NewtekOne Inc (NEWT) 2006 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Newtek Business Services fourth-quarter annual shareholder conference call.

My name is Onika and I will 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.

(OPERATOR INSTRUCTIONS).

At this time, I would now like to turn the call over to Mr.

Barry Sloane, Chairman and CEO.

Please proceed, sir.

Thank you very much.

This is Barry Sloane, CEO and Chairman of Newtek Business Services, and Michael Holden, our Chief Financial Officer, will join us today for the 2006 annual shareholder conference call.

I would like to ask Michael to read the Safe Harbor statement.

The statements in this slide presentation, including 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 cause 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 of business strategies and financial performance, anticipated future number of customers, business prospects, legislative developments and similar matters.

Risk factors, cautionary statements and the other conditions which could cause Newtek's actual results to differ from the management's current expectations are contained in Newtek's filings with the Securities and Exchange Commission and available through www.SEC.gov.

Also, we need to point out that our Capcos operate under a different set of rules in each of the eight jurisdictions and that these place varying requirements on the structure of our investments.

In some cases, particularly in Louisiana 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.

Thanks, Michael, that is always a mouthful.

Okay, why don't we begin.

I would like to draw everyone's attention to the home page of our website, www.newtekbusinessservices.com, where all of you can view the PowerPoint presentation that we're using for the conference call, as well as our earnings press release that has gone out.

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

As of 12/31/06, we have in excess of 75,000 business accounts, we're adding 2200 new clients per month and Newtek is becoming a one-stop shop for the small and medium-size business owner.

Basically, we want the small and medium-size business market to view Newtek as the Company to go to for all of their business and service needs.

One thing that is unique about Newtek is the Company has positioned itself with the realization that product and process are linked together.

Many organizations have great products, but they cannot really deliver those products through an easy distribution channel or through a good process.

What Newtek basically has done is it has perfected the product to process to customer cycle.

I draw your attention to slide number six, the Newtek Business Suite Portal.

This is a business suite that has been adopted by companies like AIG.

We're located on aigsmallbusiness.com's web site.

Basically, what we have done is we have created one gateway, one interface for AIG's customers to some to, to be able to attract a full suite or menu of business services.

There's one application, there's one way to enter.

It's a very, very easy way for entities like AIG, many of our credit union relationships, like Technology Credit Union, to basically offer business services to their customers and do so in an effortless manner.

On the next slide, you can see our insurance suite portal, which we have recently signed an arrangement with New Alliance Bank, a $7 billion-plus dollar bank located in Connecticut.

With this insurance suite portal, Alliance basically now makes a presentation to their customers that they are clearly in the insurance business for personal, for commercial, for health and benefits; also, one gateway, one web site, one 800 number, one easy way for their clients to get to a customer service representative who can remotely take care of all of their needs.

Newtek Business Services Suite -- many of you are familiar with our business lending, electronic payment processing, insurance services, digital bookkeeping, Web Hosting, web design, tax prep, data backup storage, business plan prep, and we are going to be offering payroll in the very near future.

Some of our financial highlights for 2006.

We have obviously had growing revenues in the Web Hosting and EPP areas of approximately 28% and 33%, respectively.

Both businesses are also growing profitably very nicely.

Our SBA lender for 2006 posted a profit of $317,000.

Our SBA lender last year had a very minor loss of $28,000.

Our EBITDA is growing nicely across our three key operating business segments; growth in excess of 20%.

The Company has $43 million of cash, cash equivalents and U.S.

Treasury on its books, $87 million in book value, and we've demonstrated an ability to pay down debt.

We had $8 million of debt against Crystaltech.

We have paid down all but $1 million of it, and we paid $7 million of that recently.

And, the Company filed a patent application for its Newtracker referral system, which we will talk about.

On slide number 10, you can see a lot of the performance highlights for the Company.

Real significant increases in various revenue segments and EBITDA segments.

I think also importantly, many of our investors are looking at our Capco to non-Capco growth and declines.

Our total non-Capco segment revenue increased by 22% during 2006 and the total Capco revenue segment declined by 55%.

Newtek is a financially strong company.

As I said earlier, $43 million in cash, $87 million in shareholder book value, $2.45 in book value per share.

A lot of people look at Newtek and because of the unusual accounting treatment that our legacy Capco business has afforded us, we appear to be levered.

