NewtekOne Inc (NEWT) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Newtek Business Services, Inc., second quarter 2010 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions)

As a reminder this conference call is being recorded. I would now like to turn the call over to your host, Barry Sloane, President and CEO. Please go ahead.

Thank you very much and welcome to our second quarter 2010 financial results conference call. I'm here today with Seth Cohen, our Chief Financial Officer. And for those of you that would like to follow our PowerPoint presentation for our conference call, you can go to our website, www.newtekbusinessservices.com, go to the Investor Relations section, and our PowerPoint presentation is there on display.

Seth, could you 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 material from the plans, intentions, and expectations reflected in our suggested by the forward-looking statements. Such risks and uncertainties include, among others, intensified competition, operating problems and their impact on revenues and profit margins, anticipated future business strategies, and financial performance, anticipated future number of customers, business prospects, legislative developments and similar matters. Risk factors, cautionary statements, and other conditions which could cause Newtek's actual results to differ from management's current expectations are contained in Newtek's filings at the Securities and Exchange Commission and available through www.sec.gov. Our CAPCOs operate under a different set of rules in each of the seven jurisdictions, in that these place varying requirements on the structure of our investment. In some cases, particularly in Louisiana, or in certain situations in New York, we don't control the equity or managements of the qualified business, but that cannot always be presented orally or in written presentations.

Back to you, Barry.

Thank you, Seth.

We're very pleased with the results of our second quarter performance across the entire organization. It's clear that our business strategy and our ability to execute it, as well as the understanding by the marketplace of who we are and what we're doing, is falling into place.

Focusing on page three, the PowerPoint, looking at second quarter 2010 highlights, we clearly announced net income of $931,000 which equals about $0.03 a share. Pre-tax net income came out to about 460 -- excuse me -- after tax net income came out to about $464,000 positive for the six months ended June 30, 2010. We also revised our guidance on a consolidated basis. We tightened the range and raised the midpoint to $800,000 pre-tax net loss to a $1.9 million pre-tax net income with a midpoint of approximately plus $0.5 million. So that's up $0.5 million and a tightening of the total range for Newtek Business Services on a consolidated basis.

Looking at the second quarter, we have a 3% revenue growth year-over-year. We also announced consolidated pre-tax net income of $514,000, which was $1.3 million improvement over the year prior. We looked at Q2 2010 consolidated post-tax net income, that was approximately a $1.6 million improvement over the prior year. The prior Q2, 2010 revenue trends both in our EPP and web hosting business continued to be strong showing 17% growth for the quarter year-over-year.

Some further 2010 highlights, looking what it we did for the first six months of the year, overall consolidated revenue growth of approximately 5%. We announced a consolidated pre-tax loss of $360,000 for the sixth month. That was a $2.5 million improvement. We also announced a consolidated post tax net income of $464,000 for the six months. That was a $2.1 million improvement. The revenue trends for 2010, both in the EPP and hosting for that six month period of time, very strong, 16% increase year-over-year. When you look at the segments, clearly we had a very nice increase in small business finance, posting a pre-tax net income of $557,000, versus a loss of $748,000 in the year prior. EPP was a major contributor to our better performance in the second quarter. We had revenue growth of 21%, pre-tax net income growth of 29%, and EBITDA growth of 19%.

We have a fairly significant agenda to go over for the second quarter call focusing on our strategy, financial results of the snapshot, developments in the important segments. A lot going on, our small business finance segment, our market focus, a financial review, and our 2010 outlook. As we look at our cash flow performance for 2010, we're forecasting approximately $5 million of depreciation and amortization, so you can clearly see the Company is generating cash flow. When you add that back on to the expected midpoint of our guidance, which is about plus $500,000. Lender projections for 2010 and variables, there's frankly a lot of variables moving up, and we'll talk about that when we get into the lending segment. We have had success in our FDIC contract. We'll talk about that. Our EPP business continues to grow despite the fact that overall retail sales and same-store sales appear to be sluggish in the economy. Web hosting segment, we've had good success although our growth has slowed a little bit. And I think most importantly, we continue to grow our cash flow and watch our expense line.

