NewtekOne Inc (NEWT) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to the Newtek Business Services First Quarter 2008 Earnings Conference Call. Today's Conference is being recorded.

At this time, for opening remarks and introductions, I would like to turn the Conference over to the CEO and Chairman of the Board, Mr. Barry Sloane. Please go ahead, sir.

-- CEO and Chairman of Newtek Business Services. Welcome to our First Quarter 2008 Financial Results Conference Call. Presenting today with me is Seth Cohen, our Chief Financial Officer.

For those of you that want to follow the PowerPoint presentation as we go through the call, it is available on the Investor Relations section of our Web site.

Right now I'd like to turn the call over to Seth Cohen, who will read the Safe Harbor statement.

Good afternoon. 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 business strategies and financial performance, anticipated future number of customers and 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 are contained in Newtek's filings with the Securities and Exchange Commission and are 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.

I will now turn the call back to Mr. Sloane.

Thank you, Seth.

On today's Conference Call, we're going to go through a variety of different agenda items -- from a financial results snapshot to a discussion of the adoption of FASB 159, to a breakdown of various issues in the business service segments. Seth Cohen will do a financial review, and at long last, we will do a reaffirmation of our 2008 guidance.

On page four, we can see first quarter 2008 financial results. Our first quarter revenue was up 10% Q1 2008 versus Q1 2007, led by very strong performance in our Electronic Payment Processing segment, reporting revenues of $15.2 million, up 21% over last year's quarter; our Web Hosting segment, $4.3 million, up 10% over Q1 2007; and our Small Business Finance unit, which actually had a 38% decline in revenue over Q1 2007 -- $1.9 million.

We reported a first quarter loss of $3.9 million; that was in line with previously stated guidance that we had given -- depreciation and amortization, a noncash expense of $1.8 million in the first quarter of 2008. We had significant pressure from our lending segment, which really did depress our first quarter 2008 earnings. But as we had reported earlier in the press release, released minutes ago, we are maintaining our quarterly and annual earnings guidance that we've previously given under FASB 159.

Company is financially strong, with over $30.9 million in cash at the end of the quarter. This equates to $0.86 in cash per share, very low quantifiable debt -- we have significant lending lines available to us with unused capacity, both at GE, North Fork Bank, Wells Fargo.

Looking at slide number six -- I always say a picture's worth a thousand words. Basically this is our Newtek Business Service suite. This is our offering. We believe it differentiates ourselves in the business market.

Looking at this picture -- our button suite, as we call it -- one can clearly see that Newtek is able to offer a full-suite arrangement of business services to providers like AIG, Navy Federal Credit Union, Merrill Lynch and many others. And we're able to acquire small and medium-sized business customers cost-effectively. These customers are then driven to our processing centers in remote location, which enables us to acquire the customer and process the business at very cost-effective rates.

The next slide is our Newtek Insurance Portal. Within an hour, we could take any institution with a significant customer base in the business arena and turn them into an insurance offerer, as we've done with Navy Federal Credit Union.

A Navy member -- and there's 3.1 million of them -- can go to the home page of their Web site, click on Insurance, and be driven to our button suite, and be able to acquire insurance anywhere ranging from homeowner's to workman's comp, to professional liability to group health, or really anything under the sun, particularly in the commercial insurance segment.

Segueing back to our announcement as of two days ago and today -- the Company is happy to announce the adoption of FASB 159. Historically, particularly over the past year, many of our investors and clients have looked at our financial statements relative to our Capco accounting and have asked us for additional transparency. By adopting FASB 159, which is essentially fair market value for the Capco segment, we believe we will be doing that, and being able to report our Capco segment on a more clear basis to the financial community.

With that we'll be taking a one-time $14.3 million noncash reduction to retained earnings. This also affects our deferred tax liability by $9.6 million. And we believe that the adoption of FASB 159 will enable Newtek to simplify our financial statements and to more accurately depict to the financial community the successes that we believe we're having in our operating businesses. The adoption of FASB 159 clearly makes it easier for the Company to discuss the financial results of Newtek and its Business Service suite and Business Service divisions with the investor base.

You can clearly see from slide number nine that there's a major difference, particularly with respect to noncash losses going forward. In 2008, the Capco segment will report an approximately $640,000 noncash loss with the adoption of 159 -- that's versus $8.3 million -- and $300,000 in 2009, versus $6.3 million. And basically, Capco losses will entirely, or almost entirely, go away in 2010 -- matter of fact, get a little bit of profit in 2011 and 2012.