Actually, many of these assets offset against each other.

Tax credit receivable offsets against notes payable and credits in lieu of cash and the small-business loan portfolio offsets against the GE leverage line facility.

Newtek paid off approximately $7 million in TICC debt and $4 million of AI credit debt in 2006.

What is ownership in Newtek?

We are a major play into owning a distribution channel into the small and medium-size business market.

The SMB market is clearly a lucrative market.

It represents 51% of GDP and 26 million customers.

The large Fortune 100 companies in the United States want this customer base.

They try to go after this customer base, but it's very difficult to do so primarily because their distribution channels are built for other Fortune 100 companies and consumers.

The SMB market, or the small and medium-size business market, really requires a distribution channel and a unique way of accessing those customers.

Newtek has established that way and it is quickly achieving its goals and becoming the premier provider of business services and financial products, but doing so in a low-cost way.

We're a low-cost acquirer of these clients and a low-cost provider of the goods and services.

How are we accomplishing that goal?

We're accomplishing that goal by primarily using state-of-the-art self-built web-based systems.

The web-based system allows us to acquire the customer, our Newtracker system allows referrals from alliance partners actually giving them a window into our back office operation.

Effectively what we have done is we have created a methodology to put a barcode on a service offering.

The AIGs, the credit union executives, Merrill Lynch, financial account executives who are concerned about their clients being treated well 24 hours a day, seven days a week, can log on to our system and see exactly what we're doing with their customers.

The other thing that our transparent operation system does for our alliance partners, it basically assures a high level of quality service.

Our business processing specialists know that our alliance partners are watching them, so they are, needless to say, take extreme care in handling those customers.

And, we also handle customers by doing telephonic interviews.

We don't want our small and medium-size business customers taking important or frustrating time out of their day, handwriting and faxing applications or typing in data.

Who is using our technology and who's endorsing it?

Entities like Merrill Lynch, Morgan Stanley, AIG is a new entry into our book of alliance relationships, as is New Alliance Bank.

These relationships are growing and our penetration rates are increasing.

Newtek is definitely a difficult equity-based comparison.

Similar to Wal-Mart, we're a one-stop shop for the small and medium-size business.

Similar to Progressive Insurance, we use centralized processing capabilities using Web-based software to drive customers into our processing silos.

Whether that's Electronic Payment Processing, Insurance, Lending, Web Hosting, the goal is to cost effectively using technology drive that customer with a low-cost of customer acquisition, not using an expensive bricks-and-mortar or feet-on-the-street sales operation, to our processing plants and to effectively process that business in a high-quality manner.

Our distribution channel is unique in basic service industries.

As you can see, we are being very successful and the easiest determinant of that is on slide 18.

You can see how our customer count is growing organically, and also through some acquisitions.

We're also having tremendous customer growth in our Web Hosting and EPP market.

Consequently, that has helped build our net worth.

Refocusing again on the financial position of the Company.

2006 was a watershed year for the Company in the sense that for the first time in our Company's history, Newtek Business Services -- I'm referring to the holding company -- is cash-flow positive from all operations; $1.8 million positive cash flow.

Historically, the Company generated significant amounts of cash flow from creating certified capital companies, but its investments in its businesses threw off negative cash flow.

Now that trend is reversing.

Capco, as we refer to it in the segment, has been a non-contributor.

We can see 2006 it was a slight drag on the Company's earnings, but for the first time, given that we are -- stating that we are no longer for the foreseeable future going to be creating new Capcos, we have actually been able to project out for as long as our existing Capcos are on the books up to 2011 and beyond the negative cash drain -- excuse me -- the negative income drain which is a non-cash drain that will hit our earnings.

And if you look at the items, the top line would actually be a positive effect.

Those are residual tax credits that are recognized from an income perspective that are non-cash -- income from tax credit revenue -- and then you have the non-cash expenses relating to interest, amortization of prepaid insurance, basically generating a cumulative loss going forward which we can actually schedule out of $34 million on a pretax bases.

Using an effective tax rate of 40%, which is a rate that could change from year to year, you can basically take a $20 million deduction from our book value and come up with what I believe might be a better reflection of our book value.

Obviously, this discussion is a non-GAAP discussion.