When we look at the revised projections for 2010, and I'm on slide number nine, the most significant was an electronic payment processing space where we were originally $5.6 million to $6.5 million. We revised that up to $6.7 million to $7.2 million. Our web hosting, we took the high end of the range down from $6.2 million, to $7.2 million, we took it down to $6.2 million to $6.6 million. Our small business finance, we had a nice increase from $3.4 million to $4.3 million. It was $2.8 million to $4.8 million. And the other two segments, all other incorporate activities, we left unchanged.

As we look at our strategy of focusing on the small business authority, our clients are finding, that in this difficult environment, they clearly are welcoming our initiatives to reduce their expenses, grow their revenues, and reduce their risk, and take more than one product. Our seven core offerings are doing exceptionally well. We've been able to demonstrate that we can cross-sell and cross-market into our database. And clients are coming to us because we know small business and we are the small business authority.

As we discussed earlier, when you look at the quarter-over-quarter comparison, EPP did real well. Web hosting, marginally up. And small business finance up significantly. So EPP up 21%, hosting up 2%, small business finance up 24%.

On a pre-tax basis, we also had nice -- significant gains both in EPP and small business finance. EPP was up over 29%. Small business finance had a $1.3 million delta. Web hosting had a significant increase of up 30%. I believe that was primarily driven by some goodwill and depreciation -- I should say, depreciation running off, that primarily drove that number.

When you are looking at the cash position of the Company, and we use broker receivable, which is basically the receivable that we get from broker dealers as we sell the government SBA piece, our cash position is pretty flat. However, we're paying down debt, particular with our Capital One line, and we've also increased the amount of uninsured loan participation. So overall, we're doing a good job of generating operating cash flow and we continue to pay down debt in our Company that is not highly levered.

Slide 13 is a new slide to our presentation. I think it's an important slide to take a look at. When you look at the total assets of Newtek of about $150 million, I'd like to call attention to $21 million and $43 million asset, and the $21 million and $43 million liability. Both of these assets and liabilities are byproducts of fair market value accounting. If you focused more specifically on the tax credits in lieu of cash and the notes payable in credits in lieu of cash, these are the tax credits from the legacy CAPCO business that we used to pay the interest expense on the notes. And effectively there's no cash changing hands in that particular side of the transaction. On the SBA loans transferred subject to premium recourse, I'm going to leave this discussion, I guess up to (inaudible) and Seth. I think this is driven by FAS 166. Seth, do I have that right?

Yes. That's correct.

And it's based upon fair market value accounting. I believe both these asset and liabilities are non-cash affected. So at the end of the day, if you were to deduct the $64 million from the $115 million, you get down to about $90 million of assets against $54 million. We're a far less levered company than some people think. And obviously we've talked about our legacy businesses in CAPCO.

If you go to slide 14, you'll see how the balance of tax credits will be declining and has declined. I think we began this year at about $50 million of credits approximately. We anticipate being down for $35 million at the end of 2010. You get a real nice jump in about a year and a half from now in 2011. Those tax credits will be down to slightly above $15 million, and in 2012, we'll be down to a seven-figure-type number. So we welcome, obviously, and have had as a goal for a long period of time, reducing the effect of CAPCO on our income statement and balance sheet. This will clearly help us on the balance sheet side of the equation.

We talked about electronic payment processing before. We've had really good success. We like the business a lot. The long-term trends in electronic payment processing are good as the markets are moving away from checks and cash. The proliferation of debit cards in particular, are very significant, and all forms of electronic payments. We have a great position in this space, particularly as we position ourselves as a significant e-commerce provider where we can really be a one-stop shop with respect to the website, the hosting provision, the gateway, and the ability to process the payment, both on the book and buying side as well as the customer service aspect of it.

