is included in our guidance for the rest of the year and 2006.

We had very large revenue growth out of the Electronic Payment Processing business and, most importantly, this business has great operating leverage and the capacity to grow without additional capital or significant capital expenditures.

Looking at the electronic payment processing revenue, Q1 '05 to Q1 '06 grew from 6.01 million to 9.4 million, a 57 percent increase.

Looking at the net income, electronic payment processing pretax net income grew from a negative 46,000 Q1 '05 to 414,000 first quarter Q1 '06.

Our Lending Division, some highlights.

The servicing portfolio continues to grow.

We finished out 3/31/06 with a little over 203 million or 204 million of servicing assets on our books.

Unfortunately, originations are down but, however, we have streamlined our business to become far more efficient.

And we basically have reduced the breakeven rate on our business.

Where initially it took $60 million to $62 million of loan originations in a given year and funding to break-even, we have reduced that rate to approximately 50 million to 52 million this year.

Our average loan size is down and the company is becoming far more efficient in processing.

Referrals are up and the lender is being much more selective in doing business.

In the first quarter of 2005 we received $273 million worth of loan referrals.

In the first quarter of 2006 we received $311 million of loan referrals.

We are currently closing approximately 5 percent or 1 out of 20 opportunities that we're looking at.

Fortunately, we have a very efficient way to turn loans out quickly and efficiently in a quality manner to the customer.

The lending business exhibits great operating leverage, with another $10 million, $20 million, or $30 million of loans we feel confident we'll be able to bring in the future, our pretax net income and EBITDA will grow very quickly by several million dollars at a clip.

The one other thing I will comment on the lending business is that [inaudible] our cost of capital needs to improve, our cost of money still remains at a very high level.

This is somewhat expected in a business that's only about 3-3/4 years old.

Looking at our loan loss reserves comparing Q1 '05 to Q1 '06, the loan loss reserve went from 1.5 million to 2.1 million.

We do feel that we're very well reserved and prepared for the future.

Our loan loss uninsured balances declined slightly from Q1 '05 to Q1 '06 from 37.9 million to 35.7 million.

That wraps up most of the discussion related to our segments.

The one thing I would like to say with respect to corporate highlights for the year, we recently announced three new hires in the accounting/finance area, all very senior people, all reporting to Mike Holden, as well as the additional hire of a Chief Legal Officer, Andrew Lewin, who will be reporting to our General Counsel, [Matthew Ash].

The company is in a great transition to a cash flow positive operating model.

The company has exhibited great technology, which is further demonstrating that we are a low cost producer and a low cost acquirer of customers, with our current customer base of 65,000.

We are currently adding 1,600 new clients a month net of attrition.

We endeavor in the future to simplify our balance sheet and income statement, and I'm paying a lot of attention to our [capital] base.

We have worked very hard at centralizing our operations, where historically based upon our CAPCO activity it had created decentralized legal, accounting, IT, and other functions.

One other highlight I would like to mention, this company has done a very good job of paying down its limited amount of debt outstanding.

Our [TICT] debt, which was approximately $8 million in 2005, is now down under $2 million.

With that, I would like to turn the rest of the presentation over to Michael Holden, our Chief Financial Officer.

Thank you, Barry.

Barry has given you a lot of information, and I don't want to repeat it all.

I will say that – I'll give you an overview of the company and then give a little bit more specifics on the segments, some of the things that drove the operating results.

And the company, as a whole, the revenue in the first quarter was $18.2 million which was a 36 percent increase over last year.

Total expenses were $22.4 million, a 22 percent increase over last year, which brought our loss before taxes to 4.1 million as compared to 4.9 million last year, and loss after tax was $2.7 million or $0.08 per share as compared with $3.4 million or $0.10 per share last year.

Now, I just want to give you some details on the segments.

First, starting with electronic payment processing, revenues increased 3.465 million or 58 percent compared to the prior year.

There's a number of things that drove that.

We had an increase in customers from 7,300 to 10,600, as a result of very strong marketing efforts.

We also in the last year picked up 1,000 customers through a purchase of a couple portfolios which generated about $142,000 of additional revenue.

So that really drove our income in the quarter.