It is not according to Generally Accepted Accounting Principles, but for those analysts that are out there trying to figure out what the negative effect of the future tail of our Capco business will be on our earnings stream going forward, this is it.

We have been effective in 2006 in continuing our technology launches.

The launching of our new web site and our V-Rep concept basically put us into two new distribution channels.

We are picking up a lot of customers who are going directly to our web site in addition to our alliance relationships and signing up full referrals in our basic goods and services.

The exciting thing about what we're doing is we utilize the same technology platform for all three distribution channels -- alliance partners, through V-Reps and Newtek Direct.

You can see the next two slides are showing our web site, which was relaunched in October of 2006.

Newtek BizPro is our V-Rep concept where an independent agent who could be a CPA, a lawyer, an insurance agent who wants to offer our full suite of business services can for no cost come to us, we give them this web site, we give them a couple of free months worth of Web Hosting and we give them the same window into our back office operations as our major alliance partners, and they can work their book of business with small to medium-size business clients, refer people to us and earn commissions.

Obviously, we have introduced Newt as our brand in 2006.

Delving into some of our business segments, we had a very good year in Web Hosting in 2006, good revenue growth of approximately 33% over 2005, good EBITDA growth of about 9% to 10%, good customer growth in excess of 20%.

Our Web Hosting business had $1 million of debt on it.

Clearly, we have the ability to borrow significantly beyond this amount of money if in fact we want to look at opportunistic acquisitions in the Web Hosting or other segments.

We're currently working on some new marketing initiatives.

Tim Uzzanti, the founder of our Web Hosting business, left our organization in June.

We have been very fortunate that we had a terrific replacement.

Bob Cichon has been President and Chief Operating Officer since January of 2006.

Our metrics are doing great, he's doing a great job with the team out at Crystaltech.

The industry outlook for Web Hosting is very strong according to all studies, including Gartner Group studies, and our market position is very strong within Web Hosting.

More small and medium-size businesses are getting web sites and more small and medium-size businesses are using hosting as an application for their businesses and they are coming to Newtek Web Hosting and Crystaltech to fulfill that need.

We've had a great adjustment to new ownership as we acquired Crystaltech 2.5 years ago and since then have gone from 22,000 customers to over 60,000 customers, and the management transition from Tim Uzzanti to Bob Cichon.

I think this is a good testimony to the strength and depth that Newtek has in its management team.

Following is the charts which demonstrate the successful growth that we've had in Web Hosting.

Switching over to electronic payment processing, one of our highlights was a portfolio of $2.5 million that we acquired in the second quarter of 2006.

We endeavored to put more money to work in this space because we do have cash to work but so far have not been able to make the right acquisition.

The guidance that Mike Holden will be giving for 2007 does not include an acquisition, but we are hopeful that we will be able to use $5 to $10 million of our cash to make an acquisition in this space.

The Electronic Payment Processing segment has had great revenue growth in excess of 30%.

We have tremendous operating leverage and the capacity to grow this business without additional CapEx.

We believe we are outperforming industry competitors because using our model, we are paying approximately 30 to 50% of what it would cost to acquire a customer if we're using an independent rep channel, which is primarily how most of our competitors acquire customers, first is using our business suite portal or our strategic alliance partners.

We have a tremendous ability to leverage our balance sheet in this particular segment as well.

We think we could probably borrow $30 to $40 million if we needed to off of this business's balance sheet.

It has no debt.

You can see the growth in the Electronic Payment Processing space on slide 33, tremendous net income growth.

We had a very, very good year in the EPP segment.

It currently represents a little -- close, about 50% in total revenues in Newtek Business Services.

We had a pretty good year in the lending business in 2006.

Originations are down from the prior year, average loan size is down but I will tell you that we built a tremendous operating and manufacturing plant in the lending business and we believe we have very good operating leverage to grow this business.

We have said recently and continue to say we need to improve our cost of capital.

As many of you are aware, we have filed an application to acquire a federally chartered thrift.

It remains to be seen whether we will be successful in that endeavor, but if we could reduce our cost of funding in this business and grow our menu of products in addition to just [SBA-7A] and 504 lending, we have the customer base that has a need and interest, a high-quality borrowing customer base, that we could put money out to them cost-effectively at a great risk-reward.

We've been in the lending business for four years, we've made money three of the four years except for a slight loss last year.