As we mentioned earlier, the adoption of 159 basically accelerates the recognition of a reduction in our deferred tax liability by about $9.6 million [deferred] tax liabilities created through the mismatch of GAAP accounting income and tax earnings. We also think this helps clarify what our real cash liabilities are from an investment perspective. And we think that'll be helpful for the investment community to ascertain what ultimately we're going to have to pay in taxes.

Over the course of the last 12 months, the Company has made a concerted effort to reduce its liabilities. We've paid down over $6.8 million worth of debt. And we believe that our cash position is strong. We're very liquid, and we're in a good position to grow the Business going forward without any real capital needs at this point in time to meet our growth objectives.

Looking at our various business segments -- our Electronic Payment Processing segment has continued excellent momentum. We added over 2,000 new processing merchants over the previous six-month period. The EPP business, or Electronic Payment Processing segment, is a cash flow-positive business. We had EBITDA margins in excess of 10% for Q1 2008. Business had significant operating leverage.

The NewTracker business model, which we discussed earlier, which enables us to acquire clients cost-effectively and process business cost-effectively -- this particular division works exceptionally well within the NewTracker model. Our ability to acquire customers using NewTracker from various different alliance partners and process the business remotely is working on all cylinders, and we think this business is solid and strong and have high hopes for our growth objectives going forward.

In 2008, the Company has forecasted EBITDA of $6.5 million to $7 million in this segment. The segment has no debt and very, very little CapEx. So that's pure cash flow that's flowing right to the bottom line.

Moving over to our Web Hosting business -- we're continuing to invest in the Web Hosting segment to support future growth. We like this business very much.

On a real estate basis, we're currently operating at 50% of capacity in our datacenter. We're anticipating the launch of a wholesale outreach program beginning in the third quarter of 2008. Historically, with the acquisition of CrystalTech, which was done in July of 2004, the Company primarily acquired businesses in this particular arena through viral marketing -- clients came to us, they signed up on our Web site.

We have a tremendous reputation in the Web developer market. We are planning on positioning to make outreach and outbound calls to Web developers and IT partners.

Recently, Bob Cichon, the President of Newtek Web Hosting; and Chad Johnson, our Director of Sales and Marketing, made several client calls to the customer base. This is a great marketing channel. Web developers and IT partners have huge portfolios of small and medium-sized business customers. Many of those customers take electronic payments on the Internet. Many of them have a need for the ability to finance receivables. It's a great marketing channel for us.

We plan on rolling out our Business Service suite in the form of what we have, our BizExec product, to give our partners the ability to offer those services to their customers, give them additional revenue shares and bring them in closer to Newtek.

Our Small Business Finance segment clearly had a difficult quarter. We had a decline or decrease in revenue over 2007 by 38%. As we had mentioned previously, we had historically been tightening our underwriting guidelines. And this clearly did show up in the first quarter of 2008.

As we had previously mentioned in our prior Conference Call, we anticipated having a loss in this quarter. We came in within the range of our expectations. We sold fewer guaranteed loans in Q1 2008 versus 2007. And the market also wasn't very kind to us, as the average premium on the government guaranteed sales declined from an excess of 9.9% to 8.57%.

In addition, in 2008, a company that we acquired, CDS, which is in our Receivables Financing business, also added to the overall loss in this particular segment of $200,000. CDS has been rebranded and is now being marketed as Newtek Business Credit.

And we've added some new professionals to that particular segment. Neil Wolfe has joined us as an SVP, helping us grow our originations and work with our customer base. We do believe we're gaining some nice traction in the business and building the portfolio book of business back up.

We're happy to say that we don't have any capital markets dependence in the lending segment. We're not financed with collateralized commercial paper or capital market to securitization exits. Our funding relationship with GE is a good one, and we anticipate moving forward with them. We're very satisfied with the overall relationship and have plenty of capacity in the facility, with a lot of credit availability on that ABL line.

Our long-term portfolio loan performance continues to be very good. Our loan portfolio tracking actually put us in the position where we had fewer loans in the 120-plus defaulted loan category in the first quarter of 2008 than 2007. In the 120-plus-day category, we had $1.2 million, versus $1.59 million in 2007, which actually had us at 4.3% of the portfolio in '07 and 3.7% in '08.

So although we had an under-performance and losses versus our other business categories in other segments, we're happy to say we don't have a credit problem. It's really relating to loan originations. And we are taking steps to fix that.

We currently are in the process of recruiting in lending personnel. The market is wide open in this area. We've got three major competitors that have either gone out of business or reduced their activity. We're getting some of the best loan originators in the marketplace that are coming to us.

We also have over the last several quarters reevaluated our primary loan origination sources and have made significant outreach to community banks, small business development corps, CDCs -- also known as community development corps -- lawyers, accountants and other originators. We do believe we'll have a good second quarter, coming in within our guidance levels and significantly reducing the loss in this segment that we had in the first quarter.