We have a lot of leverage in that business, and with that type of revenue growth, that's how we were able to turn a $46,000 loss into a $414,000 profit, almost all through organic growth.

Turning to the web hosting business, the revenues increased 954,000 or 42 percent compared to last year.

A number of things influenced that.

We did have an increase in customers from 37,000 to 48,000.

Also, as Barry mentioned, we're getting much more into the dedicated hosting environment, and those customers, dedicated hosting customers, the average transaction is much higher than the shared hosting customers, so that drove revenue.

Our income before income taxes increased $60,000 or 6 percent.

We had the large increase in revenue, but that was offset by a couple of different items.

The revenue in the first year in the shared hosting environment is a little bit more difficult to come by.

It's more competitive in that area, so that's decreasing a little bit on a per customer basis.

We did have some increased payroll to service the increase in customers.

And, as Barry mentioned, since we are getting into the dedicated hosting environment which costs more in capital expenditures, we did have more depreciation this year.

And, also, we did have 267,000 more in interest expense in 2006 compared to 2005, which was associated with the TICT debt.

That was incurred at the very end of the first quarter last year, and so we had a full amount on the $8 million which is at 13 percent, 12 percent or 13 percent, all the way through quarter two, quarter three, quarter four of last year and the first quarter of this year.

And then we paid-off $4 million at the end of the first quarter, so we're starting to go down another 2.1, as Barry mentioned, just recently, the end of June.

So that will start to improve.

The third segment I want to talk about a little bit is [SBA] lending.

The SBA lending revenue decreased slightly compared to last year.

We did have $251,000 in additional premium income but that was offset by last year we had a onetime recovery of loan liquidation costs of about $475,000 that we were up against.

The loss before income tax was 56,000 compared to a loss of 656 last year.

The main reason for that is we had a large decrease in our provision for loan losses.

Last year we increased it by $550,000 to cover some losses associated with the [Commercial PAPA Corporation] portfolio which we acquired back in 2002.

This year we had very little in the way of loan losses.

That's the SBA lending side.

On the comparison for income, last year, as I mentioned, we did have this big recovery on loan loss fraud.

The differential between last year and this year is 438,000 less than recovery costs this year than last year.

Turning to CAPCO, our revenue increased slightly in CAPCO because you had two more CAPCOs this year compared to last year, and revenues being the management fees that we receive on that.

And that went up because of Wilshire Texas and Wilshire New York.

The loss was 4,142,000 compared to a loss last year of 3,681,000.

We will have to give you a little bit more detail on that.

Of the $4,142,000 in loss $2,832,000 represents non-cash income from tax credit of $1,258,000, which is offset by $3,300,000 of non-cash expense on interest accretion and another 747 of prepaid insurance write-off.

So just to kind of recap that, 2.8 million out of the 4,100,000 is non-cash, and most of the rest of it is cash that is just paid to the corporate activities segment and is included in a revenue in that segment.

Last year that comparable number was $2.6 million, so it's about the same. $2.8 million non-cash loss this year, $2.6 million last year.

All other, we had a pretty substantial increase, a 40 percent increase in revenue, a $541,000 increase in '06 versus '05.

We did invest in a hotel complex, a qualified investment, in the fourth quarter of last year, in Phoenix Development Group.

That's generated a little over $1 million in lodging revenue.

We did have a substantial distribution last year from one of our partner companies that came into expediential business development for $719,000 last year.

And so that has caused us to have a decrease in that category, in the all other income side.

The profit, well a loss, turned out to be $300,000 in this segment this year versus $567,000 last year.

A couple of interesting items.

We had large profit in Phoenix Development of $534,000 this year.

As I mentioned, that didn't exist last year, so that was incremental gain.

We did have a reduction this year in smaller investments, smaller companies with, that had some losses last year.

Also, we had an investment in Washington, D.C. that lost some money this year, about 524,000.

And, as I mentioned, we didn't have as much income from expediential business development.

On the corporate activity side, which includes the management fees that I mentioned before, our loss was 1,015,000 versus the loss of 857,000 last year, so it was very similar to last year.

As Barry mentioned before, our income statement and balance sheet is on the web site, if you want to take a look at that.