This company is positioned for expansion.

We announced recently that we made an acquisition of a company called CDS.

CDS's numbers are not part of the Lending segment, but I did want to mention that CDS does give the Company the ability to provide accounts receivable financing to the small and medium-size businesses.

And we also recently announced we successfully secured a $10 million leverage line from Wells Fargo Business Credit to help that business out as well.

We have had good growth in EBITDA in small business lending.

Obviously, these aren't robust numbers, but we're happy to report a profit from the small business lending space.

And we believe we have done a good job at reducing our risk from getting out of the old CCC for portfolio, which was a legacy portfolio acquired in 2003, and reduce our concentrations in markets such as hotels.

Our 2006 annual segment results, I'm going to leave most of this discussion to Mike Holden.

I think what is most important is cash flow from operations at the holding company level generated $1.8 million, and that would include obviously the negative drag for the operating expenses of the holding company.

We generated EBITDA from the three primary business segments of $15.2 million.

I would also like to point out that the SBA lender obviously has the GE interest expense facility excluded from that EBITDA calculation.

Our 2007 annual segment guidance has been given, both for Electronic Payment Processing, Web Hosting and SBA lending.

You can find those numbers, I believe it's on slide number 42.

The top of the slide says 2007 annual segment guidance.

What might be alarming to some is that we will be forecasting for 2007 a very large significant negative pretax net income number of a range of $18.8 million to $17.1 million.

As we discussed earlier, this is primarily non-cash expense that is coming out of our Capco segment which is forecasted to be a negative $16 million, as well as amortization and other negative non-cash items that are coming from the other business segments.

As we mentioned earlier, we're going to be focusing the market and the investment community really on cash flow from operations.

Slide number 43, which is how we're going to be positioning the Company going forward, will relate to operations -- cash flow from operations coming from the business segments and total cash flow from operations coming from the holding company.

As an official forecast, we're forecasting a flat number.

However, we have been extremely conservative in making that forecast.

The All Other category, which includes basically all of our other businesses, we really have not included any gains that we have historically gotten from this particular segment.

I do believe that we have a good possibility of having positive cash flow from operations at the holding company in addition to a $6.4 million forecast of positive cash flows from the total Business Service segment, but our conservative forecast has that number at zero.

In summation, slide 44 operationally, Newtek is capitalized and positioned and built to become a unique provider to the small and medium-size business market.

The technology platform is built, we have been hiring great personal to run our divisions, the capital expenditures have been made both in software and hardware, there is very little CapEx really that is required to grow these key business segments.

The infrastructure is there, the finance is there.

We don't believe we need to go out and issue new shares of stock given our cash positions and the liquidity and cash flow that our business segments are throwing off.

The business model, the strategic vision and the systems are all in place.

Basically, Newtek has a tremendous availability to leverage its operational structure.

We do believe that it can grow in multiples from its current operating platform.

That is what we hope for, that is our belief, we will work hard to execute on that belief.

The Company's operation and support staff are positioned to grow.

Financially, in trying to figure out valuations with respect to Newtek, I would suggest that the market focus on the two key segments -- the Web Hosting segment and the Electronic Payment Processing segment.

You can look at the EBITDA numbers, these are businesses that have $1 million of debt between them.

We believe that the borrowing capabilities on both of these businesses could exceed 40, 50, $60 million.

We believe that the negative effects from Capco basically will be running off over time and we are permitted by accounting literature as well as our operational methodology -- we will endeavor to unlock and release the value that is clearly present to shareholders by figuring out ways to mitigate the negative non-expenses from the Capco business.

I want to reiterate, we view our company as cash-flow positive from operations, particularly from the Business Service segments.

The holding company costs and the CapEx costs are leverageable.

It's costing us about $10 million of cash flow to run the holding company.

At the end of the day, we believe very strongly that we can grow these operating segments.

We've made the investments, we have an accounting department right now that is well positioned to handle and manage these businesses, same thing with the legal staff, same thing with the IT staff.

We have presidents and chief operating officers of these divisions that are positioned to grow these businesses to multiples of where they are today.

The Company is liquid.

As an investment, Newtek will continue to need to execute on its plan, grow its customer base, grow its revenue base and reduce the effects of the legacy Capco business and grow cash flow from operations.

