NewtekOne Inc (NEWT) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Newtek Business Services Q3 2011 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 I will like to turn the call over to your host, Mr. Barry Sloane. You may begin.

-- shareholder conference call, joining me today is our Chief Accounting Officer, Jenny Eddelson. We welcome everyone following in on the call to go to our website thesba.com, and you can follow in on the presentation. There's a PowerPoint presentation in the Investor Relations section of our website. I'd now like to ask Jenny to read the Safe Harbor statement.

Sure, Barry. 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, 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 available through www.SEC.gov. Our cash flows operate under a different set of rules in each of the seven jurisdictions, and these place varying requirements on the structure of our investments. In some cases, particularly in Louisiana, or in certain situations, in New York, we do not control the equity or management of a qualified business, but that's not always presented orally or in written presentations.

Thank you, Jenny. I'd like to focus everyone's attention on PowerPoint slide number 3 where we announced our consolidated pretax income for the recent quarter ended Sept 30, 2011 of $335,000 that was up from $248,000 for the year prior. The consolidated pretax income was $1.3 million for the nine months, and that was versus a pretax loss of negative $112,000 from the prior year. The consolidated net income of $880,000 for the quarter ended Sept 30, 2011 versus a net loss of $318,000, and we announced a consolidated net income of $1.1 million for the nine months ended September 30, 2011, versus $146,000 net income for the nine months from the year prior.

When we look at 2011, as we go forward anticipating and forecasting what we expect to come in and the fourth quarter, we are looking at revenues coming in from $122 million to $124.8 million. We have recast our guidance on a pretax basis to $1.25 million on the bottom end of the range to a $2 million pretax. Modified EBITDA, which we will go into a definition a little bit further in our presentation, on a consolidated basis is $8.8 million at the low end, $9.6 million at the high end. One of the adjustments that we just announced which will take effect in the fourth quarter was a relocation of some of our real estate space. We were able to reduce the amount of space and ship a significant amount of our staff out to West Hempstead, Long Island. This resulted in an approximate $1.1 million lease loss expense charge on the sublease in the fourth quarter of 2011. On the positive side of that, the cash flow benefit for this relocation over the next four years will be approximately $1.4 million. And on a GAAP basis, the annual rent expense reduction will be approximately $625,000 per year over the three-year period beginning in 2012.

In the looking at the 2012 guidance, our revenue range is about $122 million to $125 million, the pretax net income on a consolidated basis is $3 million to $6 million with a midpoint of $4.5 million, and the EBITDA range is $9.3 million to $12.3 million. I believe the midpoint on that comes in somewhere around $11 million.

Focusing on the third quarter we had 5% revenue growth at $30.7 million, which is our consolidated revenue. Looking at the combined EPP and Managed Technology Solutions business, growth was pretty flat, coming in about 1%, at $25.5 million. We clearly did significantly better than the year prior in the small business finance segment as we posted $4.6 million of revenue versus $3 million and the pretax net income of $874,000 versus $404,000.

Moving to slide number six, as our business moves forward and we are reducing some of the effects of our legacy businesses, you can see the balance sheet is shrinking over the course of nine months. Total assets went from $165 million to $125 million, with liability shrinking by about the same amount, $109 million to $69 million. Looking a little bit closer at some of the key segments in revenue, Electronic Payment Processing and Managed Technology Solutions coming in pretty flat from the year prior, Small Business Finance coming in up 53% to $4.6 million.

On the pretax net income, the Electronic Payment Processing segment was down 8% from the prior-year quarter. I have to comment that this was a particularly rough quarter for the Payment Processing segment. We have gotten some early indications coming in from October and some adjustments that we've made. We feel very good about the Payment Processing space and believe that we will make a good recovery in the fourth quarter. And with that, we're not going to be changing our guidance in that particular segment for the 2011 guidance for EPP has a low end of the range of $5.9 million, high end $6.3 million pretax with EBITDA of 7.3 to 7.7. Even though we had a pretty rough third quarter, we are anticipating that we'll make our numbers and bounce back nicely.

