NewtekOne Inc (NEWT) 2011 Q1 法說會逐字稿

Good day ladies and gentlemen, and thank you for standing by. Welcome to the Newtek Business Services first quarter 2011 earnings conference call. Currently 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 that conference is being recorded. And now I'll turn the program over to Mr. Barry Sloane. Sir, you may begin your conference.

Thank you very much. Good afternoon, and welcome to our first quarter 2011 financial results conference call. I'm here today to present our results with Seth Cohen, our Chief Financial Officer. For those that would like to follow in on the PowerPoint presentation, that presentation can be found at the following web address, investor.newtekbusinessservices.com, and please click on the Investor Relations section and the PowerPoint will be available. That's investor.newtekbusinessservices.com, and click on the investor relations section and you will be able to see the PowerPoint presentation. Seth, could you please read the Safe Harbor statement?

Sure, Barry. The statements in the 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, 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 http//www.SEC.gov. Our CAPCOs operate under a different set of rules in each of the 7 jurisdictions and these place varying requirements on the structure of our investments. In some cases, particularly Louisiana or in certain situations in New York, we do not control the equity or managements of a qualified business but that cannot always be presented orally or in written presentations. Back to you, Barry.

Thank you. Newtek Business Services reported a pre-tax income of $834,000 for the first quarter of 2011, an improvement of $1.7 million over the first quarter of 2010. We announced consolidated net income of $509,000 for the quarter and we reaffirmed our 2011 guidance of $119 million to $125 million for 2011 and consolidated pre-tax income of $1.2 million to $4.3 million for the year. We had a pretty good quarter, looking at Q1 2001 consolidated revenue of $30.5 million which was an 18% growth rate year-over-year, and we had a good quarter in the electronic payment processing and Managed Technology Solutions, where we had growth of approximately 6% as revenue came in at $24.9 million versus $23.6 million. The biggest delta was generated by our Small Business Finance division, which segment posted a pre-tax net income of $1.3 million for Q1 2011 versus a pre-tax loss in the prior calendar year of $110,000.

Today we're going to spend a decent amount of time talking about our financial performance for the first quarter . Cash position, balance sheet, business trends and once again focusing on the 2011 guidance. We'll talk about strategic mission as a small business authority, our retail branding strategy, as well as taking a look at the results from our new website -- thesba.com. Looking further at the 2011 financial results for the first quarter, breaking it down by segment, the electronic payment processing segment, the revenues were up 7% to $20.1 million. Managed Technology Solutions which is a name change from prior Web hosting, came in at $4.8 million, up 1%. Small Business Finance came in at $5.1 million of revenues, up a significant 282% from Q1 2010. When we look at the core operating segment pre-tax net income, electronic payment processing was up 11% at $1.2 million from the year-over-year quarter, Managed Technology Solutions came in at $1.2 million, up 32%, and Small Business Finance, as we said earlier, came in at $1.3 million, a $1.4 million improvement from the year earlier.

The Company still has significant cash positions, $25.6 million in cash, cash equivalents, restricted cash, and broker receivables. As we've talked about in the past, the broker receivable effectively primarily relates to the government portion of guaranteed 7(a) loans that we sell into the market. The reduction of cash from $33.2 million to $25.6 million, which Seth will talk later about in the MD&A, is predominantly from the increase in investment in unguaranteed loan participations from the SBA program.

Looking further at the electronic payment processing segment, as we said, in aggregate, revenues up 7%, pre-tax net income, 11%. This is a cash-flow-positive business and the segment effectively has no debt on it. If you are looking at the EBITDA, Q1 2011 generated $1.6 million of EBITDA versus $1.5 million of the year prior.

We have renamed our Web hosting segment to Managed Technology Solutions. As this particular business looks forward, a lot of what we do in this particular segment is we provide outsourced technology solutions to the small- and medium-sized business market. Even our traditional business where we hosted significant amount of websites in our portfolio, effectively provide a managed technology solution for small business. We believe that it's more appropriate to name this particular segment Managed Technology Solutions, and will continue to do so in all of our public filings. Our revenue growth was only up 1% for the year, our pre-tax net income was up 32%. We continue to evaluate this business and it's opportunities going forward. We are very excited obviously about many of our products which we'll talk about later on in the presentation.

