NewtekOne Inc (NEWT) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Newtek Business Services Third Quarter 2006 Earnings conference Call.

My name is Oneika[ph], and I'll be the operator for today.

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

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

If, at any time, you need assistance during the call, please press *0, and a coordinator will be happy to assist you.

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

At this time, I would now like to turn the call over to Mr. Barry Sloane, CEO and Chairman of the Board.

Please proceed, sir.

Thank you very much.

Good afternoon, everybody.

My name is Barry Sloane.

I'm CEO and Chairman of the Board of Newtek Business Services.

I'll be making the presentation today, along with our Chief Financial Officer, Mike Holden.

We greatly appreciate your attendance and interest in Newtek Business Services.

I'd like to ask Mike to please read the Safe Harbor Statement.

The statements in this slide presentation include statements regarding anticipated future financial performance, Newtek's beliefs, expectations, intentions or strategies for the future, may be forward-looking statements under the Private Securities Litigation Reform Act of 1995.

All forward-looking statements involve a number of risks and uncertainties that could actual results to differ materially from the plans, intentions and expectations reflected in or suggested by the forward-looking statements.

Such risks and uncertainties include, among others, intensified competition, operating problems and their impact 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 which could cause Newtek's actual results to differ from management's current expectations or contained in Newtek's filings with the SEC and are available at www.sec.gov.

Also, we also 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 and New York, we don't control the equity or management of a qualified business, but that cannot always be presented orally or in written presentations.

Thank you, Mike.

The presentation today is posted on our website for those of you that want to go to NewtekBusinessServices.com.

Click on the Investor Relations section and then click on Presentations and Videos.

You'll be able to follow the presentation, along with the PowerPoint.

Newtek is quickly becoming the premier distributor of business services and financial products to this small-to-medium-sized business market.

We want this small-to-medium-sized business market or SMB market to view Newtek as the company to go after - excuse me - as the company to go to for all of their business service needs.

Take a look at our Business Service Suite.

We are in the business lending market, providing business loans to start up as well as acquisition financing, as well as debt funding to expand the business, electronic payment processing business, insurance services, both commercial and personal, outsource digital bookkeeping, web hosting, web design and development, tax prep and advisory services, data backup storage and retrieval, and business plan preparation.

Some of the highlights for Newtek for the third quarter of '06, we are growing revenues in the web hosting and electronic payment processing business.

We are growing profitability in the web hosting and electronic payment processing segment.

The SBA lender also posted a third quarter profit of 500,000.

We are growing EBITDA across our three primary business segments.

We finished the quarter September 30, 2006 with 48 million in cash or cash per share of $1.37.

With that, our cash equaling cash, cash equivalents and U.S. treasuries.

We also closed out September quarter with 83 million in book value or $2.39 per share.

So financial highlights for the first nine months ended 9/30/06, our web hosting segment revenue increased by 30%.

Our electronic payment processing segment increased 37%.

Our web hosting EBITDA increased by 15 percent during the first nine months.

Our electronic payment processing EBITDA increased by 62% during the first nine months.

Our SBA lending EBITDA increased by 71% during the first nine months.

Total non-CAPCO segment revenue increased by 29% during the first nine months.

Total CAPCO revenue, which the Company is designing to decline, did decline by 68% during the first nine months.

And as I said earlier, we finished the September quarter with cash per share of $1.37.

Newtek is a financially strong company with 48 million of cash earnings for it's 83 million in shareholder's equity, $2.39 in book value per share.

Our CAPCO legacy business has left some confusion relative to our balance sheet.

Some people look at Newtek as an over-levered company.

I'd like to point PowerPoint slide number nine, looking at our assets, liabilities and shareholder's equity.

Some of the assets which are non cash in nature, because of the late CAPCO accounting [unintelligible] offset against each other, such as tax credit receivable which is used to pay off notes payable and credits in lieu of cash.

So 100 million offsets against the 88 million.

Also, our small business lending operation has 26 million of loans on it [unintelligible] from 9/30/06, versus a $15 million of debt in the facility.