Otherwise, we'll turn it over to questions.

[OPERATOR INSTRUCTIONS.]

And your first question comes from the line of Evan Greenberg from Meadowbrook Capital.

Please proceed.

Barry, how are you?

Good, Evan.

How are you doing?

Good.

A little busy but good, in Chicago here.

So it's sunny.

I don't know how it is New York.

But wanted to know if the core growth that you have from your, the two main segments, you continue to expect that kind of growth going forward or whether you think some of that will moderate?

Well, I think that at this point in time the growth that we're seeing in the web hosting business, although it's fairly healthy, we do anticipate that to continue.

I think that we are optimistic as we start to open up our Newtek channels for the web hosting business, as we roll-out Newtek web hosting, Newtek data storage, and really start to bring that product into some of our alliance partners.

On the merchant services side, I think we're having just a very good run with respect to the business model.

Our average revenue, our average processing per customer is almost two times the industry average.

Our penetration rate into our alliance relationships is at the early stages.

It's, you know, the first couple of innings of a nine-inning ballgame.

So although, obviously, we're getting into bigger numbers, it's clearly a little bit more difficult to get big percentage revenue jumps off of 45 million of revenues.

We are pretty optimistic.

I do think that the growth can continue in both businesses and, importantly, both businesses really offer a tremendous amount of operating leverage.

And we do have capacity in both businesses, as well.

So pricing is not going to necessarily be much of an issue.

You're very competitive price-wise in this product?

Yes, both products, frankly, are commodities.

You know, the web hosting business and the electronic payment processing business are commodities.

What is unique is our business model.

It's our methodology of acquiring those customers, putting those customers on our platform.

And, frankly, we are very well positioned because we're a low cost acquirer of these clients and the low cost processor of the business.

And I think that bodes very well for down the road when you have several different product lines that are going full bore, your ability to cross-sell and really develop greater revenue per customer is there.

Also, on the CAPCO business, is there any new CAPCO legislation that's going on right now that would impact CAPCOs?

And what are your plans in the future?

Are you planning to do anything more with CAPCOs?

I mean we've announced that CAPCOs on the [legal] side, there is no product legislated anywhere for 2006.

There's no – we're not even aware of any bills.

You know, there are comparable products, market tax credits, and things of that nature.

But at this point in time, our almost exclusive focus is on the branding of Newtek and the development of Newtek as the premiere provider of business services and financial products.

So, right now, we have separate obligations that we're filling very well.

Fourteen of our sixteen CAPCOs are past the 50 percent mark.

We anticipate the other two will be past the 50 percent, so we'll be at sixteen.

One of our CAPCOs hit the 100 percent mark in the fourth quarter of last year.

Our second one should hit it in July or August, so I think CAPCOs are a diminishing part of our activity and focus.

How much of your cash is restricted, and how much of – how much is – you have a long-term debt facility for the SBA lending, or is it current right now?

Correct.

We have – our financing facility is a three-year facility.

It has about two years and two months left.

Our cash is 35.8 million of cash and cash equivalent, 2.2 million CDs, 3 to 4 million Treasury's, and then there's $14 million of what is viewed as restricted cash.

Within that, there's CAPCO cash, of which we get our management [side].

Okay, so that cash is really – the cash we talked about is really net cash versus debt, is that fair?

No, I would say that cash, 5 million is gross cash, and when we look at our liabilities I mean the TITG line offsets against the receivables.

But when you're looking at other types of liabilities on our books, you know, I look at the notes payable and insurance, notes payable other, and then the deferred tax liability, which actually went down in the last quarter.

I mean I would – if you were trying to come up with a cash number – I don't know, [Frank], if you have any comments on that, but I would really look at cash balances versus those hard liabilities.

Okay, Barry.

All right, thanks a lot.

Thank you, Evan.

And your next question comes from the line of [Steven Golden] from [Red Brook Ridge].

Please proceed.

Hey, Barry.

Can you give us a little feel for when you think you'll know whether that second payment processing portfolio, whether you're going to close on that transaction?

I can't really give you any more feel than I did in the sense that it was anticipated to close 6/30.

You know, in closing, it's kind of like horseshoes, unfortunately.