One of the products that we are clearly excited about is cloud computing. If you take a look at thesba.com you will see that we are clearly featuring cloud computing. On our WABC radio ad campaign with respect to banner ads and commercials, we clearly have been positioning the Company as a cloud authority. Many outside significant third-party consultants are predicting that the cloud will be a dominant marketplace in the future, particularly for the small- and medium-sized business market, and the outsourcing of hardware, software, personnel, storage, data security, and really IT as a whole for small- and medium-size businesses will continue to proliferate. There are significant cost savings and cost advantages to it. There are clearly security reasons for doing it. And we believe that even the small-end of the SMB, or small- to medium-sized business market will continue to gravitate toward new and progressive technologies, particularly the cloud.

As we look at our competition in cloud, entities like Amazon, Microsoft, and some other major participants that are clearly focusing on the upper-end of the SMB market are leaving the lower-end or smaller- or medium-size businesses to us, and we think we have a very good position in that particular space. We do believe that with our expertise, our legacy and historic business really providing outsourced technology solutions where we're available to our business clients 24-7, speak in English and in Spanish and the businesses is done in the United States gives us tremendous advantage with small businesses, and we believe that our strategy of being an authority for cloud computing will pay off.

The Small Business Finance segment is a marketplace that we've obviously been in since 2003. That business is really starting to take off and paying good dividends. Historically we've indicated that this sector has offered the best opportunity for Newtek shareholders and we particularly believe that will be the case, especially on the bottom line where the margins in this business are really good. We have a very good, attractive lending infrastructure. We have historically mentioned on this call and in public filings that we are the only FDIC contractor with a contract to service government-guaranteed loans. We were recently named a Standard & Poor's Rated Commercial Servicer, initially Acceptable and then upgraded to Select. In December of 21, we securitized uninsured and unguaranteed loan participations in the SBA 7(a) program, that hadn't been down for about 3 years prior, and issued $16 million worth of AA bonds to one investor. We anticipate seeking that source of financing going forward in the future.

We have historically closed on a Capital One $12 million line of credit to Web fund our 7(a) loans and we're working diligently with to close a second portion of that financing, a $15 million warehouse line from Capital One Bank, to fund the unguaranteed portions, which prospectively will be taken out by long-term securitization financing. We also announced recently a $10 million line of credit that was closed with Sterling National Bank to help fund our accounts receivable and factoring business.

An important part of our Small Business Finance income statement and growth going forward is our servicing portfolio. As you can see we had an increase of about $13 million in the quarter. We anticipate some significant growth . We have a real good pipeline, and I think that going out in the second, third, and fourth quarters, you'll see the amount of servicing portfolio jump as some of our pipeline begins to close and the cash flows come into our income statement. Our historic legacy business, certified capital company, or CAPCO, continues to have an effect on the Company. However, we are working diligently over time to reduce the operational aspects of this business, as well as the balance sheet and the income aspects.

As we have historically said in other shareholder conference calls, basically when you look at the credits in lieu of cash of $29 million, with the offsetting liability of notes payable and credits in lieu of cash, those 2 items so offset each other. They are both non-cash assets. We also have another item on our balance sheet that Seth will refer to when he gets to the MD&A, which basically talks about SBA loans transferred subject to premium recourse and the offsetting liability. Those are 2 items that if you add them up, are in excess of about $40 million. They do offset each other. So at times it appears our balance sheet is more levered than it is. We have $144 million in total assets, effectively about $40 million of those are in offsetting assets and liabilities that do match.