Web hosting. Growth on the revenue side a little bit sluggish. It is a challenging market. There's a lot of cost cutting being done in the hosting arena. The low end of the market in particular very difficult to compete in. We're moving upscale a little bit, but still providing that great level of customer service to our smaller price point-type shared hosting accounts. When we look at hosting and EPP our view is they go together. They're ham and eggs. We are a one-stop shop. We've had some really good success in NEWT Pay. NEWT Pay is currently comprising close to about 20% to 25% of our unit closes. Obviously they're smaller volume accounts. Tremendous competitive of product versus PayPal, and we are going to continue to press on that particular product with our customer base, particularly technology based resellers, designers, and developers.

Our free website offering, we're pushing out into the market. Some of our competitors have been very aggressive in this particular market. To be frank with you, our offering is very competitive, and we hope to have a better success on that in the future.

I think the biggest swing in variability -- in variance in our Company is what we're doing in the lending market. We've been talking about lending for awhile. Last year, I believe we had losses that were equal to about $2 million in lending. This year we're looking for a much better performance out of lending. I believe we're looking at a midpoint somewhere around $2 million. Am I right on that, Seth, for the segment?

Yes.

And so that's a $4 million swing. We fund the $14.4 million of SBA 7(a) loans in the second quarter of 2010. The pricing in this market looks very strong. We've got our forecast based on a, a $1.095-type price, and we've actually gotten dollar prices that are higher than with fed funds rate and LIBOR rate at real low levels. A full faith and credit US government flow of 50 with a yield curve that has a steepness to it. Extremely attractive. So these 90% and/or 75% government guaranteed bonds appear to be good, very strong, and that obviously drives income and pricing, and financial leverage.

As we have mentioned, we recently, in the prior quarter, had refinanced ourselves with Capital One bank, which replaced GE. We're doing exceptionally well. We recently announced that we received a Standard & Poor's rating as a commercial servicer which positions us very well to grow the service inside of our portfolio.

On slide number 21, the total service and portfolio that we're getting monthly reoccurring fee income on is about $269 million. That's -- I'm going say that's up probably close to $70 million to maybe $100 million year-over-year. I don't have that figure exactly. That's a guesstimate on my part. We also have an additional $30 million worth of loans that we are servicing, but not getting income from because they're in the non-performing category, either for our own portfolio or for others.

We're going to take the time, looking at slide number 23, to announce that we are moving expeditiously on securitizing the uninsured loan participations of our portfolio. Stay tuned for an announcement in that particular area with respect to the SBA 7(a)s. We're seeking a double-A rating and hope to be announcing an engagement shortly with an investment banker to actually securitize that portion of the loans that are sitting on our books. That will help us significantly in terms of giving us term financing and improving our cash position and overall leverage. As we mentioned earlier, our guidance is based upon under $1.10 pricing, and we -- in more recent times we're getting pricing from $1.10 to $1.12. We also are obviously aware of the fact that the SBA has run out of issuing new 90% guarantees. That occurred at the end of May. And our guidance going forward is based upon 90% that we currently have commitments to from the SBA and the pipeline, and the remainder at 75%. Our guidance is based upon what we know we can do.

We think that there is still a reasonable chance that given the support that the Obama administration has, and the democratic side of the House and a few Republicans, there's still a good chance, I won't put a probability on that, that we do get a 90% guarantee from the SBA 7(a) program. The vote actually fell one vote short in the Senate of being able to get out of debate and be a filibuster-proof opportunity, but the SBA program is rolled into a $30 billion financing program to provide capital to community banks. I believe our non-bank lender would also possibly be eligible for that inexpensive capital. Our view of it is that the -- that Washington should focus primarily on the SBA 7(a) program. The cost of doing another $16 billion or $17 billion worth of loans in a 90% guarantee would equal somewhere around $0.5 billion dollars. Not a small amount of money in historic times, but given the dollars in the bang for the buck and the ability to put up that many small business loans under the 7(a) program, it's clearly something that we hope Congress pays attention to. The key voters would be Olympia Snowe, who is a sponsor of the bill, and representative, I believe it's pronounced, LeMieux, who is a Senator from Florida. Both are backing the bill on incline, but were upset that they were not able to actually issue amendments. This is a very politicized piece. It's unfortunate. But we're optimistic that as we move into September this happens to be one of the bills that is on Harry Reid's agenda, I believe as of September 15 to push forward for a vote again in the Senate.