We have been actively bidding on performing and nonperforming loan portfolios. To date, we haven't been successful, but we have a good idea where the market is, and we anticipate acquiring some portfolios in this space, putting some cash flows on and leveraging our operating business.

We do expect to participate in the government-guaranteed USDA loan program by Q3 2008. Typically, the first thing that occurs to people when I discuss USDA loans is they think we're getting in the business of financing agriculture. The USDA loan program is run by the U.S. Department of Agriculture, but the loans that are originated -- particularly the loans that we're focused on -- are primarily not agricultural loans. They're business and industrial loans. And these are basically loans that are funded to borrowers in rural communities.

So the primary purpose of the program is to fund businesses that are based in rural communities. It's a very similar program to the SBA program. It allows us to expand our product offering beyond the SBA loan program and gives us significantly greater flexibility.

The SBA program is purely a floating-rate program -- floating rate over prime. The USDA program actually gives a fixed-rate option to borrowers. The loan sizes can go up to $25 million, where the SBA cap is $2 million.

The USDA program gives us additional availability for income. You're allowed to get fee income from borrowers. That is not allowable under the SBA 7a program. And the premium income is obviously based upon the sale of the guaranteed portion of these loans. So as you sell a $4 million, $5 million or $6 million loan, you get obviously a much bigger gain on sale than on the capped 7a program.

Loans originated under this program have an 80% government guarantee, which will be sold into the market immediately. So we pretty much have got a similar program, but we do plan on taking advantage of the USDA loan program and allowing us to do greater volumes, increase servicing under management, and get greater gain on sale.

Moving over to our insurance agency opportunity -- we currently have alliance partners with brand name-recognized players such as AIG, Navy Federal Credit Union and CEFCU. We're actively exploring some new major alliance deals which we hope to be able to announce in the next quarter. We're constantly reevaluating and upgrading our processing capabilities in the segment which historically have been problematic.

I would also tell you that the NewTracker system and operating methodology works extremely well within the insurance agency. And we can see, based upon these charts and graphs, that we are getting more referrals in, and our close rate has picked up very nicely.

You can see we had a low-point close rate in December of about 8 to 9%. And as we were closing out March, those numbers were picking up to about 15 to 19% of referrals that were coming in through the system, or actually closing. And these are being done actually at very attractive cost of acquisition.

The Company is constantly looking at cost-reduction measures. I'll be working with Seth Cohen, our CFO, in the upcoming quarters to continue to reduce headcount and [salle] related expenses at the holding company. We plan on reviewing the different business segments very closely to recognize additional cost reductions. And we've also done some closing and consolidating of different company facilities throughout the organization. We've recently closed up some facilities, and some outlying Capco states anticipate doing that in some others, which could actually save us a couple hundred thousand dollars on an annualized basis.

I would now like to turn the financial review portion of our Conference Call over to Seth Cohen, our Chief Financial Officer.

Thank you, Barry.

Before I begin, I would like to briefly review the changes we made to our reporting, which you will be able to see in greater detail when we file our 10-Q.

In order to more accurately and transparently portray our financial information and performance, we simplified our consolidated statements of operations to those elements that substantially reflect operating performance, while expanding the segment profit and loss tables to fully show each segment's revenues and expenses.

In addition, segment reporting for the current and previous periods will reflect the following changes. For expenses other than corporate overhead, intercompany expenses are now charged to the user of the service instead of the provider of the service. This change allows us to better match expenses for the revenues generated by each segment. We also elected to reclassify certain residual fees paid to independent sales agencies and organizations for Electronic Payment Processing counts, from professional fees to Electronic Payment Processing costs.

Finally, the Company moved two finance-related businesses from it's all-other segment to the SBA lending segment, now renamed the Small Business Finance segment. As previously discussed on this call, we adopted FAS 159 for valuing assets and liabilities related to (technical difficulty) all of our Capco notes.

Please be advised that FAS 159 is only for the present period and is not reflected in prior year's results. Also, please refer to our earnings press release or the corrected FAS 159 release, both issued today, to see detail of the effect on our financial statements from this adoption.

Turning to our results for operations -- revenue increased by $1.7 million or 7.9% to $23.5 million in the first quarter, compared to $21.8 million for the same period one year ago.

In the first quarter of 2008, we recorded a loss [before] benefit for income taxes and discontinued operations of $3.9 million, as compared with a loss of $4.1 million for the quarter ended one year ago. It is important to note that the first quarter (technical difficulty) was not unexpected and is in line with our previously stated guidance.