As we look at slide number 17, you can see that tax credits relating to the CAPCO program currently stand at about $17 million. Well actually, they're probably a higher number than that, but they'll diminish to about $17 million at the end of year 2011, and by the year 2012 it will be down to $8 million. I think going back a couple of years, that number was about $70 million. So it really has come down significantly, and once again we point out that the tax credits offset against the liability notes payable in credits in lieu of cash, and that is based upon our historic legacy business under the certified capital company.

From an operational and cash perspective, we continue to operate and manage I think approximately 13 certified capital companies. On slide 18, we have listed the amount that needs to be invested in these various different CAPCOs to get to get 100% mark. Alabama reached 100% in 2010, and last year we got to the point both in Florida and in Wisconsin where those particular CAPCOs sunsetted and were no longer involved with those particular entities.

As we focus our strategy going forward, we launched our new website, that's thesba.com, in January 2011. We are starting to see a significant increase in our traffic patterns going to our website. We continue to emphasize cross-selling and cross-marketing into the customer base across the entire employee base that we have. Our alliance channels are growing. We have certain several announcements that we will be making throughout the course of the second quarter. And for those of you that are WABC 77 terrestrial listeners, or WABCradio.com or in the New York, Pennsylvania, New Jersey, Connecticut area where 770 reaches, you can clearly hear our commercials throughout the day. We have approximately 460 studio naming right mentions per month, and about 280 60-second commercials. Those commercials are also on our website under thesba.com under the Community Section and under Radio. You can hear personalities such as Don Imus, Sean Hannity, Mark Levin, Larry Kudlow and others talk about the Small Business Authority.

Within the concept of the Small Business Authority, we're positioning ourselves as a thought leader and destination for independent owner-operators of small businesses all across the United States seeking to provide products and services to SMBs and independent business owners to enable them to grow their sales, reduce their expenses and reduce their risk. We've had some pretty good successes in the first quarter of 2011 as we are rolling out our strategy. We would like to proudly announce today that Bloomberg Business Wire has picked up The SB Authority Index , so as we release it on a monthly basis, Bloomberg Wire service also is releasing the SB Authority Business Index.

Furthermore, on slide 21, we anticipate Forbes publishing the Small Business Authority Index as we released at monthly, as well as our Small Business Authority market sentiment survey, where any given monthly we survey approximately 1200 businesses live as they are calling in to seek assistance from the Small Business Authority. We survey them on topical aspects such as healthcare, the lending market, e-commerce, cloud computing. And for those of you that are interested in further information on both the Small Business Authority Index or the Small Business Authority market sentiment survey, we certainly suggest that you go to our website and on the homepage you can sign-up for our newsletter, and our website also has full and historic information on our regular surveys and our index. In addition to that, we anticipate that Forbes will be publishing a Small Business Authority blog. We'll actually be blogging about Small Business Authority, timely issues, news events and topics of interest to small independent business owners across the United States. So the Small Business Authority anticipates getting it's own blog in Forbes on the Internet.

Some of you are aware that the small business authority hosts a radio show the first Saturday of every month at 4 PM Eastern Standard Time on 77 WABC. All shows our podcast and are saved on thesba.com and WABCradio.com. So for those of you that want to go back and listen to the last 4 shows that we had, there is some real good information. The February 5 show was on business entrepreneurship, the March 5 show was on healthcare and health insurance and their effects on small business, the April show was on small business lending, the recent show that we had last Saturday was on e-commerce, and the upcoming show will be on cloud computing. We are very, very happy and satisfied with our 77 WABC radio relationship. As I mentioned to you, if you click on the Community section of our website, you can listen to our radio spots by Imus, Levin, Hannity, Kudlow, Batchelor, and McIntyre.

For those of you that are TV watchers and you tune in early in the morning for the Imus in the Morning Show, which is broadcast Monday through Friday, 6 AM to 9 20 AM on the East Coast, you can see our studio naming rights, which are easily seen through Warner Wolf and Bernard McGuirk on FOX Business News. In the New York area on Cablevision at station 106, it's FOX Business News, not FOX News or FOX 5 but Fox Business News. We get to see and hear Warner Wolf and Bernard McGuirk broadcasting regularly from the Small Business Authority studios, as we own the studio naming rights.