Securitization market is back, and that's why we're optimistic about being able to get something done in the market. Part of that is because you've got a two-year treasury at 50 basis points, you've got a three-year treasury at about 70 basis points, and when you look at our SBA loans that have got gross coupon of 6% and full bank and credit floaters, clearly an attractive asset to be able to structure this escrows and securitize up.

If we have good fortune, and we're hopeful, our guidance has about $35 million in it for the third and fourth quarters. It's not inconceivable we could break that to do higher amounts of loans. There's clearly a demand for it. Our guidance is based upon 75 predominantly in the fourth quarter, if it comes 90s, we could have some nice, a nice up-side move in the lending side of the business.

We're also seeking to grow the servicing side. We did have some nice growth this year on a percentage basis. Hopefully, in the last two quarters of this year we'll be able to add some nice volume. We also anticipate announcing some very, very large new alliance relationships that are interested in working with the small business authority. Our growth strategy going forward is to clearly expand our marketing reach where historically, we've been very alliance driven and dominated with in-bound pushing the small business authority out, changing our website, becoming a destination resort with content for small businesses all across the country will be our goal, and we plan on launching our website and a lot of new information and data and content for small businesses in October.

On slide number 25, refocusing back on CAPCO, clearly we're interested in reducing the balance sheet effect of CAPCO. We talked about tax credits declining, and notes payable, and credits in lieu of cash. That would help the balance sheet. There's four particular states, D.C., Texas, Alabama, and Florida, which we believe we will get to voluntary de-certification in the near term. That is a term of art, according to the statute, means that the CAPCOs basically go away. In Florida -- the Florida CAPCO will sunset per state law in December of this year. We believe that in Alabama we anticipate getting to the 100% mark by the end of this year. In Texas, we have about $8.3 million worth of financings to go. We think that is reachable within the next year and a half. And in D.C., I would say a year and a half is the goal. Hopefully we will make that. The New York based CAPCOs, of which there are five, Louisiana of which there are four, and Colorado one, will take more time and effort.

We talk about the CAPCO drag. Clearly there is a leverage aspect. We talked about it before. There's significant management time of the CFO, the Chief Legal Officer, and myself. I say significant, that could be in the range of 5% to 10%, but in today's world that is significant. You have the accounting cost as extra financials that are due, and the internal work, both external financials that are prepared by the (inaudible) auditor, and the internal work to keep those CAPCOs up to date, and other miscellaneous costs.

As we look forward clearly at the small business authority, increasing sales, reducing expenses, and reducing risk, and really giving our customers products that they can pick on to achieve those goals and objectives is very, very valuable. We have begun to roll out Newtek University. I think we're in about the fourth week of that. We've had some real good success. Employees are getting better educated. Our cross-sell and cross marketing efforts is picking up. And I can see in that the referrals that are coming in and the increasing amount of closes. By doing this, we get tremendous amount of, frankly, employee operating leverage. We are one Company. We need to give our employees the tools they need to execute on our objectives, and Newtek University basically educates each employee, gives them a base level of product knowledge. We anticipate being completed with our first phase of Newtek University and educating our entire staff by the end of December this year.

Moving forward to our marketing strategy, we talked about increasing our outbound effort. We've continued to advertise on WFAN which has been successful. In the fourth quarter as we roll out and announce our new website, the small business authority, with some of our new joint venture partners, we also plan on announcing a Newtek business poll and a Newtek business index. I think that's going to be pretty exciting. Stay tuned for that. We've done some real good work on it, and we believe that small businesses will be very interested as a Company that is an authority on small business that has reached into a very large customer base and data all affecting small businesses will come to us to be able to track economic performance and issues the small businesses are interested in.