So there's about $11 million of equity against $15 million of debt.

Obviously, if you can collapse those, you take off approximately 130 million to 140 million of total assets off of a shareholder base of 83 million.

We do not view ourself as a levered company at all.

Newtek, during the nine months, also paid off 6.6 million to TITC, which is a public company which has a loan against CrystalTech, our web-hosting company.

Newtek also paid off $2 million of debt to AI Credit during the first nine months of '06.

It left us with 1.4 million of remaining debt against CrystalTech, clearly, an un-levered situation.

Notes payable for insurance was 7.3 million.

Deferred tax liability of 21.7 million, which actually should decline as the future non-cash interest expense and insurance premium liability wears off over time.

What is an investment in Newtek?

What is Newtek?

An investment in Newtek is a major client owning a distribution channel into a very large target market with small-to-medium-sized business market or SMB market.

It's in excess of 24.5 million potential clients which represents 51% of GDP and 9 out of 10 businesses in the United States fall under this particular definition.

We're quickly achieving its goal and becoming a premier provider of business services and financial products, with an excess of 70,000 client accounts and anticipated 75,000 by the end of the year.

We've developed a business model which makes us a low-cost provider of products and services and a low-cost acquirer of small-to-medium-sized business customers.

How are we accomplishing its goal?

We are accomplishing its goal by using state-of-the-art web-based proprietary technology.

We have a web-based referral system, which we have a patent pending on called the NewTracker system.

This system, basically, has created our interface and relationship with our alliance partners.

We allow referrals from alliance partners into our organization, giving them a window into our BackOffice operations.

Our alliance partners, 24/7, 365 days out of the year, can see exactly what we're doing with their customers.

All of our applications are web-based and this is an in-house tool to make our employees and associates efficient, smart, and productive.

We provide a Cadillac service to small-to-medium-sized businesses.

We're not looking for small-to-medium-sized businesses to fill out forms or type in data over the web.

We only look for our alliance partners to do that.

We make it very easy for them.

All we ask them to do is pass us five or six key data points, with respect to name, address, phone number, email.

They stand back.

We do all the heavy lifting.

We do the rest.

Who uses our technology?

And who has endorsed its use?

Companies such as Merrill Lynch, with its 15,000 financial advisors which were exclusive to them on electronic payment processing and our preferred provider of SBA lending.

Other [unintelligible] like Morgan Stanley with 8,000 financial advisors, Union Bank Switzerland with its 7,600 financial advisors.

We're also endorsed by CUNA, Credit Union National Association or the Trade Association for the majority of credit unions in the United States with over 8,300 credit unions and approximately - in excess of 80 million members.

In looking at comparing Newtek to other businesses, it's very difficult.

We are a one-of-a-kind company.

We are, in a certain sense, like Wal-Mart where we're a one-stop-shop for a small or medium-sized business to come to for its business services or financial products.

We process our business similar to the [unintelligible] where customers are driven to us in a push-marketing strategy currently primarily from our alliance partners.

We have centralized processing, sophisticated software, salary plus incentive bonus to employees to process the business remotely without having to have the expense of bricks and mortar human sales force on the street and do that very effectively and very efficiently.

We are a unique distribution channel in the basic service industry to small-to-medium-sized businesses.

As you can see by slide number 15, electronic payment processing customer base is growing significantly both from an organic methodology, as well as through acquisitions.

We'll anticipate having in excess of [12.7 thousand] customers by the end of this year.

You can take a look at our hosting customer account on page 17 which we anticipate to be north of 59,000 and there are a few other slides and metrics on 18, 19, which would give you an idea of how our Company is comparing to other industry participants.

We discussed our significant shareholder equity of $2.51.

This compared to $1.75 price that the stock's currently trading.

You can see our referral system and strategy is working.

We're basically doubling our referrals year over year.

We're proud to announce that our Company, for the first time ever this year, is predicted to be positive cash flow for an operations.

We're 1.5 million in positive cash flow from operations for the first nine months of the year and that compares with -11 million from the prior year.