Our marketing focus going forward is going to continue to be driven by our strategic alliance partner channel. That strategic alliance partner channel is still our workhorse and we are doing a great job for the credit union industry, the community banking industry, entities like Pershing, Chartis, Company Corporation, Morgan Stanley Smith Barney, New York Community Bank, Humana Insurance. We have strategic alliance relationships with these entities. They drive their small business customers to us because they don't currently provide electronic payment processing, small business lending, payroll, Web design, Web hosting, e-commerce solutions, data storage, et cetera. They drive our customers to us, we use our NewTracker system which has a patent pending and provide full transparency into our back office, so our alliance partners know 24-7 what we're doing with their customers, they have a full audit trail.

As we mentioned, we launched our website at the beginning of this year, as well as focused the website and our marketing presence on the Small Business Authority distribution channel, which is retail distribution channel, and we seek the Small Business Authority to grow as the destination spot for independent owner-operators of small and medium-sized businesses, and to become recognized as a best-of-breed in lending, insurance, brokerage, business information, data storage, electronic payment processing, outsourced technology managed services, payroll, and health insurance.

In conclusion, if we move toward slide number 32, you can see that we are in the process of a terrific trend turning our more recent pre-tax losses into pre-tax income. And we're excited about our midpoint forecast of $2.8 million in pre-tax income for this year. The 2011 current segment guidance that we have on page 33 will give you low and high ranges for the payment processing segment, Managed Technology Solutions segment, Small Business Finance, et cetera. And what that I'd like to turn the financial review part of the presentation over to Seth Cohen.

Thank you, Barry. I will now review our first quarter 2011 results. For the quarter ended March 31, 2011 we recorded pre-tax income of $834,000, as compared with a pre-tax loss of $874,000 one year ago, an improvement of $1.7 million. We had net income of $509,000, or $0.01 per share for the first quarter of 2011, compared to a net loss of $467,000 or $0.01 per share in 2010. Revenue increased by $4.7 million, or 18%, to $30.5 million, compared to prior year. This is primarily attributable to growth in our Small Business Finance and electronic payment processing segments.

Please turn to slide 37. We began the year with $10.4 million of unrestricted cash and cash equivalents, and ended the first quarter were $13.9 million, an increase of $3.5 million. This increase primarily reflects the receipt of cash from our broker receivable and the utilization of the securitization prefunding account during the quarter to finance SBA loans, which have been accounted for as restricted cash at year-end. Cash restricted cash broker receivable and SBA loans held for sale, effectively our short-term liquidity, totaled $31.2 million at quarter-end, down $3 million from the beginning of the year. Notes payable decreased by $50,000. A decrease in our short-term liquidity primarily reflects the Company's utilization of its own cash to fund the unguaranteed portions of SBA loans in the quarter.

I would now like to review the performance by segment. If you could turn your attention to slide 38 in the PowerPoint presentation, you will see the comparison of our first quarter 2011 results versus the first quarter of 2010. Electronic payment processing segment revenue increased by $1.3 million, or 7%, in 2011 to $20.1 million, predominantly due to organic revenue growth from a combination of growth and processing volumes and additional fee-based services to our merchants. Pre-tax income increased to 11% to $1.2 million for 2011, compared to $1.1 million for the same quarter in 2010. Although the amount of revenues, less electronic payment processing costs on our margin, as a percent of sales declined slightly over year-over-year, our margin itself increased $109,000 in dollar terms. This improvement in dollar margin, with costs other than electronic payment processing costs, remaining approximately flat between years, resulted in improved pre-tax income.

Effective with this quarter we have elected to rename our Web hosting segment Managed Technology Solutions. The new name better encompasses the full range of services we provide to and manage for customers, and reflects our belief that the arrival of our new cloud offerings and cloud architecture will accelerate customer transition from self-managed applications to our secure off-site information technology services. Managed Technology Solutions segment revenue increased by $39,000, or 1%, in 2011 to $4.8 million. The increase is due to a combination of improved revenue per plan, organic growth in virtual instances, particularly our new cloud plans, and an increase in sales of customer website development services, which overcame a decrease in plan counts year-over-year.

