NewtekOne Inc (NEWT) 2006 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the second quarter 2006 Newtek Business Services Inc. earnings conferences call. My name is Jeff, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a Question & Answer Session towards the end of the conference. [OPERATOR INSTRUCTIONS]

I would now like the turn the call over to Mr. Barry Sloane, Chairman and CEO. Please proceed.

Thank you. Welcome, everyone. Thank you for attending our second quarter shareholder conference call. On behalf of Michael Holden, our CFO, and myself. We appreciate your interest in our business and potential investment. I would also like to suggest for those of you that have internet availability, our PowerPoint presentation is hung on the home page of our website, and you can follow along there. Please bear with me as I read the Safe Harbor statement.

The statements in the slide presentation including, statements regarding anticipated future financial performance, Newtek beliefs, expectations, intentions, and strategies for the future, may be forward-looking statements of the Private Securities Litigation Reform Act of 1995. All forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from the plans, intentions and expectations reflected and suggested by the forward-looking statements.

Such risks and uncertainties include among others, intensified competition, operating problems and other impacts on revenues and profit margins, anticipated future business strategies and financial performance, anticipated future number of customers, business prospects, legislative developments, and similar matters. Risk factors cautionary statements and other conditions, could cause Newtek's actual results to differ from management's current expectations, and are contained in the Newtek filings with the SEC, and available through www.SEC.gov.

We need to point out that our [capitals] operate under a different set of rules in each of the eight different jurisdictions, and at each place variable finance and the structure of our investments, 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. Now to begin the presentation.

Newtek's second quarter '06 highlights, Newtek Business Services is back in regulatory compliance with the NANC, with Nasdaq and the SEC. Michael Holden and his new accounting and finance team will help reestablish the Company's financial credibility with capital markets. We had growing revenues in Web Hosting and Electronic Payment Processing in the quarter. We had growing profitability in Web Hosting and Electronic Payment Processing.

We're growing EBITDA across three key business segments. The Company as of 6/30/06 has 48 million in cash, cash per share of $1.38, which would include cash, cash equivalents, and short-term U.S. treasuries, and approximately 83 million in book value, or $2.39 per share.

Some of the financial highlights that occurred during the first six months ended 6/30/06, our Web Hosting revenue increased by 32%. Electric Payment Processing revenue increased by 38%. This is '06 versus the same period last year. Web Hosting EBITDA increased by 22% during the first six months ended 6/30/06. EPP processing EBITDA increased by 17%.

Total non-CAPCO revenue, which is everything essentially outside of the noncash tax credit income increased by 24% during the six months ended '06, and as we said earlier cash per share of $1.38. The Company is financially strong, as of 6/30/06, 48 million in cash, cash equivalents and short-term treasuries. 83 million in shareholders equity, and $2.39 in book value. Many people in looking at Newtek's balance sheet based upon the legacy of the CAPCO business, are seeing Newtek as being an overlevered company.

I would like to point out on slide 6, or page 6 of our slide presentation, we have almost 130 to $140 million out of $240 million worth of assets, that essentially would collapse or consolidate against the liabilities of the other side, that being tax credits receivable of 103 million, offset against notes payable and credits in lieu of cash 9 million, and it's fall business loan portfolio of 30 million, offset against 22 million of the GE CIT signature bank facility. Essentially if you look at the balance, the total assets, once you collapse those assets and liabilities of 110 to $100 million over 83 million of shareholders equity, the Company is not levered at all.

As a matter of fact, the Company continues to pay off all of its debt obligations. We paid off $6 million in the first six months of the year to TICC, with about 1.9 million remaining. We also paid $2 million to AI credit during that same period of time. Remaining debt on our balance sheet, the tech note has $1.9 million left to it, with notes payable to AI credit, which is especially premium finance of 7.3 million.

There is also a deferred tax liability, which is primarily directed from the timing differences between revenue recognition financially, and how we pay tax. This is currently 21.6 million. We do believe holding everything else constant this should decline in the future, as we throw up non-cash losses financially from the CAPCO business, and tax liabilities pick up down the road.

In focusing on Newtek, Newtek is a major play into owning a distribution company whose primary target is the small to medium-sized business market. We're looking at a marketplace that has over 24 million of potential clients, this represents 51% of our GDP today, it is a very valuable customer base. We believe it is going forward, the economics and demographics of the U.S. business environment, make this particular segment very lucrative.