Lastly, before I turn the presentation over to Seth, and we have pointed this out previously in the press release and earlier in the presentation, we have revised our 2010 segment guidance. We've tightened up the upper and lower bands in revenue, as well as in the key segments of payment processing, web hosting, and small business finance. We've improved our guidance in payment processing. We've improved our guidance in small business finance, and that is reflected by our expectation that the midpoint in our guidance will yield us a $500,000 pre-tax profit this year, and we are looking forward to reporting our first GAAP pre-tax profit in a long time. And you can take a look at that effect on the bar chart on slide 53, and the chart on 54.

And with that, I will turn the presentation over to Seth Cohen.

Thanks, Barry.

I will now review our second quarter 2010 results. For the quarter ended June 30, 2010, we recorded pre-tax income of $514,000 as compared with the pre-tax loss of $775,000 one year ago. We had net income of $931,000, or $0.03 per share in 2010, compared to a net loss of $637,000, or $0.02 per share in 2009. Net income benefited from a partial release of an income tax valuation allowance. Revenue increased by $929,000, or 3% to $28 million compared to prior year. This is primarily attributable to the growth in our electronic payment processing, web hosting, and small business finance segments. We should also note that under FAS 166 that Barry talked about before, we did not have the benefit of booking as revenue the premium from the transfers of our guaranteed pieces in the first two quarters with the minor exception I'll go into.

If you turn to slide 57, we began the year with $12.6 million of unrestricted cash and cash equivalents, and ended at June 30, 2010, with $7.8 million, a decrease of $4.8 million. The decrease in cash early reflects the volume of SBA guaranteed portions originated and traded near quarter end, with their settlements coming after quarter end which resulted in a $1.6 million increase in our broker receivable to $8.1 million, as well as movement of cash into restricted cash due to the operation of our new term loan. Cash, restricted cash, and the broker receivable totaled $25.2 million for quarter end, down slightly from $25.8 million at year end, primarily reflecting our SBA lending and receivable purchasing activities and catch-up of expenses accrued in 2009 and paid in 2010. Increase in bank notes payable reflects an increase in the line that supports the receivable purchases offset by pay-downs on our new term loan from Capital One.

I would now like to review the performance by segment. If you could turn your attention to slide 58 in the PowerPoint presentation, you will see the comparison of our second quarter 2010 results versus the second quarter of 2009. Electronic payment processing segment revenue increased by $3.5 million, or 21% in the second quarter of 2010 to $20.4 million, predominantly due to organic revenue growth from a combination of growth in our merchant count and an increase in process volume per merchant. Pre-tax income increased 29% to $1.4 million for second quarter 2010, compared to $1.1 million for the second quarter of 2009. Although the amount of revenues was electronic payment processing costs, or margin, as percent of sales declined quarter-over-quarter, our margin increased in dollar terms. This, although slightly offset by costs other than electronic payment processing costs increasing 4% between years, resulted in improved pre-tax income.

Web hosting segment revenue increased by $107,000, or 2% in the second quarter of 2010 to $4.8 million from $4.7 million in 2009. The increase is due to a combination of improved revenue receipt per plan and organic growth of virtual instances and hosted dedicated servers. Shared websites decreased period-over-period. Pre-tax income increased 30% to $277,000, to $1.2 million for the second quarter of 2010 from $917,000 in 2009. The improvement in profitability primarily resulted from the decrease in depreciation amortization. The decreases in other expenses offset the gain in revenues.