Moving to slide number nine, cash position, when we look at cash, cash equivalents, restricted cash and the broker receivable, broker receivable being effectively the self-liquidating government guaranteed SBA loans which liquidate on a 14 -- approximately 14-day maximum cycle. That comes in about $31.3 million. Our cash positions clearly do move up-and-down, primarily reflecting the operations of the lender.

Focusing on the Electronic Payment Processing segment, as we said, we are still looking at $7.3 million to $7.7 million of EBITDA guidance for the year. Obviously, this has been an important segment for us historically. We still view it as such. Clearly we've got some significant headwinds from the economy. But as I've said, we had an excellent October, and we believe that will gravitate towards a very strong fourth quarter. We believe that performance is away from what's going on in the economy, based on some internal adjustments that we've made within the business. We have no debt on this particular segment. We look at our proposition, particularly in the eCommerce space, being able to offer our shopping cart, our own gateway, our own host, which were as well as payment processor. It is a very compelling position, and we continue to look towards good results and good growth in the EPP segment.

On slide number 11, we look at our Managed Technology Solutions initiative. Pretty flat for the third quarter. Somewhat consistent with what's going on in the overall economy. We are continuing to press pretty hard on this business. We think we will have some positive expense reductions going into next year with real estate reductions in a few things else moving living in our favor. I think most importantly, our business mix is changing, particularly in the area of shared hosting, which is a tough business to grow in this market, particularly with some of the social networking competition out there.

And cloud computing is clearly a significant product for us and is extremely important. When we talk about cloud computing, we think this is a major trend that has just begun to catch on in the United States and other economies. Effectively, it's the outsourcing of hardware, software, personnel, storage and data. Our Company is very well-positioned to participate in this space because of our real good back office Cadillac customer service. Cloud computing is extremely relevant, because for businesses, it wound up containing their cost, improving efficiencies, offering much better service and management of resources for small businesses, more security and more functionality. Some of the competitors in cloud, the early players, the Amazons, the Microsofts, the players like Rackspace tend to be competitors under more larger companies, Fortune 1000 really offering enterprise solutions.

We clearly have a tremendous focus on the small to medium-sized business market. Tomorrow we will be rolling out a recession special for business owners which will include cloud where we will be able to offer for $10, six months worth of cloud hosting, along with some interesting Microsoft software to help build and develop a website, all for $10, with no customer contracts. So, customers can have the opportunity to try us out, as well as resellers and wholesalers and to experiment with our cloud. You can find our cloud product on thesba/cloud, and you can take a look at that special, and we will be putting out a press release on that tomorrow.

I think one of the important aspects of cloud as we look at it, our average cloud -- monthly cloud instance revenue is about $173. When you compare that to shared, it is considerably less. Obviously, a customer gets considerably more for using our cloud service. Gross margin significantly better and total dollars significantly better. Even though we are experiencing some levels of attrition, you can see on slide number 16, we are very, very focused on our cloud VPS instances sold and will continue to be so throughout the rest of this year, and it's clearly a focus for 2012.

Clearly the big turnaround story within our four walls has been our Small Business Finance unit. As we've said, we've got terrific leading infrastructure, origination, underwriting, funding, service and collection. As many of you may be aware, we recently put out a press release. We were named as the number one non-bank SBA lender in the US non-bank as a non-depository. We made more loans than any other non-bank, non-depository SBA lender in the United States. On an overall basis, we came in 20th, which we thought was a terrific accomplishment for our Company. We think this sector continues to offer the best opportunity for our shareholders relative to profit growth, revenue growth, as well as cash flow. We are a rated Standard & Poor's commercial servicer. Our original rating was accept, and that's been upgraded to select. We closed an S&P AA rated securitization in December of 2010. We recently secured our financing on our Capital One bank line, which is a $27 million facility, has been extended out to September of 2012. And we have a $10 million line for factoring business with Sterling National Bank.