We see new business formation continuing to grow, and with the trends in immigration, we see new business formation also continuing to go grow. We believe Newtek is achieving its goals and quickly becoming the premier provider of business and financial services to the SMB market. As of 6/30/2006 our current customer count is approximately 68,900. We have developed in this market as a low cost provider of products and services, and a low cost requirer of small and medium-sized businesses.

How are we accomplishing the goal? How are we positioning ourselves in this market? What's making us different and unique? We utilize state-of-the-art Web-based proprietary technology, both on the front of the business to acquire customers with our Web-based referral system, which we know as New Tracker, which allows alliance partners and other participants, to essentially give them a window into our back office operations. Keeping them posted on every referral on opportunities they give us, see exactly what's going on from an operational perspective, with their clients that they outsource to us.

Secondly, all of our businesses operate on Web-based applications. We use this as an in-house tool to make our employees and associates efficient, smart, and productive. In September we're going to be announcing several new business initiatives, which I think will further give the market some knowledge, as to what we're doing in the software development and how operations and the platform are state-of-the-art.

In looking at Newtek what makes is difficult is to try to come up with other corporate comparisons. We are definitely a difficult company, in terms of creating industry comparisons. In looking although our company, in certain aspects we're similar to Wal-Mart where we are a one-stop shop for the small and medium-sized business owner.

The small and medium-sized business owner wanted to acquire our products from other providers in the market, you may have three different insurance agents. One for Home and Auto, one for his Health and benefits, and one for his Property and Casualty. He may have CPA or a bookkeeper doing his books and records. He may have a web designer. He may have a community bank providing him funding. He may have an independent merchant processing agent providing electronic payment processing.

The problem in this market for SMB or small and medium sized business, is you can't get quality providers attentions. You must go to multiple sources with all different gateways, and all different entrance points, without one level or standard of quality service. That's what Newtek provides. On the back end of our business we model our business after GEICO and Progressive, centralized processing using Web-based software.

In terms of our position in the market, we think we are very unique in creating a distribution channel for basic service industries. In many respects we think we're doing what Dell has done in the computer business, in terms of acquiring customers, and distributing computers on a made-to-order basis, and what Amazon.com has done, in terms of distributing other people's goods and services, and being a gateway for consumers, into a multitude of products and services.

As you look through slide 11, 12 and 13, we have some interesting metrics that we're creating. Look at our different business lines, revenue, based upon the various different divisions as you can see, the merchant processing business for us really has got the steepest growth increase, and we've pretty much got increase across all the segments.

Also looking at growth in our customer count in the different businesses, we can see the growth in lending over the last several years, growth in the insurance business, the electronic payment processing business and in its particular chart on 14, is not including acquisitions. With acquisitions I believe we are north of 12,000 or 13,000 customers.

Number of web hosting customers by year, we're starting to look at our businesses, based upon number of customers per Full Time Equivalent employee. Slide 16 shows that obviously we get the most operating leverage by employee in our web hosting business, and secondly in our merchant processing business. Hopefully you have got revenue that we're measuring for full time equivalent, with the most significant being in the merchant services area, and secondly in the lending area.

Shareholders equity per share continuing to grow throughout the last five years. Our business model is working, in terms of driving referrals to Newtek Business Services. You can pretty much look at points throughout '05 and '06, and obviously there is some seasonality there. If you go from March '05 to March '06, or July of '05 to July '06, you can pretty much see the referrals coming into our divisions are doubling. We're very optimistic about our pipeline of future strategic alliance partners and referrals.

We'll talk a little bit about our new marketing initiative going forward, which we think will enable us to continue to keep this growth rate of referrals up. Who uses our technology, and who has endorsed it? Companies such as Merrill Lynch, with over 15,000 financial advisors. Credit Union National Association, with over 1,000 credit unions. The largest credit union in the world may be the Federal Credit Union, Bank of Switzerland, and others.

New technology launches, in September we'll be launching our new website, and I think what's exciting about this, and we'll talk about this a little later. It definitely dovetails into some of our new marketing initiatives, our new website will be interactive and will be very user friendly for small and medium-sized businesses, to sign up directly to us, so we will be able to offer a Newtek business services direct product, as well as be able to sign up other alliance partners, such as local insurance agents, CPAs, lawyers, and many other sources and referrals to Newtek business services.