Small business finance segment revenue for second quarter 2010 increased by $379,000 from 2009, or 24%, to $1.9 million due primarily to a $249,000 increase from servicing fee income primarily associated with the FDIC contract. The Company recognized $193,000 of premium income for loans that had been sold in the first quarter as warranty period expired in the current quarter, as required under ASC Topic 860. The segment recorded pre-tax income of $557,000 for the second quarter of 2010, an improvement of $1.3 million as compared to the pre-tax loss of $748,000 in 2009. Segment benefited from the recognition of a $1 million gain from the fair valuation of the liability, liability for SBA loans transferred subject to recourse. The liability created upon the implementation of ASC Topic 860 which we had discussed last quarter.

Slide 61 and 62 show the effects of ASC Topic 860 on a simplified basis. By electing to fair value the liability to its true economic value for segments the Company benefited by recognizing the difference between the premium amount received on the loan portion sold and the likely lesser amount to be returned to the transferee prior to the expiration of the brief warranty period. The Company will recognize the revenue later in the year when the transactions are accounted for as sales under applicable accounting standards. Although ASC Topic 860, also known as FAS 166, changed the accounting treatment for the sale s of these loan, it did not change the operation of the Company's SBA lender and therefore neither the economic benefit nor the effect on the liquidity of the Company from originating SBA 7(a) loans.

For 2010 the pre-tax loss in the CAPCO segment decreased to $666,000, for 37% compared to pre-tax loss of $1.1 million in 2009. Reduction in loss primarily reflects reduced management fee expense period-over-period. For 2010, the all other segment had a pre-tax loss of $215,000 for the quarter. The $770,000 decrease from 2009 pre-tax income of $555,000. The change to loss primarily reflects a one-time $1 million gain recognized in 2009, but not repeated in 2010, offset by $168,000 reduction in expenses.

In the second quarter of 2010, corporate activities recorded revenue of $532,000, a $393,000 decrease from $925,000 one year ago. This decrease is primarily due to reduced management fees for our CAPCOs. Management fees are expected to continue to decline in the future as CAPCOs mature and utilize their cash. Our efforts to reduce costs resulted in $165,000 decrease in total expenses compared to 2009 for the segments. As a result of the decrease in management fees offset by the reduction in expenses, the corporate segment increased pre-tax loss to $1.7 million compared to a loss of $1.5 million in 2009.

Finally, slide 59 again reflects that we are improving our previously issued guidance for 2010. Based on operations to date and our forecast for the remainder of 2010, we have narrowed our range for full corporate revenue for 2010 to $110.1 million to $114.1 million, and our range for pre-tax net income or loss in 2010 to a range of a potential loss of $800,000 to potential income of $1.9 million. The change from a potential loss of $2.4 million to income of $2.3 million previously provided as guidance. Improvements in the electronic payment process and in small business finance segments primarily drove the change.

I would now like to turn it back to Barry.

Thank you, Seth. Operator, we'd like to take questions now.

Thank you. (Operator Instructions) Our first question comes from Keith [Rohloff] with National Security.

Barry, great quarter. I guess my question is, with the Small Business Lending Bill that's before Congress, if that were to, in fact, pass is there any way to quantify exactly how that would affect Newtek as far as your revenue guidance and that income guidance for this year or for next year?

Hard to quantify, but I can give you some -- I guess what I'll call macro parameters. Back in June 2010, and there have been a variety of different versions of House and Senate bills relating to SBA, and I'm going to tell you, these are the three major components that affect us and borrowers. Component number one, the waiver of guarantee fees that the borrower pays. That's attractive to the borrower. Item number two, the difference between a 90% guarantee and a 75% guarantee. And that's significant, obviously, because you've got 15%, when you seek to do, let's say $100 million worth of loans, that's a difference of $15 million. So, you're looking at, A, an additional $15 million of gain, because it's full faith and credit, versus uninsured, as well as levering capital.

The other aspect of 75% versus 90% is, gee, how long does that go for? What they were trying to do was put it in place so that it would go from July through the end of the year. Six months. It wouldn't be shocking to me if they did pass something, say in September, where they push it forward for another full year. I think that it's a bill that is very friendly. I mean -- put it this way. If this was stand alone and wasn't part of a lot of other government spending, this would have total bi-partisan support. It's -- Olympia Snowe, for example, sits on the committee, she's a sponsor. LeMieux. So, that's one aspect of it. In other words, how much and how long do you get 90%s.