When you look at our servicing portfolio, you can see over the course of the last several quarters, this continues to grow very nicely. We have forecasted and estimate that we will be, at the end of this year, December 31, 2011, somewhere in the neighborhood of $450 million to $500 million of servicing for others -- scratch that, total servicing, servicing for our own loan portfolio and service others. Obviously, servicing is a recurring business recurring revenue streams. We are real happy about our level of expertise in that particular area.

As we move to slide number 20, we somewhat discussed this. You can clearly see that we are shrinking our balance sheet. I think that some of our legacy businesses which have unusual accounting treatment, many of that -- many of those items and aspects are diminishing in its level of importance. You can see that in areas such as SBA loans transferred subject to premium recourse there is no longer any premium recourse. And on the capital business, credits in lieu of cash clearly is declining at a fairly rapid rate. You can take a look at slide number 21, in 2010 there was an asset and a consequential liability of $35 million in this particular area. By the end of this year, it will shrink to somewhere around $17 million or $18 million. By 2012, it will be somewhere around $7 million or $8 million, so we are happy that this is reducing the illusionary aspect of leverage with respect to tax credits and interest expense payable in tax credits.

Going forward, this will be our first full year at the end of the fourth quarter of launching our Small Business Authority brand through our thesba.com website. For those of you that are interested, we also welcome you to sign up for our newsletter on thesba.com's homepage, and that gets released every single month. Two of the items on the newsletter, our market sentiment survey, our SB Authority market sentiment survey, which has now been picked up by Bloomberg and CNBC, and we also report on it in Forbes, as well as our market sentiment survey as we poll businesses every single month on important topics. A recent survey focused on small businesses activity with respect to social media. We continue to emphasize cross-selling and cross-marketing into the customer base, and one of the things we're going to begin to track in the beginning of next year will be average revenue per customer unit, ARPU. We are very focused on putting additional products in to customers and raising our average revenue per client.

We continue to grow our alliance channels with an important partner, and I think importantly, what you are going to see from our Company is growing our presence as a business service provider with all of our business applications hosted in a cloud environment. We intend to be a cloud application service provider for small to medium size businesses. So, whether they are doing merchant services, payroll, web hosting, if they want their insurance policies, we want to give them the ability to access all that data, all that information from a tablet posted in the cloud. We will have further conversations about this as the year goes on and as we roll into 2012. We look at our strategy and mission statement. Clearly in working with small businesses, particularly today, we enable them and help them grow their sales, reduce their expenses and reduce their risk and offer state-of-the-art business solutions. We have worked very hard increasing web traffic to thesba.com, you can see on Slide 24. Obviously, you've got peaks and valleys, and we test different things to drive customers to our site, and we are on a nice upswing as we go into the fourth quarter. And you can see some of this statistics on unique visitors versus total visitors. Our uniques, I think, have climbed north of 10,000, and we are real happy about that.

Some site statistics for thesba.com, I believe these statistics come from Alexa. We get extremely high grades with respect to our website and we'll believe historically where our website has not been a real big asset for our business, we look forward to it going forward as being extremely important and valuable. You can see how we are growing our presence in this particular space. We are exhibiting about 750 unique visitors a day. The average time on the site, 3 minutes and 30 seconds. So, people are coming to the site and taking their time on it and reading and reviewing and looking at our product offerings. We also have a pretty low bounce rate, a 54% bounce rate.

As we mentioned earlier, we have our own blog on Forbes, a small business authority blog which can be viewed on blogs.forbes.com/thesba. We talked about our business index being published, as well as our market sentiment survey. On the first Saturday of every month, we have a radio show, the Small Business Authority Hour. You can see the types of programs that we have posted. We talked about business entrepreneurship, healthcare, small business lending, eCommerce, two sessions on the all-important cloud computing. We are going to continue to have the Small Business Authority Hour the first Saturday of every month. It is typically at 4.00 PM on WABC Radio. It's also on the Internet at wabcradio.com. For those of you that are not in the northeast, 770 is the channel which typically can pick up -- get picked up in New York, New Jersey, Connecticut and parts of Massachusetts.