So, you know, I'd like to believe we're close, but there's a possibility it may not close.

And if it doesn't close, we have the cash and we'll just buy the portfolio.

Okay.

And how's – you know, what does the back half of the year look like from a competitive landscape in web hosting?

Do you expect dedicated servers to be a bigger part?

How big will, you know, how big a part of your business will Linux become?

I think that what we feel very good about is, frankly, both the web hosting business and the merchant business are two very hot industries.

Web hosting is becoming a – it's clearly a growing business.

More small, medium-sized businesses are hosting applications.

The higher positioning of the company, of putting ourselves in the [inaudible] center over a year ago, which gives us the ability to have a secure location but to also have data storage.

We're in a great market there.

And, you know, the more dedicated web hosting we're doing, we're getting more revenue per customer.

There's more stickiness to that particular customer.

It's a higher quality customer, and can also lead to things like data storage or other higher gross revenue products.

And the amount of small, medium-sized businesses that are using web hosting or storage is growing very quickly.

So we're very happy with our position in the web hosting space.

And not too dissimilar in the merchant space, a larger percentage of all transactions, all payment transactions, are being done electronically.

And cash and checks are diminishing.

So I think what's interesting about Newtek, particularly in the hosting space of the segment, is we're in rapidly expanding markets.

We're growing market share.

Our commodity, our methodology, our investment dollars you require across this business is very unique.

And, frankly, we're real happy with how it's going, and we expect that to be successful.

And you expect to file the second quarter Q on time?

Yes, we do.

We anticipate filing it long before [inaudible].

And do you think you'll be announcing second quarter results around that time or a few weeks ahead of that?

I believe that it will be – we have put out a date which would be August 14th.

But one thing I will say to you is, unfortunately, with the company being behind schedule, it's [inaudible] effectively we have 30 days to [inaudible] our Q. So we're going to use that time to [inaudible].

We also have a new external auditing firm.

It's done a terrific job with us.

But we want to make sure that we are extremely thoughtful in putting out good products.

But it's moving timely.

I should say we anticipate being timely.

And I think relative to our hardships in the past with the new staffing that we have, the new resources that are being given to us by the auditing firm, we feel most of our troubles are behind us in this area.

Can you talk a little bit about some of your newer alliance partners that you announced and how you feel like things are going?

Especially the GM dealership organization?

I think the relationship, particularly with the [GMMDA], is working very well.

We have people that are marketing with the association directly to those dealers.

It's been a very [tight] organization.

There's a community minded aspect, our relationship with them, where we incent the dealers with charitable contributions, which clearly incents [inaudible].

We've had tremendous success in the electronic payment processing space, and have now started infiltrating now with insurance products.

And, frankly, the insurance market is quite a fruitful one when you think about car dealers, so we're very, very happy about that.

Now, what does it take?

It takes working.

We've attended a variety of their conferences, all over the country.

We do webinars, provide telemarketing material, and do telephonically directly market into those relationships, along with our trade association partner, the GMMDA.

What about SBA lending into that, into that customer base?

It [inaudible] -- the one issue I will tell you is, unfortunately, SBA guidelines for car dealerships, they're a little old.

And, particularly, the price of a car today, it is a rather smallish dealer that would be able to meet the requirements for an SBA loan.

Oh, that's a good point.

Although maybe they could do just a small SBA line, or is the fact that it would have to have so much security of the business means no one would want, you know, no one would add an SBA loan to the mix with all the other loans that they could put on the books with all the collateral they could offer up in security?

It's definitely a market, a credit issue, but the biggest issue is that the SBA has a cutoff, and I'm not 100 percent sure of what it is in sales.

Oh, okay.

So they don't even qualify a small businesses just to get any loans from them?

Oh, okay.

That makes more sense.

Okay, thank you very much.

Okay.

Thank you, Steven.

[OPERATOR INSTRUCTIONS.]

And your next question comes from the line of [Dominick Broadway] from UBS Financial Services.

Please proceed.

Hi.

I just wanted to know the number of clients utilizing three or more of your services, and if it's growing?

And, if so, at what rate?

We currently do not publish to the market the number of clients that are using three or more of our services.