The other aspect of the bill, and this is a big one, is raising the minimum loan size -- I should say the maximum loan size from $2 million to $5 million. That takes a program that we're involved with, and I won't to say it multiplies it by two and a half times, because you don't immediately double your loan size, but it could increase our volume by 50% to 75% because, number one, a lot more borrowers are going to qualify for this. And then the question is, part of the bill has legislated the $5 million at 90%s for a period of time versus a cap on the guarantee, because you could do a $5 million at 75%, you could do a $5 million at 90%. Really hard to quantify, but I feel pretty comfortable that if this passed, I'm going to -- it could have a seven-figure effect.

Okay. All right, thank you.

Sure.

Thank you. Our next question comes from Paul Solit with Potomac Capital.

Hi, it's P.J. Solit. So, business looks good, all the segments look good. It was nice to see the margin rebounds in both EPP and web. I guess my question is, on EPP, looks like about an 8.6% EBITDA margin, which is up from 8% last quarter, but that's still below the double digits we saw in '08. Is it possible to get back towards the '08 type margins, or is there something structurally different here?

I think, P.J., that the market is just gotten very competitive, and until we lose more competitors, it's going to be hard to get back to double-digit type EBITDA margins. Now, also I have to say that a lot of it depends upon the type of business that you put on. We're very focused on low risk. And there was a point in time where Internet-based business was viewed as a higher level of risk by the market. We didn't view it as such. And it hasn't been. So, I'm going to say that double-digit type margins could be tough for us to get back to, when you look at EPP as a segment alone. As we look at revenue per customer, which we currently don't measure. If a customer is coming into us, however, and they're taking EPP, and they're taking down a gateway and a hosting plan, our revenue per customer, margin per customer does go higher.

So, these are competitive markets, competitive times. We are not, and we've said this before, we're not optimistic on the economy. Our growth is not based upon us riding an economic boom. It's based upon market share, having better products and doing a better job for customers. So, I know that was a long-winded answer, but not wildly optimistic about those margins.

Got you. The return on assets still look great. All right, my other question was on the legislative outlook, so we covered that. That's it. Thanks.

Thank you.

Our next question comes from Marc Silk with C. Silk and Sons.

Is this the same Barry Sloane that's on Fox News now? You're a media star. Let's see, Barry, another good quarter. You know what, I want an opinion piece from you, I -- without putting the government issue. Let's put the government issue to the side. What are you hearing from small businesses as far as your biggest challenges, head winds, tail winds, et cetera? We all know about the Obama Care, et cetera. But what are they thinking, saying, et cetera, because again, you have a good, let's say, vision.

Yes, I think in order of importance, there's not a small business out there that isn't forecasting a 20% rise in their healthcare costs. That's number one. For businesses that are in need of capital, banks still aren't lending, and they're very receptive to working with us on our programs, both the SBA program, merchant cash advance, and receivable financing.

Hiring, not happening. The overall business outlook and forecast for that small to medium size business owner is not positive. So they've got pressures from, A, being unable to finance, costs going higher. They're definitely concerned that they are going to lose the benefit of the Bush, tax breaks that go away, so they see a pinch in their cash flow, and they're sitting tight. So, we frankly don't see a tremendous amount of business expansion. The only area where we see it is in technology, but a lot of the other businesses are real, real quiet.

Okay. And how long is your lease up in Brown Stone and New York as well? Because I don't know if there's opportunities to downsize down the line if possible, if need be?

You say our lease in New York? Is that what -- I'm sorry.

Yes, and in Texas.

Okay. We have a decent amount of space in Texas, but we're $2.00 a square foot, and it's not much of a cost, and we've got excess capacity down there.