For those of you that are Imus fans or WABC Radio listeners, we continue to be very involved in WABC who has sold us the naming rights to the radio studio. We did over 440 studio naming right mentions a month. We get over 265, 60-second commercials a month. For those of you that watch Imus on Fox Business News in the morning, as he does a radio show and the TV show, which is once again the Imus in the Morning Show on Fox Business News, you can see when Werner Wolf does the sports, he reports live from the Small Business Authority studio with thesba.com mike flag, as well as Bernard McGuirk when he does his Bernie Briefing, you can clearly see the Small Business Authority backdrop, his mike flag plus announcing where he is reporting from as well.

Fast forwarding ahead to our marketing focus. Clearly, our strategic alliance partner channel is still the core for our Company. Our relationship with credit unions obviously has been extremely important to us as we've maintained that relationship since 2003. We view credit unions clearly, particularly with situations going on with banks as a real important partner of ours. Pershing, the largest clearing broker deal, Chartis, formally AIG, who was formerly the largest insurance company in the world. Morgan Stanley Smith Barney, the largest investment bank by a number of stockbrokers. We have these alliance relationships that drive clients to us through our new tracker system. Clearly, this channel has worked very well for us. We are using our retail branding strategy as the Small Business Authority. We believe it is working. Between the WABC radio, between our website and other things that we are doing in the marketplace, our position becoming recognized as a best of breed in small business lending, insurance, business information, electronic payment processing, eCommerce, managed technology solutions continues to grow and grow every day.

In conclusion, we obviously have a terrific trend on slide number 39. For our pretax income, you can see we've certainly come a long way with improving GAAP income and improving cash flows. Our 2011 revised guidance with one quarter to go, we are looking at EBITDA on EPP space of 7.3 to 7.7, managed technology solutions a 6.2 to 6.4. These are two services -- service businesses with recurring revenue. I believe the combined debt on these two businesses is about $1.6 million. So, we have virtually no leverage on them. These businesses are typically businesses that trade at interesting multiples in the market. We have a lot of our investors that will look at these businesses and look at our market cap and scratch their head.

The Small Business Finance segment, which obviously has turned the corner and made money in 2010 is forecasted to do about $3.5 million to 4 million of pretax this year. By the end of the year, the shareholders book value of small business finance will probably be closer to about $19 million. You can see you start to form a pretty good core value amongst those three particular entities loading the cash in. Obviously, we do run a public traded company at the holding level. That is clearly what it is chopping down some of our cash flow, chopping down our GAAP numbers, but we move into next year with a lot of hope and promise for our pretax net income range with a midpoint of about of $4.5 million of pretax net income and modified EBITDA number with a midpoint range of around $11 million. So, we will look at that and are optimistic that we can begin to refocus our efforts on the investment community and as we report GAAP income, are able to show demonstrable cash flow and a real positive trend in our business, and our market, despite the backdrop of an extremely tough environment.

Not easy to have a shareholder conference call on a down -- DOW down 380-point day, but we are here, and we are glad to be reporting to our shareholders. I'd like to now turn the call over to Jenny Eddelson.

Thank you Barry. I'd like to start with our consolidated third quarter 2011 results.

For the quarter ended September 30, 2011, the Company had pretax income of $335,000 compared to pretax income of $248,000 a year ago, an improvement of $87,000. We had net income of $880,000, or $0.02 per share for the third quarter of 2011 compared to a net loss of $318,000, or $0.01 per share in 2010. The current period was positively impacted by the utilization of a portion of an NOL at NSBF, for which a reserve has previously been reported. This created the higher-than-expected tax benefit for the quarter.

