Nelnet, Inc. (NNI) 2007 Q4 法說會逐字稿

Good day, everyone. Welcome to Nelnet's fourth quarter 2007 conference call. Today's call is being recorded and broadcast live over the Internet. At this time, Mr. Phil Morgan, of Nelnet's Investor Relations Office will begin with opening remarks. Please go ahead, sir.

Thank you, Lisa. Thank you everyone for joining us today. Nelnet's fourth quarter earnings release and financial supplement have been posted to the Investor Relations website at www.nelnet.com. On today's call we will have Jeff Noordhoek, President; and Terry Heimes, Chief Financial Officer, providing the formal remarks, and Mike Dunlap, Chief Executive Officer and Chairman, joining for the question-and-answer session.

Before we begin the formal remarks, I would like to read the Safe Harbor statement. We would like to remind you that there will be forward-looking statements made during today's call. The forward-looking statements may differ materially from actual results and are subject to certain risks and uncertainties that are detailed in our earnings release and in our filings with the SEC. The Company does not intend to update any forward-looking statements made during the call.

During the course of this call, we will refer to a non-GAAP financial measure which the Company defines as base net income. Please refer to our website for the reconciliation of GAAP net income to base net income. After Jeff and Terry have concluded their formal remarks we will open up the call for questions. I would like to now turn the call over to Jeff.

Thank you, Phil. Good morning everyone, and thank you for joining us today. Today we will discuss our operating results for 2007, but more importantly we will talk about the success of our strategies to diversify revenue and net income. I will take some time to talk about the impact the recent legislation and the global liquidity crisis have had on the student loan origination and acquisition components of our business.

Finally, I will briefly touch upon the outstanding fundamentals and macro economic dynamics that impact education services industry as a whole. First, let me remind you that Nelnet is a diversified education services Company serving the growing needs of the education seeking public. As you listen to our review of 2007 and consider our opportunities for 2008, we want you to keep in mind we have been highly successful in reducing our reliance on student loan net interest margin.

In addition, the demand for our broad group, lower risk fee-based services in the education market is extremely encouraging. The results for 2007 include continued growth of our diversified revenue stream, increased bottom line contribution from fee-for-service operations, active management of operating expenses, and strong bottom line performance when considering the impact of the 2007 legislation and the ongoing global credit crisis.

Base net income, excluding charges related to the new legislation and related structuring, was $0.34 per share for the fourth quarter and $1.72 per share for the year. Fee-based revenues reached $83 million for the quarter and $312 million for the year which represented 65% of our total revenue for the fourth quarter and 66% for the year. Importantly, and as a reflection of where more and more of our revenues will be coming from in the future, our fee-based operations contributed 43% of our base net income in 2007 compared with 33% in 2006.

Terry will provide a more in depth analysis of the numbers in a few minutes. Even though it represents an ever decreasing portion of our revenue and net income, I will spend time discussing the current state of the student loan industry since it is in such a state of flux. We remain committed to our mission of helping families plan, prepare and pay for their education.

However, the manner in which we fulfill our mission is continuing to evolve as the legislation enacted in September, coupled with the global credit crisis is putting extreme pressure on the student loan finance market. The new legislation alone creates significant challenges in the FFEL industry. Last fall we proactively made the tough decisions necessary to right size our business with a new, lower economics of the FFEL program.

As we predicted, many of our thinly capitalized competitors who did not respond quickly are being forced to exit the business in an abrupt manner. However, what we did not predict was the ever increasing severity of the global credit crisis and its far reaching impact on the entire student loan finance industry. The ability to attract capital to fund FFELP and private loans has become increasingly difficult and increasingly more expensive.

We secured liquidity in the fall as the credit market was tightening and we currently maintain an $8.9 billion warehouse line of credit with nine banks with approximately $1.7 billion available of capacity as of today. The credit facility matures in May 2010, but the liquidity line backing the facility has an annual renewal this coming May.

We expect relatively significant pricing pressure on liquidity renewal given the current credit contraction going on worldwide. Ultimately if we cannot come to acceptable pricing terms with our warehouse lenders, we do maintain the ability to term out the facility for two years with a minimal step-up in costs.

The buyer base in the term asset backed securities market has contracted with a near complete disappearance of the structured investment vehicles which drove the pricing in the long end of the market. That said, FFELP ABS transactions are still getting done for well capitalized finance companies that can fund the subordinate tranches on balance sheet. This means that significant portion of our more thinly capitalized competitors are currently unable to access the ABS market and are also more likely unable to renew warehouse lines of credit due to the need for tangible equity capital.