I think one way to visualize the gateway into Newtek, would be to take a look at slide 22 and in particular the website CU small business.com. CU obviously stands for credit union. This is a website which we have structured together with CUNA, strategic services, the marketing office of CUNA, to give their credit unions a gateway to provide referrals to Newtek business services.

As Newtek grows particularly in its Newtek Direct, the Newtek alliance relationship, you can see it is very easy to enter Newtek from multiple products, by equally passing a referral to us. We believe that this strategy will enable us to continue to keep our high level of growth rates in the future. In the fall of this year, we're going to further push to develop the Newtek brand, and we're going to be begin to unveil or full branding strategy in mid-September.

As I mentioned we're going to have our new corporate website launched, and also going to launch our virtual salesforce and virtual franchise effort, so you can take a look at the CU small business website, and we're also going to be offering that to third party providers, such as insurance agents, CPA firms, and other alliance relationships to be able to drive their customer base to us, and for them to be able to earn referral fees. We also look forward to unveiling our Newtek direct program, which will enable small to medium-sized business to access us directly.

From a financial perspective we're happy to say the Company is forecasted in 2006 for the first time in our history positive cash flow from operations, that is up from a negative $5.8 million number in 2005. We've historically tried to demonstrate to the market that the legacy financial implications that have been left by our CAPCO business from a balance sheet income statement perspective, need to be looked at and analyzed.

Take a look at slide 25. You can see how the CAPCO drag on earnings has affected the Company for the first half of 2006. We have the comparison of '06 versus '05. The primary difference between '05 and '06 is we had significant non-cash income recognized from tax credits in '05 of 11.4 million, versus 3.3 million in the first half of '06.

We hit statutory hurdles, which saved [hybrids] of tax credits, which enabled us to earn more non-cash income in prior years. I think going forward this non-cash drag from interest expense accretion, to non-cash interest expense, amortization, will be prevalent. I think Michael Holden and his team are doing a very good job of trying to break this out, provide more transparency to the markets, more of the steps we've recently taken obviously is to bring our segments into six different segments and businesses, and I think you will see more transparency in our Qs and public announcements going forward. I think the important part obviously for markets and stock price valuation, is focused on cash flows, and that's where we're driving our financial disclosure.

In slide, beginning on 26, you can begin to see the cash flow increases that we've had from businesses such as web hosting, even our growth for the first six months of this year growing at 21.9%. Slide 27 income before taxes for the first six months and EBITDA 10%. A little bit of slower growth here, and some people might be concerned we can bring this out in the Q&A about our margins here.

We have elected to move forward with several different initiatives in the CrystalTech business, such as a Linux offering, and some storage offerings. We've also almost doubled our payroll this year, to set the business up for significant growth going forward. I think that our expense line should be pretty flat going forward through the latter half of this year as well as 2007. We have a lot of operating capacity to grow the business significantly from these levels.

Some highlights in the electronic payment processing sector. As we mentioned on the last conference call, we did close on a $2.5 million portfolio acquisition. We announced previously that in a letter of intent signed on a $7.5 million portfolio acquisition, which anticipated closing June 30, 2006. At this point in time, that close is extremely uncertain, and I would go so far as to say within the last day negotiations have broken down.

I will add that we actually have some metrics in the underlying businesses, that we believe at this point in time, give us pause not to change our guidance in the sector, but we still have the 7.5 million of cash available to make an acquisition in this particular market, and we will be looking at other portfolios to purchase. Despite the fact that we have not closed on this particular portfolio, at this point in time we're not changing our guidance, but we want to announce to the market that it looks like this particular acquisition, in which we had initially put into our guidance six months worth of ownership in 2006, has a high probability of not closing at this point in time. Not based upon efforts of the Company.

We've had significant revenue growth obviously in electronic payment processing segment, that's a clear highlight in this business, as well as the web hosting and SBA lending business, have great operating leverage and capacity to grow, with very little capital or CapEx that will be needed. Electronic payment processing revenue for the first six months of '06 growing to 37%. EPP pretax net income, we're looking at small growth here. I will let Mike chat about this. Last year we did have a one-time gain. I think the growth rate is just significantly higher on the bottom line in this particular segment of the business.