Our certified capital company business is essentially a non-contributor to our GAAP earnings and is a drain on earnings per share.

An analysis of that takes place on slide number 23 where you could see the non-cash income versus the non-cash interest expense from our notes to CAPCO holders, our interest - our non-cash expense to insurance premium amortization where, for the first nine months of 2006, this CAPCO segment, on a pure non-cash basis, is a $7.4 million drag on our earnings.

One would think that we look forward towards doing possibly till the fourth quarter NRK as well as our forecast for 2007 is to position the Company with a pro forma earnings to enable the market to better understand that this Company is generating positive cash flow from our business operations.

New technology within the first nine months of the year, we've recently [unintelligible] launched our new website.

I encourage you all to take a look at it, professionally done nine commercials that endure our various different products.

We've also established our Newtek Direct Business model where you can now go to our website and provide a referral direct from a small-to-medium-sized business, as well as establishing our VRep concept, where effectively, we can put in business an insurance agent, local CPA, a lawyer, anyone that's got business contact relations and turn them into a referring partner.

Our new website also enables us to establish further penetration into alliance relationships but most importantly, we believe that we can use the same technology that is currently driving the majority of our business through our alliance relationships through our Newtek Direct Model and our VRep model.

This gives us tremendous operating leverage both on the front end for customer acquisitions as well as for processing business.

On slide 25, we take a look at what our new website looks like.

I welcome you all to go to the website and introduce yourself to NEWT, our new stock symbol which was changed in the recent corner from NKBS to NEWT.

Further, it has been done to create our branding strategy for people associating NEWT with Newtek, our stock symbol and high-quality products and services.

Slide number 28, you can see graphically some of the growth that we're having and success in the web-hosting area, with EBITDA growing at 15.1% growth rate, our web-hosting income for taxes at a 8.5% growth rate over nine months year over year.

Electronic payment processing highlights, we did close a $2.5 million portfolio acquisition in the second quarter.

Unfortunately, we failed to close the $7.5 million acquisition which was anticipated closing 6/30/06.

Because this transaction did not close, and we contemplated it in our previous earnings guidance for the third and fourth quarter, this did affect our pre-tax earnings in this particular segment from Q3, Q4 and the year, as well as EBITDA numbers.

We're proud to say that even the very positive impact of this portfolio acquisition, we still just slightly missed our pre-tax earnings guidance in Q3.

We do anticipate replacing this portfolio with another portfolio.

We're in the market to do it.

The cash is still available and that will significantly improve our EBITDA and pre-tax numbers for 2007.

Electronic payment processing business has had substantial revenue growth in excess of 36%, 37% and we look forward to growing the EPP business with a great operating leverage because we currently have the capacity to grow the business significantly without any additional capital or capital expenditures.

As you can see, EPP revenue in slide 31 grew at 37.3% and our pre-tax net income grew at 61% year over year.

You'll exclude a one-time gain in 2005.

The growth was actually 525%.

Although our lending business is struggling somewhat, we're also extremely happy with some of its successes.

We've been able to reduce our breakeven costs in this business.

Our average loan size is down significantly and the Company is significantly more efficient in processing the business.

Our referrals are up significantly and the lender is more selective, from a credit perspective, which we think is important as we do anticipate a weakening of credit in the coming quarters in years ahead of us.

There's tremendous operating leverage in this business segment.

We are working on improving our cost of capital and management anticipates a report to the public markets shortly where we can report that we have been able to improve our cost of capital in this segment.

We are currently an SBA lender 7A and 504.

The Company is interested in positioning itself so that it can make other types of loans for the small-to-medium-sized business market.

In calendar year 2006, we'll look at $1 billion worth of opportunity which, unfortunately, don't fit the SBA 7A loan program or the 504 program.

We anticipate being able to fit some of those particular lending opportunities with factoring in finance opportunity, possibly advance credit payments, as well as a conventional loan program.

I suggest all you investors stay tuned towards dealing in this particular segment.

We're working on it and we believe that the lending business is extremely important and attractive to our overall business strategy.