In contrast we fully intend to continue to use our financial strength to securitize (inaudible) FFELP loan assets to free up capacity in our warehouse line of credit. The ABS market for private student loans has since disappeared and accordingly we will look to significantly reduce and potentially eliminate the private loans we fund on our own balance sheet and shift our efforts to working with others in their origination activity to create fee income from our private loan business.

Spurred by the stress in the ABS commercial paper markets the auction rate and variable rate demand note markets have also experienced an unprecedented disruption. Many auction broker dealers on Wall Street have decided to let auctions of all asset classes fail. We currently have $2 billion of auction rate notes and $900 million of variable rate demand notes outstanding which when combined is roughly 10% of our debt capital structure.

Even though our auction rate and VRD in debt is predominantly rated AAA and are generally over 100% collateralized by federally guaranteed student loans, investors and broker dealers spooked by loss in the subprime mortgage market have created an irrational and unprecedented environment of failed auctions in these highly creditworthy assets. The interest rates charged on the failed auctions are slightly different depending on the notes but are generally in the T-Bill plus 125 to LIBOR plus 150 basis point range. We are actively working to restructure the auction and VRD in debt at more favorable rates.

This crisis in the capital markets led us to announce a second restructuring in January. We proactively took steps to reduce operating expenses relating to our student loan origination related businesses further. Since we cannot determine nor control the length or depth of the capital markets disruption, we plan to actively manage direct and indirect costs related to our asset generation activities, and be more selective in pursuing loan originations in both the school and direct consumer channels.

Accordingly, we have suspended consolidation loan originations and will continue to review various origination decisions going forward. As a result of these items we will experience a near-term decrease in origination volume compared to historical periods. Where does all this leave the Company, ion particular the student loan finance industry?

First, consider a few critical points about our Company. We have a $26.7 billion existing loan portfolio that will serve as an annuity type revenue stream for many years. We have the flexibility to dial up and dial down our FFELP loan originations based on our strong origination platform and liquidity position. We have highly efficient loan servicing capabilities with significant scale and capacity to grow through our own internal originations or to seize new third party servicing opportunities.

We have a very strong capital base along with operating capacity. We have a diversified product offering and revenue stream. Fee-based revenues are growing both as a percentage of total revenue and in absolute dollars, a trend we expect will continue. We have been very proactive in right sizing our expense structure in response to the two unprecedented events affecting our student loan business.

Let me repeat our statement from the last call. We will not grow for growth's sake and will not create unprofitable loan assets and sacrifice value creation for short-term volume or some mythical market share benefit. We will continue to monitor the market and be proactive in keeping the Company financially strong.

Before I turn the call over to Terry to discuss the details of our financial performance, I want to highlight some of the dynamics we look to as we chart the court for Nelnet in 2008 and beyond. 2008 will provide the largest class of graduating high school seniors in the history of United States. The cost of education continues to rise at twice the rate of inflation. The financial aid process is continually increasing in its complexity given ever increasing government regulation.

We have seen a suspension of dramatic reduction in new loan originations from approximately 15 industry participants including two top 10 participants. Capital to fund loans is becoming scarce and accordingly, more and more expensive to obtain. Banks are more reluctant to put new loan assets on their balance sheets given the increased capital commitments from all consumer commercial financial assets.

What does all this mean? There are definite challenges. For some participants in the student lending business these are potentially insurmountable challenges. For Nelnet, however, the industry dynamics are providing opportunities in the education services area in general. We believe our strategy has positioned us for success in this growing but complex space.

Let me highlight that 65% of our revenues came from fee-based businesses in the fourth quarter. At this time I would like to the turn the call over to Terry Heimes to discuss the details of our financial performance.

Thanks, Jeff. Today I want to talk to you about our operating results for 2007 and provide some color on our business strategy and the performance of our various operating segments. Given the current market conditions, I will spend some time talking about our liquidity and funding capacity and finally, talk about our strategy and performance objectives given the business environment for 2008 and moving forward.

First, the more traditional measures of performance and results. Our GAAP net income from continuing operations was $19.2 million, or $0.34 per share for the fourth quarter of 2007 and $35.4 million or $0.71 per share for the year. This compares to a loss of $5.9 million in the fourth quarter of last year and GAAP net income of $65.9 million or $1.23 per share for all of 2006.

Base net income was $13.4 million, or $0.27 per share for the fourth quarter of 2007 and $38.5 million, or $0.78 for the year which compares to $0.22 and $1.42 per share for the fourth quarter of 2006 and the 2006 fiscal year. Obviously, a substantial amount of unusual activity occurred during all periods. Moving the discussion to a review of comparable operations can be complicated.