In the lending segment originations are down. We have been working very hard on our cost control and being a lot more efficient, in terms of processing loans. We believe we produced our breakeven in this business by about $10 million of closings or originations. Our average loan size is also down significantly in the Company, and far more efficient at processing business. Our accruals are up significantly, and the lenders have been exceptionally more selective in deciding what loans its wanted to take on, in the last six to twelve months. We feel very positive about the lending business, and as a new business we realize that we need to continue to work on getting our cost of capital down.

Our loan loss reserves are up significantly. We're very well positioned for what we think will be a weakening economy going forward. We've also been able to reduce concentrations in certain segments, like hotel concentration, which went from 35% last year to 18% this year. That's been accomplished through sale of our loan portfolio, as well as prepayments. We've also reduced our old portfolio from commercial capital corporate of 56% down to 24%. We think that's a good event. Our retained portfolio really has had very little growth. We don't view this as a positive, we view this as a negative.

Obviously we would like to grow our holdings, but its been difficult to originate loans in the current floating rate environment, where we're a prime based lender. We're all-in, we're trying to put money out at approximately 11% on a floating flat prime rate basis. It has been very difficult to make loans in a fixed rate environment with a 10-year treasury, 5, even at a quality spread of 3 to 400 off the curve, fixed rate lenders going up against our SBA program have a significant advantage.

With the yield curve being negative, which its been for over a year, quite challenging for us to put loans out in this environment. We do believe that this negative loan yield curve will not last forever, and the Company is looking to diversify and develop other conventional funding sources, to be able to originate loans into its customer base.

On slide 36 you can see our average loan approval rate has declined significantly from the average size of 342,000 to 258,000. We look at that as a positive development, as we're becoming more efficient, and more able to diversify our risk across smaller pools of loans. We're also using larger pools of individual loans with smaller balances.

We believe we've had a terrific second quarter. We continue to make new hires particularly in the accounting and financial department, which will enable us to report and provide better management reporting, and watch the metrics of the business. The Company has had a successful transition to a cash flow positive operating model.

We continue to expand our customer base to almost 70,000 new business clients, very high growth spanning 1500 to 1600 net new clients a month. That's net of attrition. We're working very hard and believe we will be successful in simplifying our balance sheet and income statement, and being able to report our operating businesses to the market, and hope to eliminate or remove some of the different aspects, or difficult aspects that the capital creates on our income statement and balance sheet. We're working hard to centralize our operations, and to pay down very limited outstanding debt.

I would like to now turn the presentation over to our CFO, Michael Holden, who will tell us how we did in the financial perspective.

Thanks, Barry. Barry went over a lot of information including the balance sheet, and what I am going to do, is go over the second quarter of 2006 in a little bit more detail. Just as a summary, the revenue for the second quarter decreased 24% to $30.0 million. The decrease was predominantly due to an over $8 million decrease in non-cash income from tax credits. Expenses increased 21% to $23.4 million. We incurred a pre-tax loss of $3.4 million in 2006, compared to a pre-tax income of $6.9 million in 2005. The net loss was $2.3 million or $0.07 per share in 2006, as compared to net income of $4.5 million, or $0.13 per share in 2005.

Now I would like to touch on the performance by segment in the second quarter. Electronic payment processing segment revenue increased $2.0 million, or 25% to $10.6 million. $2.7 million of the increase came from organic growth, while $200,000 came from portfolios that we purchased. This offset $900,000 in revenue that we recorded in 2005, from a recovery of an investment in Merchant Data systems. That gave us income before taxes of $723,000, a decrease of $427,000, or 37% compared to 2005. If you exclude that $900,000 recovery I just mentioned in 2005, income before taxes would have increased by $473,000, or 189%, that would be a very significant increase.

Web hosting segment revenue increased $600,000, or 22%, to $3.3 million. We continue to add customers including dedicated hosting customers, which generated higher revenue per customer. Income before taxes was $1.048 million, an increase of $130,000, or 14% compared to 2005.

While we had a strong increase in revenue our margins were under a little pressure as the revenue per share web hosting customer decreased, and we used additional personnel to service our customers. Also we incurred more depreciation costs as we increased our capital expenditures, to host more shared and dedicated customers in 2006.