This loss was due to increased losses in the lending segment as well as a decrease in income from operations from the Web Hosting segment, which were partially offset by improvements in income from operations for the Electronic Payment Processing segment and a $2 million reduction in the noncash loss in the Capco segment and the adoption of FAS 159 in this period.

Our net loss was $2.7 million or $0.08 per share in the first quarter of 2008, compared to a net loss of $2.9 million or $0.08 per share in the first quarter of 2007.

I would now like to review the performance by segment.

If you could turn your attention to slide 20 in the PowerPoint presentation, you will see the comparison of first quarter 2008 versus our results in the first quarter of 2007. Electronic Payment Processing segment revenue increased by $2.7 million or 21% to $15.2 million in the first quarter of 2008.

The revenue increase is predominantly due to organic revenue growth of 18% over the first quarter of 2007 as a result of both an increase in the average number of asset-processing merchants and an increase in the average monthly processing volume per merchant.

Income before taxes increased 17% to $1.1 million over the first quarter of 2007. In the first quarter of 2008, Electronic Payment Processing costs increased at a slightly greater rate than revenue over the first quarter of 2007, reflecting the addition of several higher-volume, lower-margin merchants over the last 12 months.

In the first quarter of 2008, our Web Hosting segment revenue increased by $394,000 or 10% from the first quarter of 2007, to $4.3 million, due to the organic growth of hosted sites. In the first quarter of 2008, we increased our average number of monthly Web sites by 13% over the same period last year, to 68,000 Web sites.

[We saw a] decrease in income before taxes of $315,000 in the Web Hosting segment in the first quarter of 2008 compared to the first quarter of 2007. This was primarily the result of a $342,000 increase in rents and utilities, reflecting our move to a larger datacenter last year; $189,000 increase in salaries in benefits due to the increase in staff to support growth in the segment, and $109,000 increase in depreciation and amortization due to capital expenditures on servers (technical difficulty).

We expect the impact of the cost of the new datacenter to be mitigated during the course of the year. As [more of its] capacity is utilized, [we] continue to grow, and margins should improve. The new space should be sufficient to house growth beyond 2008.

Small Business Finance segment revenues for the first (technical difficulty) decreased by $1.8 million, or 38%, to $1.9 million compared to the first quarter of 2007 -- (technical difficulty) primarily a result of a decrease in premium income, which we experienced for a couple of reasons. We deliberately originated fewer loans in the first quarter of 2008 (technical difficulty) we were seeing did not meet our underwriting criteria.

As a result, in the first quarter of 2008, we filled the guaranteed portions of nine loans, aggregating approximately (technical difficulty) [$7] million (technical difficulty) to those for 25 loans aggregated (inaudible) $6 million in the first quarter of 2007.

We also extended (technical difficulty) average premium received on the sale (technical difficulty) first quarter of 2008 (technical difficulty) 9.9% in the (technical difficulty) 2007, which adversely affected our [premium agents] this quarter. Should the price remain at this level (technical difficulty) continue to adversely affect revenues (technical difficulty) segment's performance [in the] future.

(technical difficulty) ended March 31, 2008, (technical difficulty) [lending] segment had a pretax loss of $1.5 million (technical difficulty) in the same period last year. It is important to note that this loss was not unexpected and was in line with our previously stated guidance. [We] anticipate seeing an improvement in our bottom-line results in our lending segment in accordance with the guidance we have provided.

For the first quarter of 2008, Capco segment pretax costs decreased to $1.4 million, (technical difficulty) by roughly 59%, compared to $30.5 million (technical difficulty).

-- breaking up.

This was primarily due to the adoption of FAS 159, which resulted in a $2.2 million reduction of the net noncash loss calculated by subtracting interest expense and amortization in [fee-paid] insurance, from income from tax credits to $367,000 -- [that of] $2.6 million for the three months ended March 31, 2007 we calculated on the forward-cost basis.

For the first quarter of 2008, revenue in the all-other segment decreased by $162,000, or 20%, compared with the first quarter of 2007, primarily due to reduction in interest income as a result of decreasing cash and cash equivalent.

The (inaudible) segment for the first quarter 2008 [increased] by $457,000 [to] $556,000, primarily due to the increased expenses associated with additional customer service and sales tax to the insurance agency (inaudible) entities in anticipation of future growth.

In the first quarter of 2008, corporate activities, which generates revenue primarily from management fees from the Capco segment, recorded revenue of $1 million, [5%] decrease from one year ago. The segment lost $2.2 million, which was flat over the first quarter of 2007. Increase in salary and benefits expense is offset by decreases in professional fees and other expenses.

Slide 21 in the PowerPoint presentation compares our full-year 2007 guidance with our actual results. As you can see, we met our guidance for 2008 on a consolidated basis.