Revenue increased by $1.5 million, or 5% for $30.7 million compared to prior year, primarily from growth in our Small Business Finance segment. Please turn to slide 45. We began the year with $10.4 million of unrestricted cash, and ended the third quarter with $13.7 million, which is an increase of $3.3 million. The increase primarily reflects the receipt of cash from our brokerage receivables and the utilization of the securitization prefunding accounts which has been accounted for as restricted cash at year end financed SBA loans. Cash, restricted cash, broker receivable and SBA loans held for sale, effectively our short-term liquidity, totaled $32.3 million at quarter end, down $1.9 million from the beginning of the year. This decrease in our short-term liquidity primarily reflects the Company's utilization of its own available cash on the unguaranteed portions of SBA loans.

Now I'd like to review the third quarter 2011 performance by segment found on slide 46. Electronic Payment Processing segment revenue increased by $189,000, or 1% in 2011 to $20.7 million, predominantly due to organic revenue growth from a combination of growth in processing volumes and additional fee-based services to our merchants. Pretax income decreased $107,000, or 8% to $1.2 million for 2011 compared to the prior year, primarily due to margin. For the amount of revenues less Electronic Payment Processing cost declining slightly year over year, and was partially offset by a decrease in other expenses between periods.

Managed Technology Solutions segment revenue was $4.8 million, or flat period over period, reflecting a decrease in the total number of plans, offset in part by improved revenue per plan at the result of the growth of cloud instances and an increase in the sales of custom website development services.

Pretax income was flat period over period at $1.3 million. The Small Business Finance segment originated $25 million of SBA loans in the third quarter of 2011 versus $15.2 million in 2010 and purchased $15.3 million of receivables versus $16.4 million in the same period last year. Revenue for the third quarter of 2011 was $4.6 million as compared to $3 million in the third quarter of 2010, primarily due to an increase of $1.3 million in premium income from guaranteed loan sales as well as improvements in servicing and interest income. The increase in loan origination, additions to owned and serviced loan portfolios and improvements in portfolio performance was sufficient to offset a $308,000 increase in the combined loan loss provision and change in fair value and a $589,000 increase in operating expenses, primarily from additional salaries and loan origination (inaudible). As a result, the segment had pretax income of $874,000 for the third quarter of 2011 versus pretax income of $404,000 for the same period of 2010.

For the third quarter of 2011, the all other segment had a pretax loss of $304,000, a $110,000 increase from 2010 third quarter loss, primarily due to the startup of our payroll services subsidiary. For the third quarter of 2011, the Corporate Activities segment recorded a pretax loss of $2.1 million compared to a loss of $1.8 million in 2010. The increase in loss is due to the expected decrease in capital management fee revenues of $185,000, as well as an increase of $150,000 in operating expenses period over period. For 2011, the pretax loss in the Capcos segment decreased by $184,000 to $616,000. The decrease from loss primarily reflects reductions in management fee expense and other general operating expenses period over period.

Now please turn to slide 47. In terms of guidance for 2011, as Barry previously discussed, we have narrowed our range for consolidated pretax income of between $1.25 million and $2 million based on the Company's recent relocation and recognition of a loss on its sublease rental in Q4 of this year. Previous guidance reflected a range for pretax income of between $1.5 million and $4 million. Revenue guidance remains unchanged at $122 million to $124.8 million, and the Company is projected modified EBITDA of between $8.8 million and $9.6 million.

Slide 49 reflects our guidance for 2012 which was also recently revised to tighten the pretax income band and include consolidated modified EBITDA. The Company is projecting consolidated revenues of between $121.9 million and $125 million and consolidated pretax income of between $3 million and $6 million. Our 2012 guidance range for modified EBITDA is between $9.3 million and $12.3 million. Expected performance in the core EPP, Managed Technology Solutions and Small Business Finance segments hope to essentially drive the forecasted improvement in consolidated pretax income over forecasted 2011 and account for the large range in forecasted pretax income in 2012. I would now like to turn it back to Barry.

Thank you, Jenny. Operator, we'd like to open it up for questions.

Thank you. (Operator Instructions) I'm showing no questions in the queue at this time.

Thank you very much, operator, and we appreciate everybody attending our call today. Have a good day.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect, and have a wonderful day.