Pre-tax income increased 32%, or $299,000, to $1.2 million for the first quarter of 2011 from $932,000 in 2010, reflecting primarily decreases in salaries and benefits from a reduction in headcount in 2010, and depreciation and amortization.

Small Business Finance segment originated $19 million of SBA loans in the first quarter of 2011 versus $12.3 million in 2010, and purchased $17.2 million of receivables versus $7.5 million in the same period of 2010. Revenue for the first quarter of 2011 increased by $3.7 million to $5.1 million from $1.3 million in the first quarter of 2010, or 282%, due primarily to an increase of $3 million in premium income from guaranteed loan sales, as well as improvements in servicing income, interest income and income from factoring receivables. 23 loans transferred in previous quarters that achieved sales status during this quarter resulted in $1.5 million of premium income and a corresponding net $1.5 million fair value reduction. During the first quarter of 2010 the Company recorded no premium income, but it did record a fair value gain of $979,000 related to the transfer of 17 guaranteed loans subject to premium warranty. Considering all changes in revenue and fair value between periods effectively increased segment income by $1.6 million.

Referring back to Barry's comments concerning assets and liabilities related to loans which have been transferred but had not achieved sales status, as we continue to recognize those transfers as sales over the next 2 quarters, those balances, for SBA loans transferred subject to premium recourse and the matching liability, the liability io SBA loans transferred subject to premium recourse should approach $0. We expect those 2 accounts to reach $0 by the end of the third quarter.

The increase of loan originations, improvements and additions to owned and serviced loan portfolios and increases in receivables factoring were sufficient to offset a $200,000 increase in expenses, primarily from additional salaries, loan origination costs, and interest expense, and resulted in pre-tax income of $1.3 million for the first quarter of 2011 versus a pre-tax loss of $110,000 for the same quarter of 2010, an improvement of $1.4 million for the Small Business Finance segment.

For the first quarter of 2011, the All Other segment had a pre-tax loss of $296,000, a $52,000 decrease of 2010's first quarter. For the first quarter of 2011, Corporate Activities segment recorded revenues of $335,000, a $373,000 decrease from $708,000 one year ago. This decrease is primarily due to the expected reduction in CAPCO management fees. Total expenses increased slightly by $61,000 period-over-period, primarily due to an increase in salaries and benefits. As a result of the decrease in management fees, the corporate segment increased its pre-tax loss to $2 million, compared to a loss of $1.5 million in 2010. For 2011 the pre-tax loss in the CAPCO segment decreased to $611,000, a 32% reduction, compared to a pre-tax loss of $901,000 in 2010. The $290,000 decrease in loss primarily reflects reduced management fee expense period-over-period.

Finally we are reaffirming our guidance for 2011, which can be found on slide 39. For 2011 ,we are projecting consolidated revenues of $119.6 million to $125.3 million and consolidated pre-tax income of $1.2 million to $4.3 million. I would now like to turn it back to Barry .

Thank you Seth. Operator we'll take questions now.

(Operator Instructions)

Keith Zorbak, National Securities.

I have a couple questions. The first is regarding the cloud computing -- how significant can that be for you guys down the road? It sounds like you're just getting started in it. Is that something which could really be bringing in $3 million, $4 million, $5 million of revenues per quarter at some point or per year? And the other question would be, as far as the stock is concerned -- what are you doing these days to help promote the stock, and do you have any plans to do more to try to help promote the stock to get the stock going.