Small business lending did have a very nice growth in EBITDA for the first nine months of the year, growing 7.14%.

Slide number 35 depicts that we did have an attractive comparison this quarter, the last quarter regarding pre-tax income.

We've also been able to reduce our concentrations in our largest segment, the hotel segment, from 28% down to 19%.

We've also been able to reduce our concentration in our legacy CCC portfolio.

CCC was the company acquired in 2003, which actually formed Newtek Small Business Finance and the concentration in those old originated loans is down 40% to 24%.

As I mentioned previously, on slide 38, our average loan size is down 253,000 from 358,000.

We view that as a significantly positive occurrence.

Some overall highlights for Newtek, we continue to make attractive hires like Holden was hired, people in the accounting/finance department have bolstered his department.

We've had a transition to cash flow positive operating cash flow which we depicted a $1.5 million positive operations for cash flow versus -11 from the year prior.

We continue to improve and expand our technology.

We're excited about our new website launch.

Our customer base is expanding significantly where we're growing 1,700 new customers a month and that's net of attrition.

We're looking forward to simplifying our balance sheet and income statement, as we look to reposition our certified capital company business.

We've also spent a lot of time working on centralizing our operations and de-centralizing our historic structure, which was based upon our certified capital company business.

We've had great success in paying down limited debt outstanding.

All of our objectives in 2007 is to separate and segregate the capital business further than we have done previously, both operationally and financial.

In summary, our business our business model is in transition and is a terrific investment opportunity.

We believe the small-to-medium-sized business market is incredibly valuable and we're well positioned to be a major market participant into it.

We believe we're demonstrating that we're an attractive direct distributor of products and business services and of the small-to-medium-sized business market.

We have a very stable business model and importantly, it's extraordinarily stable.

We're a low-cost processor of business services and financial products and we do believe that when the Company is ready to go out and cross-delve into its customer base, we're able to do it extremely effectively.

With that, I'd like to turn over the presentation to Mike Holden to do a management discussion and analysis.

Thank you.

Thanks, Barry.

With the press release, you should have the information about the income statement for the three months ended September 30 '06 and nine months ended September 30 '06 also.

I'm going to focus on the third quarter of '06, as compared to the third quarter of '05.

Revenue for the quarter was increased 6% to $21.6 million.

This was in spite of a $4.6 million decrease in income from tax credit.

Last year, we reported $4.7 million in income from tax credits.

We achieved a 50% threshold in the [Wilshire] Louisiana for CAPCO.

Including revenue in the other income line, this year was a $1.7 million gain from the sale of a qualified CAPCO investment.

Expenses increased 3% to $23.4 million.

We incurred a pre-tax $1.7 million in 2006, compared to a pre-tax loss of $2.1 million in 2005.

That gave us a net income - net loss - excuse me - after income tax benefit of $1.1 million or $0.03 per share in 2006, as compared to a net loss of $2.0 million or $0.06 in 2005.

I'd like to now turn to a review of the performance by segment.

Electronic payment processing segment revenue increased $3 million or 36% to $11.2 million; $2.8 million of this increase came from organic growth, while $220,000 came from the portfolios that we purchased in the last year.

Income before taxes was $935,000, an increase of $775,000 or 484%, compared to 2005.

Web hosting segment revenue increased $700,000 or 25% to $3.5 million.

We continued to add customers, including dedicated hosting customers which generate higher revenue per customer.

Income before income taxes was $996,000, an increase of $47,000 or 5%, compared to 2005.

While we had a strong increase in revenue, our margins were under a little pressure as the revenue per shared web-hosting customer decreased, we added additional personnel to service our customers.

In addition, we increased our capital expenditures to host more shared and dedicated websites.

SBA lending segment revenue increased by $499,000 and 22%.

This increase includes a $244,000 increase in premium income.

The lending segment earned $510,000 in 2006, as compared to a loss of $1.1 million in 2005.

The increase was primarily due to the $244,000 increase in premium income and also, an over $1 million decrease in the provision for loan losses.