With that, I will pass the rest of the presentation off to Mike Holden, who will go through our MD&A.

Thanks, Barry.

Barry went through a lot of information.

I will go over the fourth quarter of 2006 and compare some of the fourth quarter of 2005 in some detail.

First of all, revenue for the fourth quarter decreased $6 million or 17% to $29.8 million.

This was entirely due to an $8.3 million decrease in income from tax credits.

Last year, we recorded $18.1 million in income from tax credits as achieved the 50% threshold in the Wilshire, Texas Capco.

This year, we recorded $3.3 million in income from tax credits as we achieved the 50% threshold in Wilshire, New York 4 and $6.4 million as we achieved the 50% threshold in Wilshire New York 5.

Just so everybody knows, we have achieved all of our thresholds in the different Capcos at this point, so going forward, we will just have accretion as income from income tax credit revenue.

Our expenses increased 6% to $23.4 million.

We recorded income before provision for income taxes of $6.4 million in 2006 as compared with income from provision for income taxes of $13.7 million in 2005.

You will note that we are treating an investment that we had in Phoenix Development Corp.

as a discontinued operation in 2006 and therefore have recorded net income of $212,000 as discontinued operations in the fourth quarter of 2006 as compared to $305,000 in 2005.

Net income after tax provision was $3.9 million, or $0.11 per share in 2006 in the fourth quarter as compared to $8.6 million, or $0.24 per share in 2005.

I would now like to like to review the performance by segment.

The Electronic Payment Processing segment revenue increased $3 million at 33% to $12.2 million.

Income before taxes, or $865,000 as compared to $941,000 in 2005.

You should note that we had a very large -- actually $700,000 in income in this segment last year for the termination of a contract, so we did go up dramatically if you exclude that item.

The Web Hosting segment revenue increased $638,000 or 21% to $3.6 million.

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

Income before tax was $864,000, which is $77,000 less than last year.

A major part of the decline was due to a settlement of a lawsuit which totaled $250,000 in the fourth quarter this year including legal fees.

SBA Lending segment revenue decreased by $241,000 to $2.2 million.

This decrease was primarily due to a decrease in premium income of $489,000.

We sold $7.2 million of loans in 2006 as compared with $12.8 million of loans in 2005.

The Lending segment lost $35,000 compared to $625,000 in income in 2005.

Revenue in the Capco segment, which I talked about a little bit before, declined significantly to $11.4 million from $19.8 million in 2005.

Income before income taxes was $5.9 million compared to income of $14.6 million in 2005.

The last thing I'd like to go over and Barry went through the guidance a little bit, but if you look at our press release, there is [some] tables in the back that give the guidance by quarter and for the year.

And I am not going to go through every single item, but what I would like to do is just give you the quarter-by-quarter details and then go through a summary for the year.

So for the first quarter, we're projecting revenue of $20.3 to $20.8 million and a loss of $5.4 to $5 million.

Second quarter, $22.3 million to $22.8 million, a loss of $4.6 to $4.2 million.

The third quarter, $23.1 to $23.6 million with a loss of $4.7 to $4.3 million, and the fourth quarter, $24.8 to $25.3 million, and a loss of $4.1 to $3.6 million.

And then just I think it's worthwhile to look at it in summary for the year.

For the year, we are looking at total revenue of $90.5 to $92.5 million.

As Barry mentioned, we are not going to have very much in the way of revenue from the Capco segment going forward, [added] $6.4 million to $6.8 million.

And if you look at the guidance by segment, we're looking at the EPP segment to be between $3 million and $3.4 million in income, or $4.8 to $5.2 million in EBITDA.

Web Hosting at $3.6 million to $4 million in income, $7.1 to $7.5 million in EBITDA, the Lender from flat to $500,000, $3.5 to $4 million in EBITDA.

Capco segment as was mentioned before, primarily non-cash, a loss of $16 million, and that is pretty predictable, so $16 million high and $16 million low.

All other segment we have projected at a $3.4 million loss to a $3 million loss, but Barry did mention that we have a very strong possibility of an upside in that regard.

Remember, these are in Capco qualified investments that we've made over the years and we do get liquidation events from time to time.

Corporate activities, a $6 million loss.

If you remember, that reflects the management fees coming in from the Capco as income of about $4 million and expenses of about $10 million.