On the next slide, slide 22, we have given you details by segment for cash flow from operating activities for the quarter. Please note that we've included the EBITDA reconciliation in the Addendum section of this presentation should you desire to review it.

I would now like to turn it back to Barry.

Thank you, Seth.

Looking at our 2008 segment guidance for the remainder of the year -- as we have previously said, we are maintaining our guidance for the second, third, fourth quarter and to an annualized basis.

The highlights of this guidance are as follows. We anticipate in the Electronic Payment Processing segment to do somewhere in the neighborhood of $65 million to $66 million of revenue, drive $4.5 million to $4.6 million of net income, with EBITDA of $6.5 million to $7 million; as we've stated earlier, this segment has no debt.

Our Web Hosting segment -- we anticipate $18 million to $18.5 million of revenue; pretax net income approximately $3 million to $3.1 million, with EBITDA somewhere in the neighborhood of $6.4 million. Our SBA lending segment should improve throughout the remaining portion of this year to drive revenue somewhere of $10.5 million to $11 million. We anticipate throwing off a loss for the year -- about $1.75 million, with EBITDA about $1.5 million to $1.6 million.

EBITDA generated from the three Business Service segments of $14.8 million, and we anticipate generating revenues on a consolidated basis, looking at all of Newtek, in excess of $100 million, from $101.5 million to $104 million.

Operator?

Yes, sir?

We seem to have a bad connection. I'm going to call back in, and then we'll open it up for Q&A, okay?

Wonderful, sir. Thank you very much.

Thank you. We'll call right back in.

Ladies and gentlemen, if you will please stand by while we wait for the arrival of our moderator. Thank you.

(OPERATOR INSTRUCTIONS) Stephen Silk, C. Silk and Sons.

Good afternoon, everybody.

Barry, I always have to take a couple of Excedrin to be prepared to read your quarterly report. And so, it leads to seeing that the FASB 159 is taking place. But reading through the income statement, where there were some changes and a couple of line entries on the balance sheet, we still have the situation of what appears to be a lot of debt. And you have the credit, as far as assets. Is there any acceleration to when that runs its course -- as a goal, so that we're not even looking at the Capcos anymore, on either the balance sheet or the income statement?

Steve, I think -- I appreciate the question. And clearly, it is the goal of our company to not spend much time in discussion of the legacy Capco business. I think if you take a look at the financials that we produced in the press release, March 31, 2008 ending, you've got credits in lieu of cash of about $86 million, notes payable and credits in lieu of cash on the liability side -- maybe $5 million.

And if you go back, that had been mismatched, which would have created the issues in the income statement. The income statement now -- I believe FASB 159 has taken care of that mismatch, and that's what we spent a lot of time talking about today.

Your point is -- is there any way for us to take a look at that, both assets and liabilities? I think that's a question that I would pose to our internal accounting experts to take a look at those assets and liabilities to see where they fall under FAS 159.

At this point in time, it has been the Company's position that those assets and liabilities should be reflected. But we understand where you're coming from. They really do offset one another. They'll continue to offset one another going forward.

And I think just from the standpoint of leverage, which is, I guess, your comment, you were able to not have those on the asset or liability side -- all of a sudden, you've knocked your financial leverage down to $110 million on a capital base of $59 million.

So it definitely makes a difference. And it's just something we have to continue to look at. This was clearly a step in the right direction. It'll get us closer to being able to report GAAP earnings in the future. We're still at a GAAP loss. But I understand your position. Hopefully, we'll be able to take a look at that in the future.

Right, I would agree it's a step closer to making it easier to understand.

Okay, just a few other things. The 88,000 business accounts -- it was up sequentially nicely year-over-year, but up only about 1,000 over the last quarter. Is that a seasonality issue? Are you having net attritions in one particular area more than you might have expected? Any growth to make that up in another sector?

Steve, it's a good question. I think that we have experienced a reasonable amount of attrition in the portfolio. So as we're putting on new customers -- and even though you're getting revenue growth, what we are seeing in the economy -- and I do think that's a function of the economy -- is you've got businesses that say, Gee, you know what, we've experienced the majority of this attrition in our Web Hosting division. I may have three sites, four plans, five -- you know what, I don't need this plan, I don't need this site. And then you've got some businesses that are going out of business and shutting down. So I think that the slowdown in the customer count is somewhat more reflective of attrition.

On a positive note, thank God the attrition that we're seeing at this point is the weak players in the portfolio, and not of the bigger accounts, the bigger customers.

I guess overall, in this type of economy, just staying at a level account basis -- something to be said in the positive.