Revenue in the CAPCO segment declined significantly to $1.7 million from $6.1 million in 2005.

In 2006, we did not achieve any investment thresholds, while in 2005, as I mentioned before, we did achieve a 50% threshold in Louisiana for CAPCO, thereby generating $4.7 million in income from tax credits.

Loss before income taxes in the CAPCO segment was $3.6 million, compared to a loss of $183,000 in 2005.

The decrease was due to less income from tax credits and more interest expense, insurance expense and management fees, as we had two additional CAPCOs in 2006;

New York [live] and Texas for the whole nine months - the whole three months, in this case.

Revenue in the "all other" segment increased by $1.5 million primarily from the previously-mentioned $1.7 million gain on the sale of a qualified CAPCO investment.

The income in this segment was 1.9 million, as compared with a loss of $295,000 in 2005, primarily due to the $1.7 million gain.

Now, I'd like to turn it back to the operator for questions.

Thank you. [OPERATOR INSTRUCTIONS] And standby for your first question.

Your first question comes from the line of Barry Johnson.

Please, proceed, sir.

Yes, I had a - I joined the call late, so you may have already answered this but I was just curious, how do you plan to deal with the CAPCO losses with regard to the balance sheet versus operating income?

I think that there's two aspects to that and one would be from, I would say, operational perspective.

Management is currently looking at different ways where the effects of CAPCO could essentially be removed through a [unintelligible] certified capital company.

We own and operate approximately 16 of these entities in eight different jurisdictions across the United States.

Each one of these CAPCOs - I shouldn't say each one of these CAPCOs.

We actually have - in certain markets, we have four or five CAPCOs.

Where we have four or five, it falls under a different regulatory bottom.

So one way in which we are looking at and exploring reducing or mitigating the effects of this non-cash drag with respect to EBITDA would be a sale or disposition.

The second way would be to report this business on a pro forma earnings basis, potentially, separating [in segments] 100% of the non-cash effects on the certified capital business.

And the third way might be to look where appropriate where we have [hit the 100%] mark in some of the [unintelligible] where we'll be out of the regulatory requirements to view them as discontinued operations--

Right.

--which would have an effect over time.

So management is spending a significant amount of time exploring these aspects.

I think the important issue is that we don't view, with the exception of financial presentation, the going-forward aspects of our capital business to be debilitating in any way.

As a matter of fact, we [unintelligible] in the operating business over the last three years while we've been involved with certified capital company.

We do believe that we want to make the financial picture more clear to investors.

We are looking at various ways both operationally and financially to separate and segregate the capital impact from our income statement and balance sheet.

I will tell you, there's no easy quick-fix as to the solution.

Right.

All right, thank you.

Thank you for your question.

Your next question comes from the line of Steven Silk with Steve Silk & Sons.

Please proceed.

Good afternoon.

There was no balance sheet with the earnings and I was wondering are you continuing to re-sell the 35% guaranteed SBA part of the loan?

Are you holding on to some of that for interest income?

And how well are they performing, as well as the loans outstanding?

Sure, Steve.

I appreciate that.

We are selling off the government guarantee piece at this point in time.

Our portfolio is in very good shape.

I apologize if the balance sheet didn't flow through.

That might have been an error from - via our news flyer but what we did - we did create it, so--

Okay.

--you have an income statement balance sheet of cash flows to [unintelligible].

The - not meeting the incentive on the CAPCO, you don't lose the credits?

Everything, over time, should flow through so that the offsetting tax credit asset will equal the liability that you have?

That's correct.

Of the 16 certified capital companies, 14 of them have hit the 50% hurdle.

We anticipate that, at 12/31/06, 16 of 16 will have hi the 50% hurdle, so recapture of tax credits based upon statute will be a foregone conclusion.

Sure.

Alliance partners, when you go into Merrill Lynch, are you - will there be a [unintelligible] or why don't you talk about how you're being accepted, as far as a new sales opportunity for the Merrill Lynch broker or the credit union?

Do you get lip service when they sign up for you and you never - and it's difficult to get your foot in or are you becoming known and becoming an easier sell?