The one thing I will tell you, Dominick, is currently we have not aggressively sought after cross-selling opportunities with our client base.

But that's not to say that we're not cross-selling because we are doing it in a limited way.

But one thing we don't want to do is we don't want to [span] or really put our customers out.

We are currently developing attractive in-house software that will enable us to bring up an entire customer's record and approach the customer once they're [inaudible] one of the particular areas.

And as a customer service call, make sure that we market the Newtek brand in developing market awareness, that we can do all the other things.

Where are we cross-marketing?

We are cross-marketing in the web hosting [inaudible] products and services.

In the SBA lender, although it's clearly not a requirement, we do offer [inaudible] life insurance, which is a requirement on the loan.

And property casualty insurance on [inaudible].

And, as I mentioned to you, with the alliance relationships, like GMMDA, we have multiple products that we can sell into them.

And we are selling currently many products.

However, I think if you'd put yourself in the position of a small or medium-sized business owner you really don't want to be sold multiple things at the same time.

Our goal is to develop enough value for our customer service base, we go back to that customer regularly and make them aware of what we have, and we drive them to our web site where our new web presence [inaudible] will be that initiative, as well as having software internally that will enable customer service representatives to be fully cross-trained on all of the different products [inaudible].

Okay.

Thank you.

And your next question comes from the line of [Paul Soloman] from [Glen Ellyn].

Please proceed.

Hi, guys.

How are you doing today?

Hey, Paul.

How are you?

Good, good.

Two questions.

One, you mentioned the purchase of a portfolio of 100,000 loans, is that correct?

We didn't talk about a core purchase of any lending portfolios.

I think we discussed merchant portfolios.

Oh, okay.

100,000.

I'm sorry.

That's correct.

Is that something you plan on looking at going forward?

Is it something that's going to become part of the business model?

We did announce it.

We – I think about six months ago, and [inaudible] of capital into [inaudible] portfolio.

And we have successfully closed [inaudible], deal, [inaudible] for another one.

There are a lot of single purpose public companies that actually have gone out and purchased portfolios, and done it well.

We believe that by acquiring portfolios it gives us the ability to [inaudible], work on our transaction costs, and it is definitely a strategy that we like going down the road.

But we want to do it, you know, thoughtfully and methodically, you know, not just go out and buy anything that's available.

Right.

Okay.

And second question, again, I was in and out on the call, is it that you mentioned that you guys are currently closing one out of 20 referrals?

In the lending?

In the lending space?

Lending side we are probably closing one out of 20 referrals that come into the system.

And I think that's a function of three factors.

Number one, we're probably one of the few lenders that can do that because of our [inaudible] methodology and our pre-qualification screening.

So we're able to really provide quick no's to referral partners and their clients.

Number two, we have announced recently that we [inaudible] underwriting [candidate].

And, you know, we like the credit business.

We like lending money.

We think it's a [bit of honey] to our offering.

However, if you ask me whether I'd, you know, rather be long credit or short credit right now, this may not be the best time in the market to extend credit.

Right.

But this is a business segment that we like it, we want to be in it, and when the time is right we'll be aggressive towards it.

Right now, we're taking an extremely conservative position towards extended credit.

You know, we clearly had enough looks and loan, a little bit over a [million dollars] this year.

But we clearly have enough looks and loan to be able to do more volume, but we really want to make sure that we do the right credit, [inaudible] delinquency [inaudible].

Our portfolio right now is exceptionally well behaved.

And we have a much better reserve on this year versus last year, with respect to the first quarter.

Well, what are we looking at in delinquencies as this year compared to last year, percentage wise?

I don't have those statistics.

I believe that is [inaudible].

Okay.

All right.

Thanks, guys.

Thank you.

[OPERATOR INSTRUCTIONS.]

At this time, gentlemen, we have no further questions.

I would now like to turn it over to Mr. Barry Sloane for closing remarks.

Great.

I appreciate everybody participating, and we will endeavor to file our 10-Q tomorrow, and we look forward to speaking to everyone in a month.

Have a good afternoon.

Thank you for your participation in today's conference.

This now concludes the call.

You may now disconnect.

Have a great day.