Back on the balance sheet -- the decrease in cash was about at $7 million in the quarter. Trying to look at the areas where you might have used that cash. Could you enlighten me on that?

Sure. I will give you a little bit of a broad comment and may rely upon Seth to be a little bit more specific.

But when you look at our cash position from quarter to quarter, we may use excess cash that we have on the books to fund additional loans. We may have various SBA government-guaranteed pieces that may not settle on March 31st and settle in another quarter. We did pay down, I'd say, $3 million to $4 million of debt and payables in the first quarter.

So I think when you take a look at that various different combinations of situations that went on in the lender and paying down of additional debt, that makes up for the primary differential.

So some of it could be a timing issue.

What about -- so there was the announcement that you bought 100,000 shares for that, so use of $100,000 in cash. Was that the only share repurchase that you made in the quarter?

What we do, Steve, is we have a policy that we report 100,000 increments with respect to purchases. And I think that you'll continue to see that consistency. So we have $1 million authorization. I believe we're currently a little over $300,000 in purchases against that authorization. So the next time you'll see a comment on that from the Company, it most likely will be us crossing a 400,000-share hurdle.

Okay, I was only asking in regard to the use of cash for that purpose.

Yes, that's right.

It's not that material.

I'm looking at the revenue by segment. And I know -- to me, it sounded like you've laid a lot of groundwork and have spent a lot of money to grow in areas perhaps other than your main three -- the Electronic Payment, the Web Hosting and the Small Business Finance.

So I'm looking at that as expenses that are going out. And we really are not yet kind of seeing any revenue that has made up for the groundwork that you've laid. Am I kind of categorizing that correctly? And where do you see when that might -- we might see a jump in that? And is there a category killer there that might become your fourth main line of focus?

Okay.

I'm going to answer your question with a yes. But I'd like to circle back. And also, as I was listening to your second question, I think I can also help answer the first.

One thing I think that is of importance when you're looking at liabilities and cash balances -- and we did try to emphasize this -- is the reduction of the deferred tax liability, which -- if you go back, and you take a look at the deferred tax liability, it was at $17.8 million on Dec. 31, '07, and it's at $7 million, which is a combination of FAS 159 and the loss. So that's almost a pickup of $10.8 million of cash that would have went out the door. So if you are looking at sort of following cash for the first quarter, I think that was a very positive step.

Now to answer your second question, which related to increases in expenses that we've had in the Web Hosting segment -- I'll address that division. I don't know if you were also referring to lending. But what we're dealing with right now in the Web Hosting segment is -- and we try not to do too much whining about the economy, this -- I don't believe in that. The economy is the economy; everyone's got the same issues.

But the reality of it is that clients are choosing lower dollar-oriented plans. The lower gross margins are in the lower dollar-oriented plans. So we do have excess capacity to do more dedicated business and drive bigger dollars. But it clearly has been a challenge.

In terms of coming up with a category killer -- I think our position of going out to IT partners, Web developers in a real, bona fide outreach program; giving them a real value-added proposition, which is giving them the ability to market our business services to their customer base and give them a revenue share, which no other Web host can do -- give them the ability to offer loans to their customers, give them the ability to offer receivable financing -- these are all real value-added propositions.

Not an easy thing to do, but we anticipate rolling this out in the third quarter on a bona fide basis. And we're making some adjustments in-house to be able to position ourselves to do this. But I will tell you there are some headwinds in the market today, and it's become pretty competitive.

Right.

And just on the Small Business Finance -- while the environment seems to be the most obviously tough of your segments, is that an area where you, if the economy turns around, can be your biggest area of growth, do you feel?

Basically, having a lending background, this is a segment or a division from us that I agonize over a little bit. On the other hand, it is a specialized kind of lending; it is small business lending. And we do have a real good facility, with a good process.

We've not found the sweet spot to loan originations. Given the way this business works, there's tremendous operating leverage in it. We've got the capital, we've got the lending capability, and we've got this fixed cost. We're just not levering the capital that we have deployed in the business.

So this is a business where if -- due to some of our competitors, like BLX, or some of our other competitors that have effectively gone out of SBA lending -- Business Loan Express owned by Allied, and some of our other competitors that have significantly curtailed their lending options, and we're getting a lot of their originators coming to us looking for funding. This is something that can turn around quite easily without taking any risk, making the better loans in this market. And all of a sudden, these losses can turn around and turn into profits quite easily.

And that's what we believe and anticipate will occur over the next several periods and over the next several years. We are banking on and hopeful that our lending division will turn around and generate profits for us.

Thanks for taking my call, Barry.

Thank you.

[Suman Kaur, RedChip Company].

Yes. Hi, Barry.