Actually, Steve, over a period of time, the Newtek brand becomes more well known within a given alliance relationship.

I believe, at this point in time, we have over 1,000 Merrill Lynch professionals that have signed up to our NewTracker system.

When I say signed up, it means they have logged on.

They have their own password-protected log-in and they have submitted a minimum of one referral to that system.

So we're very proud with penetration rate that we have into that system and that's across two products.

We have our 11 level-three sales and marketing professionals that are throughout the United States that work with financial managers, [Lynn Merrill] and the financial advisors, the 15,000+ that educate them, secondly, on how beneficial merchant processing and SBA lending can be to their business which primarily relates to asset aggregation, bringing in cash under management and other assets, as well as tying up marketable securities and other assets against pledge collateral to the loan.

The credit union relationships, obviously, are different.

We market into the credit union branches.

We look to link external websites, provide marketing materials, seminars.

Our penetration rates in these alliances are significant to us but a very, very small fraction of what our ultimate potential can be.

So we believe that there is a tremendous amount of upside to Newtek and our alliance partners, with respect to us continuing to forge forward on these relationships.

And I think it's been positive that Morgan Stanley has just recently accepted us and Union Bank in Switzerland.

So it seems like we're doing good things in the marketplace.

Great and finally, when do you think you'll start looking at more of cross-marketing all of your products?

I don't know that that's taken hold yet as you're trying to just get one product out for the customer as they need it.

Yeah, it hasn't yet, at this point in time, Steve.

And I think that we constantly get asked, well, when are you going to start cross-marketing and the good news is, we're growing like crazy without having to do it.

But believe me, it's not that I don't want to do it.

If I'm growing at 30% or 40%, I'd like to grow at 60% or 70%.

However, we don't want to inundate or spam our customers and we want to do it when we're totally ready and that really relates to us having all of our databases in a centralized format, having our processionals trained.

We believe that, in this business segment, cross-selling occurs subsequent to the initial sale.

In certain products, it can occur up front but we're analyzing it.

We're testing it and we want to make sure that when we do it, we do it right because others have failed at this, we are not going to fail.

We're going to succeed.

We just want to make sure it's done at the right time.

Yeah, it looks like - I mean, if they're already a customer, it's somewhat like you have the fish in the barrel.

How do you reach them?

It would look like an easy thing but I understand what you're trying to do.

Well, good luck going forward, Barry and thanks a lot.

Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Steven Golden with River Ridge.

Please proceed.

Hey, Barry.

A couple questions on the quarter and fourth quarter guidance.

And maybe you went over some of this and I, unfortunately, didn't get a chance to listen to a portion of the upfront comment, so if this is repetitive, I apologize.

But it looks like one of the biggest deltas in overall guidance is at the "all other" line.

Right.

Can you - what is that and what's the reason for the change in outlook there?

Well, I think one of the issues, historically, with respect to our business is the CAPCO funds obviously accrued to Newtek and its shareholders [are deployed] in qualified businesses.

Mm-hmm.

Historically, we've had to by statute, invest in many, many, many qualified businesses.

And particularly, in today's accounting environment, I won't say all of them but most of them are consolidated into our books and records.

What is occurring, with respect to some of those businesses, are they are being harvested, they are being sold and they're basically creating a positive [bearings] where historically, that has been a very negative [bearing].

As a matter of fact, I mean, I could remember years where we've lost 3 million, 5 million or more million from other businesses outside of the primary business segment.

So we've had some positive relationships in the "other" category, both from operations.

Some operating positive.

Some not operating negative and we've also had some one-time gains in that segment from investments that have been harvested.

And it seemed like, at the end of the second quarter, I think you had - you thought it would do sort of 7 million of revenue and be about breakeven.

Now, it looks like, if I look at - I guess that was for the year.

The guidance for the year, that was at the end of the second - I'm sorry.

Maybe I have this - no, I think I--

No, we've got the "all other" category--

Oh, you've actually got it improving.

Yeah, well, we did have--

Yeah, I'm sorry.