Keith, with respect to cloud computing and the cloud, in general, there is clearly going to be a major industry push to provide cloud computing and cloud services to all businesses across the United States, whether they are the Fortune 1000 or even the smaller businesses. Cloud computing, which has kind of got a nice catchy name to it, really works. It's just better utilization of resources so that even smaller businesses are going to be able to achieve cost savings, have more secure data and information, and really get better service. So we are uniquely positioned in that historically. To a certain degree, you can say we've performed cloud services, but not under the name cloud, in the sense that our customers basically used our cloud, our data center; and unlike a lot of other technology providers that might have done e-mail or hosted websites or other business applications, we are very hands-on and are available for our customers from a service perspective.

Many of you are probably familiar with the fact that Amazon.com or other major players are offering cloud. Right now, because Amazon's tremendous capacity and data center, they are able to offer cloud computing to major companies, but they don't really provide a lot of the hands-on service that a small business would require. S,o with that said, we see this as being a significant product, a growing product; you're going to hear this advertised more and more. So for those of you small business owners that might be listening in -- this is your phone system, your e-mail, you shouldn't have any towers under your desk. It enables you to plug-and-play, whether it's your home laptop, your office, a PDA device, so you're connected to the cloud. So we think this could be significant. We don't currently have any forecasts that we have made public relative to this particular segment within managed technology solutions; but that may be something we do in the future.

Relative to the stock price -- as we are grinding into a very good profitability run here, where we've got several quarters backed up, the Board and I will be chatting about doing more in the investor relations section. One of the things I think you can see is we are spending a lot of time in the public relations area of the Company. If you go to our website under Community, and you look at videos, we're on FOX Business News, FOX News, we're in the Wall Street Journal this week, we are almost in a periodical a day. So we're out there with our Company, and with our name and our brand, and it should take hold. We may need to try to get the investor [call] out for a little bit more visibility, but it is clearly on our mind.

And do you ever think of changing your name from Newtek to the Small Business Authority?

We are actually going to call it Keith. No, just kidding. It's a good question, Keith, and it's kind of logical. I think that, right now, we feel very good about where we are from a branding strategy, it's the Small Business Authority powered by Newtek. Newtek is a brand into itself particularly among strategic alliance partners. So we're very, very comfortable right now with our current market position; really known as Newtek Business Services, from a retail perspective, as the Small Business Authority. So I would say we really like our current market position, which is really 2 names, to be frank with you, 2 different brands.

Great thanks.

Charles [Scherk], private investor.

Hi, Barry. Just one question. I wonder if you give me a little idea of the value of the 3 primary businesses if they were separated or sold. Just a general feel for what the market value of those businesses individually might be.

My Chief Legal Officer and Chief Financial Officer have threatened to waterboard me should I ever discuss that. Although, what I think you could do, is, you could look at the pre-tax or the EBITDA numbers and put market multiples on them, and a lot of people have done that. And when they look at those individual segments and they add them up, they go, wow. The contrast to that is that we have a Holding Company that has a reasonable amount of cost, which ultimately drops to the net.

Now the good news is, we've got a positive net and it's growing. We feel that in order to generate significant bottom-line growth, the Company needs to get significantly larger. We don't have much leverage on our balance sheet; we've got a lot of equity; and we are sitting back waiting to be opportunistic. And we think we can be a much bigger Company, frankly, going forward, because we've got a very sophisticated Holding Company and management infrastructure that can harbor significantly more revenues, a lot more assets, and be able to cover that overhead. So I think that the sum of the parts model clearly works for a lot of investors. On the other hand, some have argued it hasn't shown up in the stock price. So I appreciate the question, it is a good one. I hope you appreciate my non-answer answer, and I hope that was helpful.

That's fine. I always appreciate your thoughts. Thanks very much.

Harold Elish, UBS. All right.

(Operator Instructions)

Presenters, I'm showing no additional questioners in the queue. I'd like to turn the program back over to Barry Sloane for any closing remarks.

All right. Thank you very much, Operator, and thank everybody for attending the call. And we appreciate your attendance and your good questions and look forward to reporting at the end of next quarter.

Thank you, sir. Ladies and gentlemen, this does conclude today's program. Thank you for your participation and have a wonderful day.