So that would generate overall a loss between 17.1 to $18.1 million.

After tax, it would the $10.8 to $11.8 million, and that would be $0.33 to $0.33 a share.

So with that, I'd like to turn it back to the operator for any questions.

(OPERATOR INSTRUCTIONS).

Lisa Springer, Red Chip.

Congratulations on a great year.

My question to you concerns the CDS acquisition.

Could you comment on what you see as the opportunity with that business in terms of cross-selling it to your existing clientele?

CDS is primarily in the receivable finance business, or factoring business, and that Company has been around for 30 years, has a good reputation and capability to basically process and finance accounts receivables.

Many of our businesses are small early-stage companies that do have receivables that they can pledge.

Many of our companies actually can use us as an outsource capability to collect on their receivables because we do that as well as finance them.

We're able to obtain a $10 million leverage facility for -- a collateralized leverage facility from Wells Fargo Business Credit and I think what it's going to do is for many of our customers that need short-term or maybe revolving money, we can now provide that through the receivables finance vehicle, and then we have the SBA-7A product to provide term financing.

I think the long-term goal is similar to our business service platform.

We want to available to provide all forms of funds and financing to small and medium-size businesses, in addition to things like business credit cards and other types of conventional small and medium-sized conventional commercial business loans.

Okay, thank you.

(OPERATOR INSTRUCTIONS).

[Ashish Masur], Merrill Lynch.

Congratulations, Barry, on a great year.

My question is specifically regarding as a future acquisitions and somebody looking at the stock price currently.

Can you comment on where do you see the business growing and where do you see the most amount of revenue generation going forward?

I think that we have a variety of different businesses in different stages.

Obviously, the most mature businesses we have, Lending, Web Hosting and Electronic Payment Processing.

As a matter of fact when I have management meetings internally, I put various cycles on them.

Our insurance agency business is only about 2.5 years old, and definitely needs some seating.

I think that we are very optimistic that we will continue to put very good, strong numbers up in the EPP space and the Web Hosting space.

I think that when we solve our cost of capital for our Lending business, number one, I think we're going to be able to -- we have a lot of customers that want more products than our current financing can provide and our cost of capital is high.

So I think that if you look at the different businesses, Electronic Payment Processing, great cash flow, good customer count; Web Hosting, great cash flow, great customer count; SBA Lending, it's the honey.

You have to the money to attract the businesses and everybody wants us, particularly small businesses, to know that they can come to us if they need funding to get financing.

I think we have done an excellent job so far with a limited product menu.

And if you look at any business that goes through a cycle of establishing itself from scratch, cost of money gets cheaper and cheaper over time as they're able to demonstrate that they're good at their business, and frankly we've been able to do that.

We have had a very good track record, I will knock wood and spit a few times relating to credit.

We have great operations, we have great people running that business and managing that business and a great staff.

So I'm very optimistic there.

I think we have a very good future in the insurance agency business.

AIG thinks so.

They put us on their aigsmallbusiness.com web site and we are now getting leads on a regular basis, insurance leads coming through their web site.

Seven-plus billion dollar bank in Connecticut, New Alliance Bancorp thinks so because they've taken us on for the full insurance portal, and that we're going to the linked onto their web site and we're going to be working through their 80-plus branches, bookmarking their lending officers' computers to make sure that we get those insurance referrals both for things like workman's comp, general liability, health insurance, insuring the real estate, etc..

So at the end of the day, Ashish, we're in the business to provide a full business suite and portal to the SMB market.

Some products have different characteristics than others, but we're very excited.

We continue to invest our cash flow in our businesses.

Yes, so we are sacrificing some numbers maybe throughout 2007 and parts of 2008, but we have a very bright future ahead of us and I am very optimistic about our business lines and business segments.

Thank you.

Ed Antoian, Chartwell.

First question is, guys, have you released the quarterly numbers anywhere?

Not in a format; no, not in a normal, let's say, income statement format.

When will that happen, or do I have to wait --?

We could put something together, if that is the desire.

My first question is just on EPP business.

How did it do in the quarter, year-over-year, revenue and earnings and cash flow for the fourth quarter?

I think I mentioned that a little bit before.

One of the things that (MULTIPLE SPEAKERS).

It's hard to follow you without some numbers to look at, but (MULTIPLE SPEAKERS) .