I had these actually, I think, reversed.

Yeah, so the "all other" category is actually improved?

Yeah.

Okay.

Yep.

And okay - and it looks like, relative to where you thought you'd be third quarter on the businesses, at the end of August, it looks like you basically--

Hit the range.

Yeah, well, actually, no, I guess you thought you'd be - you'd have 1.3 million of payment processing EBITDA.

Well, this is what you might have missed.

Oh, no, I'm sorry.

No problem and let me see if I can--

Yeah, you did 1.3 million versus 1.7 million to 1.8 million of what you thought expectations were.

So you underperformed a little there.

Can I address that?

Sure.

The primary reason for that on the performance was driven by--

The lack of buying that portfolio?

Correct.

Okay.

[Unintelligible] that's the bad news.

The good news is we still got the cash.

Yep.

We will deploy it and we did, on an organic basis, outperform, so--

Right.

--they're issues but they're not real--

And is that - do you still qualify that acquisition opportunity as debt or is it on life support somewhere with a heartbeat?

No, it has no heartbeat.

Okay.

And it looks like you were actually above your range on web hosting and then in SBA, you killed it.

It was a good quarter for SBA--

But not on a revenue basis but it was really margin.

Did you just take a bunch of costs out of the SBA side?

Is that what happened?

What we've been doing with the SBA portfolio, frankly, is just reducing the position in it.

We've been selling down the uninsured loan portfolio, reducing our exposure, [bending] our criteria.

So that increased our performance for the quarter.

I'd also say the expenses were lower than [unintelligible] for the loan losses were lower [unintelligible].

Mm-hmm.

Yeah, it seems like the credit upgrade trade are doing theirs.

A wise one, at this juncture.

And then in the fourth quarter, versus your previous fourth quarter guidance, you've really raised - or actually, no, that's not what's kind of flipping the numbers.

So the difference in the guidance for the fourth quarter now versus back three months ago is - on the merchant processing side is primarily the acquisition opportunity.

Is that right?

Primarily the acquisition opportunity is driving that lower and we view something that'll be recouped in '07.

Web hosting is a little better.

SBA lending, a little bit lower.

I'm just looking at EBITDA [unintelligible].

Yeah, that's what I'm looking at.

What about EBITDA?

Since you outperformed in the second quarter, versus your expectation - I'm sorry - in the third quarter, versus your expectations but you've actually guided down significantly versus your end-of-second-quarter expectations for SBA.

With the midpoint to about 400,000.

We want to be conservative in that segment.

We love the segment long term but it's just not a segment we particularly care to get real aggressive with at this point in time.

Given the marketplace - and let me see if I can address this well because this is important.

We are an SBA 7a lender only. [unintelligible] emphasized on the call that we believe that we're going to be able to add products to this portfolio in the near term.

The SBA program is a floating-rate program over prime.

So you're looking at an 8.25 floating-rate base.

At 275, we're 11% gross note floating rate.

We are competing against community banks right now that on a fixed rate basis, can lend at 9% treasury plus 450 great spread, fixed rate, so it is a very difficult, competitive environment for us with this one program, which we happen to like and in a normal yield-curve environment, it'll be a better program.

As we diversify, reduce our cost of funding, this particular business activity, we think, is going to be valuable and potentially, a big winner.

We've been able to manage our credits well.

We've been able to reduce our costs.

We're becoming more efficient.

I think we've said that this is an area where it's okay for the time being, to just be a push.

Mm-hmm.

Okay.

All right, I think that's - and what do you expect on a free cash flow basis, for the fourth quarter to be?

We haven't forecasted it, at this point in time.

Okay, all right.

I think that's it.

Thank you.

Thank you for your questions.

Yep.

At this time, there are no questions in queue.

I would now like to turn the call back over to management for closing remarks.

Okay, we appreciate everyone attending the third quarter call and we look forward to reporting the results for the Company annually.

Thank you very much.

Ladies and gentlemen, this concludes the presentation.

You may now disconnect.

Thank you and have a good day.