In New York, I think this is in the [Q], isn't it? What our lease terms are? Or no? Okay. Okay. In New York we've got about another four years to go on our lease. That would be one of the very few areas where we could improve costs. Sublet market is real tough. And no real activity there at this point in time.

Okay. And the last thing is, I see you were quoted in The New York Times on July 11, basically saying that when the SBA loan guaranty fell back to 75%, you didn't [send] the loan to be SBA program. So, let's say, theoretically it goes back to 75%. Is that -- do you want to retract on that statement? I mean is there -- I don't know if the outlook is looking better, obviously, but are you going to just pull back?

I think the statement that we made was -- I can't remember it. You might have the article in front of you, but I think the statement that we made was that it would be more difficult for us, because we would have to deploy more capital, and therefore, prospectively, make less loans. I think that's the statement.

Yes.

I'll be honest with you, I think that's accurate. I think that's reflected in our guidance. I think that if we had 90% guarantee [baked], for a longer period of time, we would be a lot more aggressive in promoting and marketing the fact that we want to lend, and I think we would clearly blow away the types of projections that we have here. With that said, we did discuss on this call our efforts in securitization, which don't replace 90%. Right?

Right.

But they do provide you, or will -- would provide us, cost-effective financing on a more permanent basis, and that type of relief would also help us in the marketplace.

And from what you --

As we sit here today, and I think it's a good question, to be clear, the guidance that we have anticipates predominantly 75% in the fourth quarter.

And one more thing. And then, so what do you think that the government can do to help the small business ? I mean, realistically. Because I know there's things in place, you can't turn back the clock regarding healthcare.

Well, I think -- I'm not going to predict whether the SBA portion of the legislation is going to pass or not. I think it's less likely than not, but you can't rely upon my guess, because that's all it is is a guess, and you can't bank on it. But the government for small business can do the following things. It can pass the SBA portion of finance. The SBA loan program has been around for 50 years. It works. It's not Fanny Mae, it's not Freddie Mac, it's not HUD. It's a program that actually works and provides financing for small businesses that do 75% of the job growth. Very, very valuable.

I think there's a possibility that Obama Care never gets instituted, and there's 20 attorney generals that have filed suit. The state of Missouri has passed a referendum, 7129, basically saying they don't want Obama Care. The other things that the government can do is they can keep tax rates lower, and not raise tax rates. Or maybe give some relief with respect to payroll taxes to improve small businesses' cash flow. But the best thing they can do is to put the hands back in the business owners and reduce government interference. I'll try to keep my political statements down to a minimum.

All right, guys, thanks for taking the time to answer my questions, and good luck going forward.

Thank you. Thank you, Marc.

(Operator Instructions) We have a question from Brian Walsh with Oppenheimer.

Hi, Barry, great quarter. Phenomenal numbers. Just a quick question. Your stock itself is -- had a good day considering the market conditions for the day, but there isn't an awful lot of volume of recent. Is there-- have you been receiving any institutional interest, or any calls that are eyeing up your company at this point?

Hard question for me to answer, Brian. I think what I, what I can tell you is that the -- I think the performance speaks for itself and should begin to draw attention to institutions or bigger buyers starting to look at the stock as an opportunity. Clearly, when you're running red quarters, for many quarters --

Right.

-- you're going to lose a lot of investors that just don't think it makes sense. For the longest period of time, people have looked at various components of our business and realized that they're interesting and they provide attractive or interesting valuations. So my view of this is, by being able to string profits in the third quarter and the fourth quarter, which we're hopeful we can do, that's going to, that's going to attract some interest. So --

It should definitely do that.

Yes. I mean, I think the primary focus of this Company right now is to deliver a good third and fourth quarter. That's about the most I could say.

Well, it was great quarter, and let's keep it up.

Thank you, I appreciate it, Brian.

Thank you. I am showing no further questions at this time.

Okay. Operator, thank you very much, and I appreciate everyone attending our second quarter call and the questions, and look forward to presenting in the third quarter. Thank you very much, everyone.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference, and you may now disconnect.