Right, right, right.

But overall, the EPP went up $3 million in the fourth quarter, it's up 33%, the $12.2 million.

We had a very unusual item last year.

We had a $700,000 settlement of a contract where we actually received income, and that's included in our number for last year, which was $941,000 of income.

So if you back that out, you're at 241 on an apples-to-apples basis, and this year, we made 864.

And what was EBITDA?

EBITDA -- (MULTIPLE SPEAKERS) I don't have it right in front of me.

I do have that number, but I don't have it right front of me.

Alright.

The other question I have is on the presentation.

You showed to numbers for '07, and one is, you gave us page 43, 2007 guidance, and page 42 you gave us guidance.

What is the difference between EBITDA and net cash provided or used in operations?

I would say the main difference is, it's very similar.

The main difference is in the lending operation.

In the lending operation, it might be a little controversial to use an EBITDA number because really the amount of money we're that paying to GE for example is really I think a little bit more like cost of funds.

So on the page 42, which is the net cash from operations, it really doesn't look at it that way as being a let's say a non-cash item or added back item -- would be the interest on the GE loan.

So let's just look at EPP.

If I start out with $2 million in net income, obviously I add back the depreciation of $2.3 million, and do I add back the accretion of interest expense to get to EBITDA?

Yes.

Not -- in this case, EPP -- yes.

And normally, you would add that back, yes.

What I'm trying to do is reconcile -- (MULTIPLE SPEAKERS).

Let me just tell you -- let me just give you kind of like the overview.

The overview is that the net cash provided in operations that we're using on this page is a total GAAP measurement.

This will tie in exactly to our cash flow statement in our 10-Ks and in our 10-Qs.

So it's not an alternative to GAAP.

So that's kind of why we want to have this statement in here, as opposed to EBITDA.

So what we're trying to do is we're trying to take that cash flow statement and really break it down by segment and kind of look at the going-forward businesses to the left, if you want to call it that, and the legacy Capco business to the right, which is going to be phasing out.

When I look at your --.

I would not like to use this 42 at this point right now, I would just like to focus on the EBITDA, and we have a separate schedule that we're going to put out next week which gives you I think a little bit better detail.

And when we put that out, then I can go over that with you.

And just so I know, so revenues in the quarter for EPP were 12.2 versus 9.2?

That's correct.

And op income was 864 versus 941, and you explained the 700,000 extra income in '04.

But in '06, you showed an EPP actual revenues of 43.6 and you're projecting an increase of over $10 million, I guess roughly -- actually not 25%, so a little slower than 25% growth, actually kind of like 20%-ish growth.

So that is one question -- you know, why is the growth rate decelerating from 33% to 20%?

And then second, explain why the flowthrough to EBITDA, you've reported EBITDA of 4.4 in '06 and you're only estimating that it goes up $0.4 to $0.8 million on a $10 million revenue increase?

That's a very good question.

We're continuing -- analyzing that right now.

There's a couple of different things that are impacting it, one is just some growth in expenses.

And I would say to a certain extent, we have been adding the higher revenue customers that might not have as good of a margin percent as some of the existing customers.

But we have a big effort right now to try to evaluate more on the profitability by customer and the margins by customer, try to get a better handle on that.

I might also add that in the 2006 numbers, you did have one portfolio acquisition, and the 2007 forecast that we have put out has no acquisitions whatsoever.

And was any of that portfolio acquisition in Q4?

When did that acquisition occur?

Second quarter of '06.

So it had a benefit in -- a little bit of benefit in the second quarter, but third and fourth quarter.

So what was the organic growth if the actual growth was 33% in EPP and Q4 -- what was the organic growth?

It's pretty close to that.

I don't know off the top of my head, but I would say probably 30%, high 20s.

Oh, I thought you made an acquisition in Q2.

Yes, we did, but I'm saying you back out -- it's not a big difference in the revenue because we record that net.

Some accounts, we record gross, some accounts we record net.

When we do the acquisition, it's net accounting, so it's not that big of a revenue increase.

But those accounts generated revenues in Q4 of '06, so if you take those out of the mix because they did not exist in Q4 of '05, what would the apples to apples (MULTIPLE SPEAKERS).

What I'm saying is, we're recording those nets.

You don't record the revenues of -- you don't record the revenues derived from those customers, you record the residual that we get from the person we bought the portfolio from.