Hi, how are you?

Yes, I'm fine. How are you doing?

Good, how are you doing today?

Yes, I'm doing good.

Well, though you have given enough insight about the Small Business segment (inaudible), will you have any tightening [of] the underwriting guidelines regarding the lower approval of loans? Even in this quarter the Company suffered loss in the lending segment. Do you have enough funding available? So what's the [plan] going to be in the future? (inaudible) number of [rituals]?

I think your question was -- do we have enough funding and capital available to grow the lending business? And the answer --

No, what I want to understand is, what -- I mean, (inaudible) [in the past], when the [EBITDA] (inaudible) the number of [rituals] is not very high, [though] we had been very stringent about the underwriting guidelines of loss.

Correct.

So going forward, what [is the string] you're expecting to be, [as in] the rate of approvals to the number of [rituals]?

I think that what we anticipate seeing is participants that used to give other lenders their originations. Our competitors are now tightening and going out of business. We are now seeing offerings from those funding sources.

Newtek has been in the small business lending space for five years. Frankly, it's been a good five years for lending in general. Newtek is now developing the reputation for being a small business lender in this space. So now, instead of seeing third- or fourth-choice opportunities from these types of participants -- because they give their better stuff to the other providers -- we're moving up in the food chain.

So without having to loosen our underwriting guidelines, but keeping our underwriting guidelines tight -- and I'll just give you a simple explanation of what that means. We are less apt to do a startup business with a 15 to 20% down payment on a loan. We'll want, if we're going to do a startup, a more significant down payment; a business that's had an -- where the operator might have a long-term history in the business.

So I think that our position is -- and what we're seeing and believe will occur in the second quarter -- and what we're experiencing is more offerings of better-quality loans coming to us in bigger volumes, as the competitive environment is lessening for lending.

Right, that's great, that's [right].

Thank you all.

Thank you.

(OPERATOR INSTRUCTIONS) Harris Hall, Round Hill Asset.

Hello there.

Hi, how are you?

Fine, thanks, Barry. How you doing?

Good. Doing great, thanks.

Trying to understand a little bit -- and I appreciate how detailed your slides are here; it definitely makes it a little bit better for us -- trying to get a sense of when you reach either free cash flow profitability or EBITDA profitability on a consolidated basis, setting aside the Capco expenses.

Okay.

Harris, last year, in 2007, we had cash flow from operations -- which is kind of a tricky measure, because that can go up and down depending upon what you're doing in your lending business -- of negative $2 million. And we had a $1.8 million charge from the EPP business that affected that number. So we're pretty close to a push or a breakeven.

This year we had some headwinds obviously in the lending business, some headwinds in the Web Hosting business. Without getting too far out on a limb from a forecasting perspective, I'm hopeful that we'll be -- I'm just going to -- this is not official guidance, and I realize that I'm on a conference call -- plus or minus a couple of million dollars, and most likely will probably be minus a couple of million dollars with respect to cash flow throughout the course of the year. Now that could change, but that's sort of our best guess at this point in time.

What's going to turn that around to where you could see EBITDA including the holding company change -- we've got some very significant participants in various different business segments -- alliance partners that are coming on-stream -- that will hopefully give us lift from our insurance agency.

One of the questions that was posed earlier is, what is it going to take for your lending business to turn around? You put on another $20 million, $25 million of loan originations, which we think we've easily got the capacity to do, and have the infrastructure to do. That'll turn it around; then generate a couple million dollars worth of cash flow.

Couple of these alliance partners will increase the cash flow, couple million dollars in each -- the EPP segment and the Web Hosting segment. It's available. We have not given '09 guidance at this point in time. Maybe in the next quarter or two, we'll go out and take a look at that. It's a little hard to forecast in these economic times.

But we don't think it's going to be difficult for us to be able to go from where we're currently EBITDA-negative to EBITDA-positive, including the holding company. We're definitely playing in the small business space for a big play; it's a big market. We think we've got an operational methodology and a strategy that can grow this business significantly.

So we think it's clearly worth the Company redeploying a couple million dollars in cash here and there into businesses to get the third, fourth and fifth engine running, to generate positive cash flow and positive profits. Because we think that you get a big payoff at the end if you do that, and be able to demonstrate that you could actually acquire and process small business customers and process the business in the back office cost-effectively.

At the end of the day, you're a smart investor. Equities are very option-like in their structure. We clearly have value inherent in the different business segments. And we think that we're making a significant and appropriate investment by plowing back some of our excess cash flow to get our lending business turned around, to get our insurance business with some lift. That'll be able to also generate maybe a fifth or sixth business opportunity down the road.

Okay.