SBA lending revenue decreased by $1.35 million, or 36%. This decrease was due to a $1.4 million drop in premium income, as a result of less originating and selling fewer loans in '06 compared to '05. The lending segment lost $102,000 in 2006, as compared to a profit of $1.1 million in 2005. As I mentioned the decrease was due to $1.4 million decrease in premium income, offset partially by $215,000 less in the provision for loan losses in 2006.

The revenue in the CAPCO segment declined significantly to $2.4 million, from $10.5 million in 2005. In 2006 we achieved the 25% investment threshold in our New York 4 CAPCO, which generated $746,000 in income from tax credits. In 2005 we achieved the 50% investment threshold in the DC Capco, which generated over $9 million in income from tax credits.

That gave us a loss before income tax of $3.2 million in '06, compared to income of $5.4 million in '05. The decrease was due to less income from tax credits like I just mentioned, and also we have two additional CAPCOs this year, New York 5 and Texas, as compared to last year, which means we have more interest expense, more insurance expense, and higher management fees in '06 compared to '05.

The last two segments and all other, and the revenue in the all other segment increased by $810,000, or $557,000 of which came from Phoenix Development Group, which is our hotel and real estate facility in New Orleans. The loss in this segment decreased from $958,000 to $601,000, primarily due to a net reduction and loss in smaller entities, many of which have been closed during the past year. As to corporate activities, the loss in that segment increased to 1.2 million from $664,000 last year, primarily due to additional overhead added in the past year, to manage the additional underlying businesses that we have, and also additional finance, legal, and compliance costs.

With that, I'd like to turn it back to the operator for some questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of [Kevin] Greenberg. Please proceed.

Third time I was called Kevin today. How are you doing, Barry?

Good. How are you?

Question about the churn rate at CrystalTech. I don't know if you went over it on any of the slides. Your reports are very comprehensive, and I think people should appreciate how much you divulge. Wanted to know what the churn was for the quarter, and how many new customers you picked up from CrystalTech?

Evan, we are probably churning somewhere between 17 to 18%. That's on an annualized basis.

That's down from the 20s?

It is down from the 20s, and I would say the industry average churn is a little bit over 20% in the web hosting segment. Some of the things that we're seeing clearly is a trend of more dedicated web hosting versus shared, and obviously the dedicated customers are bigger ticket, there's more stickiness to them, they're hosting more sophisticated applications.

We're optimistic about our churn rate. We're adding approximately 1,000 to 1,100 new customers a month. That is net of attrition. As we start to put on more dedicated versus shared, I can't tell you that this customer count increase that we've been having, is going to continue.

But the ASP, the ticket levels should be higher?

No question. Revenue for customers should be higher.

Are you seeing any cross pollination? Are you seeing those customers that are signing, ongoing to using credit card processing, and using loan possibilities, and insurance possibilities? Are you seeing some of that?

We're starting to see that. I think where we see that most obviously is in the alliance relationships. In other words, we go set up a new alliance partner. They are enamored with the fact that we have a full bundled suite. When you go to, we talked about today the sea of small business, you will start to see Newtek announcing a lot of these relationships, where people are coming to us because there is one place to go for their small and medium-sized business customers.

In terms of cross-selling or cross serving customers once they're in our portfolio, we're very careful about that. We're doing that selectively. We are seeing more and more of our clients picking up more than one product. Also, as we said, it gives us the ability, and the opportunity to margin pool.

Some of the our products, particularly like the merchant processing product, where it could be price, aggressive pricing, we're able to also go in and show savings in the area of insurance, D&O, or health insurance, things of that nature. And it really softens the overall relationship, and softens the commodity aspect of the business, so we're very, very optimistic about our model, where it is going.

One last question. On the buyback side, how many shares have you bought back so far, of the million shares you're buying back?

We've been authorized to buy up to a million shares, and so far we have not bought any back. Part of that frankly I think isn't based upon our issue relative to getting our financials out. We're now back in compliance, and I think there is more of an open window for us to do that in the future, where in the past without having the financials out, that could put us in an awkward position.

Hopefully the Street starts to understand everything you've been executing. Keep up the good work!

Thank you, Evan.

There are no further questions for you at this time.

Okay. Thank you very much.

Ladies and gentlemen, this does conclude the presentation. You may now disconnect. Good day.