They're still operating that portfolio.

It's the gross versus net accounting, so this is a net accounting treatment, it's not a gross accounting treatment.

So we're not generating a lot of revenue, we're generating a good amount of income and we also have a good amount of amortization that we have to pay for the portfolio.

Basically, and I know you're very familiar with how some of these EPP segments work, this is net accounting, so you're really not booking revenue minus our core cost of goods sold, minus SG&A and all that type of thing.

So maybe the other question is -- what is of the effect on operating income in Q4 for that acquired portfolio?

I think it's about $80,000 a month, Mike, so I think that that particular acquisition probably added close to about $240,000 of cash flow.

So the acquisitions are significant.

We thought about giving guidance quarter an acquisition for '07.

We elected to be conservative and pull it out.

A $5 to $7 million acquisition, Ed, probably should drive about $1 million of income to the bottom line in the first year.

Obviously, of concern is why $10 million of relatively organic growth only drives $400,000 to $800,000 of EBITDA growth, especially when you're telling me your acquisition you made in Q2 generates $80,000 a month, and that was made in the middle of Q2, so you have four months of that into '07 that you didn't have in '06.

So that's $300,000 that's almost all of your EBITDA growth.

(MULTIPLE SPEAKERS)

$700,000 that was in the '05 that's not in the '06 number.

There's one other important item.

In 2006, we bought a minority interest back from the former president and chief operating officer, and that contributed to $45,000 which occurred for three months in 2006.

In 2007, that accounts for the whole year.

So that has a negative non-cash effect of approximately $600,000 in 2006, so that won't affect the EBITDA.

I was focusing on EBITDA.

Okay, I'll let somebody else ask a question.

Steven Silk, Steve Silk & Sons.

Good afternoon.

Could you talk, Barry about if you're formulating plans to start cross-selling to your existing client base, an opportunity perhaps to increase revenue per customer by new offerings?

Steve, I think one of the things that we will talk about in our 10-K is our interest in building and developing our cross-marketing, cross-surveying and cross-selling platform.

We believe that that will obviously add significant value to Newtek, and to our customers.

We've been pretty adamant about not doing it until we are real comfortable that we have the right software, we have the right systems and we have the right personnel that are trained and cross-trained to be able to deliver more than one product into a customer.

We believe that we will be successful in this endeavor where all of the major financial institutions have difficulty in doing it.

We believe we will be successful for the following reasons.

Number one, all of the divisions within Newtek work with each other.

There is no fiefdoms, we're not putting extraordinary pressure on people to pay real proprietary attention to those quarterly numbers that we're spending a lot of time dealing with today.

We believe that the cross-selling and cross-serving platform is the real long-term value add for Newtek shareholders and really for creating and building a first-class business and operation in the future.

So what it basically takes is somebody that can subsequent to coming in on our books for one product with sophisticated software and attractive drop-down menus, being able to call up a current business lending client, an EPP client, an insurance client, intelligently talk about the service that we put into them, talk to them about their business based upon the information and then data we have in the system and make sure that we can then make bona fide specials and offers to them in other product categories.

So it's on the white board, we're hiring people to do it, we're developing the software and the systems which basically we require all of our systems to be very well integrated and to have our customer service agents well-trained and to be able to offer multiple products.

It's there, but I think that that is something that we will be able to execute on in 2008 and develop in 2007.

That will add significant revenue per share per customer and penetration into the customer base.

And frankly, we think it's what's going to make Newtek a very special company, even thought it's a special company today.

So looking at guidance for the coming year 2007, there would not be any added revenue from that, but as you formulate it, if it were to start maybe towards the end of the year, you could see some growth or some results?

I guess that is the hope?

That's correct.

We don't have any cross-selling or cross-marketing built into these numbers.

Thanks, good luck, Barry.

At this time, there are no questions in queue.

I would now like to turn the call back over to Mr.

Barry Sloane for closing remarks.

I appreciate the dialogue and the questions today.

One of the things that we will endeavor to do is to publish our fourth-quarter results tonight.

They will be available on the home page of our web site and we look forward to further questions and comments and working with all of you in the future.

Thank you very much for attending.

Ladies and gentlemen, this concludes the presentation.

You may now disconnect.

Thank you and have a good day.