I'm just looking at your '08 guidance. The corporate activities -- I think of that as kind of G&A and overhead, but you've got it generating $4 million in revenues. How should we think about revenue generated by the corporate activity segment?

I'm going to let Seth give you a very technical answer of how that segment is classified. It's not laid out where it's just corporate overhead. There are a confluence of events going on in that segment. I'll let Seth answer that.

Okay.

I can help you, if you need it.

Well, I was going to say, the segment -- the revenue is from the Capcos that we operate. So you would see -- if you look at the guidance on the next page, you'll see -- well, you can't see it on these. But essentially, when you get our new 10-Q, you'll see the relevant accounts or management fees that flow from the Capco segment into the corporate activities segment. Because the corporate -- one of our corporate activities is managing and operating the certified capital companies.

Otherwise, the expenses are a combination of -- yes, there is corporate overhead. But because we've centralized our entire sales and marketing operation, and because of the one Newtek effort to sell across all of our segments, the corporate activities is much more than simply corporate overhead.

Barry can go into more detail. But essentially, our NewTracker system, all the relevant pieces to NewTracker, the personnel behind it -- the [BSS] is our whole system for aggregating referrals -- the referral contracts, the way that we supply the Electronic Payment Processing, Web Hosting, Small Business and the other entities, with their potential sales leads all come through the corporate activities area.

There are -- besides those, you have outside entities as well that sell [to] -- we do more than that. But essentially it's all -- most of it is organized through corporate.

So the $8 million EBITDA drag that you're guiding to in '08 -- in future years, would you expect that to go up, go down, be the same? I'm kind of looking at it as Capco goes away, but you've got some increase in maybe commissions or overhead. So is that a wash? Is that $8 million --

We don't think that -- we don't think our corporate overhead should increase in any significant manner. We think we'll get significant leverage out of a full-blown accounting staff, legal staff, HR staff, IT staff; at the cost of being public, for the most part. I don't believe those are variable costs at this point in time.

So you'd expect that $8 million drag to kind of just continue (inaudible) --

[Steady].

-- over future years?

Yes.

Okay. Because that's a big number for you guys to overcome with your operating segment.

Yes, it is.

And the all-other, the $3 million EBITDA drag there in all-other -- those are kind of your newer businesses you're just investing in getting off the ground?

That's coming from things like the insurance segment. What other stuff is in there?

Business Connect is in there.

And I've got a couple of qualified businesses that are also sitting in that segment that are a drag at this point in time.

So insurance is not rolled into the Small Business Finance segment?

No. No, that's in the all-other segment.

Okay.

Small Business Finance consists primarily of our lending operation, which is the SBA lender, and the company now called Newtek Business Credit, which is a factoring company -- purchases receivables.

Okay.

And then again, looking at this another way, what would be -- without putting you on the spot for guidance years and years out -- what would be kind of a revenue run rate that you would associate in your mind with positive EBITDA, and maybe even positive net income or positive free cash flow?

Historically, we've always gone to the 20% default number. But I'm a little reluctant to make that comment, particularly given where we're running this year, and looking at what's in front of us with respect to the economy.

I will do, on the other hand -- I think we're at such low base levels in the SBA business and in the small business lending space, and in the insurance segment, that we are hopeful and optimistic. But that's really where we're going to get the lift, as well as continued growth in EPP, and enabling us to get some additional traction in the Web Hosting division.

So you don't want to put a specific revenue number, like $150 million or $200 million, where you break even?

Not unless my -- I want my compliance officer or my CFO to stuff a sock in my mouth. But no, Harris, can't do that at this point. But we understand what you're looking for.

Okay.

But just -- right now, we've just given guidance for '08, which is a little over $100 million, with practically all of that coming from Business Services.

Right.

How much is coming from the other?

It's almost all coming from Business.

It's almost all from Business Services, which -- once again, in past presentations, we've sort of gone over percentages. I think in 2005, 35% of our revenue was from Capco. I mean, we've made almost a complete shift and flip-around.

In 2003, we had virtually no revenue from Business Services, so we've gone from zero to 100 in about four years.

Okay, great, that's very helpful. Thank you.

Thank you.

Thank you. And with that, we have no further questions. Mr. Sloane, I would like to turn the call back over to you, sir, for any further comments or closing remarks.

Great, thank you, operator.

Well, I appreciate the attendance of everybody and the questions, and the patience. I realize this is a challenging market. But we feel we're very well positioned. We've got some good strategies and look forward to reporting a good second quarter.

And we'll see you all in about 90 days.

Thank you.

Ladies and gentlemen, that does conclude today's Teleconference. We would like to thank everyone for their participation on today's call. Have a great rest of your day.