Consider the following: The fourth quarter of 2007 includes restructuring charges of $3.3 million after tax, or $0.07 per share. The fourth quarter of 2006 includes impairment charges related to our settlement with the Department of Education totaling about $0.22 per share after tax. Thus, excluding the legislative changes impairment charges and other one-time items base net income was $0.34 per share for the fourth quarter of 2007 versus $0.44 per share for fourth quarter of 2006.

From a full-year perspective the year ended December 31, 2007 included approximately $46.8 million in after tax restructuring or other charges related to changes in legislation for a total of $0.94 per share. Excluding the legislative changes, impairment charges and other one-time items, base net income was $1.72 per share for 2007 versus $1.64 per share for 2006. Our student loan assets were $26.7 billion, an increase of $2.9 billion or 12% year-over-year and our shareholders equity topped $608 million at year end.

As we look back at 2007, Nelnet has been very successful in the execution of our key business strategies and diversification of revenues, but has also faced significant challenges in terms of market and industry conditions. As we look forward to 2008, with the change in legislation, disruption in the capital markets and reduced economics related to new FFELP loans, asset generation and asset growth will no longer be key drivers or measures of our success.

Before we get to funding, liquidity and the prospects for 2008, let's talk about the performance of our fee-based businesses and operating segments. Our fee-based revenues totaled $83.2 million for the quarter, an increase of $12.1 million or 17% compared to the same period a year ago. For the year fee-based revenues totaled nearly $312 million, an increase of $72 million or 30%.

Fee-based revenues made up 65% of our total revenues for the fourth quarter and 56% of our total revenues for the year, a substantial increase from the 53% and 44% a year ago. Importantly, our fee-based business segments contributed nearly 43% of our base net income during 2007 compared to 33% in 2006. For the year ended December 31, 2007, loan and guarantee servicing revenues from third parties totaled $128.1 million for an increase of $6.5 million or 5.3% compared to 2006.

We saw a pretty substantial increase in our guarantee outsourcing revenue 2007 as compared to 2006 which offset a decline or run-off in our third party FFELP loan servicing revenues. The changes in legislation and capital markets will provide some challenges as well as opportunities in this segment as we move into 2008.

A repeal of the VFA agreements between the Department of Education and certain guarantee agencies could reduce our revenues by nearly $9 million in 2008, but we believe there will be some significant opportunities to increase our third-party loan servicing revenues as some industry participants look to take advantage of our origination and servicing platforms allowing us to capitalize on our significant economies of scale in this area.

Our other fee-based revenues are generated from our tuition payment plan and campus commerce segment as well as enrollment services segment. These revenues increased $58.6 million during 2006 to nearly $161 million, an increase of more than 57%. Our tuition payment plan and campus commerce revenue totaled $42.7 million for 2007 an increase of $7.6 million, or 21.6% compared to 2006.

We continue to see positive leverage and growth opportunities here. After tax operating margins have improved each of the last three years and although this is a relatively mature market, we believe we have growth opportunities not only through new school clients, but also growth in revenue opportunities from our existing client base.

Nelnet enrollment services includes our college preparation and planning services as well our lead generation activities. Revenues increased $48 million or 86% during 2007. The acquisitions of Peterson's and CUnet have significantly expanded our product offering. We believe we have some excellent opportunities to capture value here, not only through integration, economies of scale and operating leverage, but also through our school touch points, services provided and administrative capabilities allowing us to create value for our school clients.

Excluding a one-time charge for impairment of intangible assets incurred during the third quarter, base net income contribution was roughly flat for 2007. Although operating margins have contracted here over the last couple of years as we have built the business, we believe we have opportunities to take advantage of revenue growth and expense control in 2008 and beyond.

Our software and technical services revenue increased $6.6 million during 2007 or 43%, totaling $22.1 million for the year. During 2007, we were able to increase our after-tax operating margin by capitalizing on our operating leverage. While we expect some potential softening of revenues in this area, should lenders exit the student loan business, we also see opportunity to work with lender and school clients to outsource their development and maintenance activities.

In addition to our traditional education focus, we also see diversification opportunities outside the education, finance and services areas with some new product development activities. With the changes in legislation and capital market activities, we have proactively taken steps toward operating cost reduction specifically focused in the asset generation and related support areas. Operating expenses, excluding restructuring charges, are flat compared to the third quarter and compared to the fourth quarter of last year.

We are very pleased with our operating cost performance given the growth in our fee-based revenues. Through our restructuring efforts, we have reduced the cost related to our asset generation activities to a level that can be supported by the economics of new loans provided we get some relief and stability related to our funding costs.

This brings us to a discussion of our lending activities, the related funding costs and funding capacity. As you are all aware, the legislation passed last year significantly reduced the yield on loans originated after October 1, 2007. At year end we had less than $500 million of these loans in our balance sheet, less than 2% of total loan assets.

The capital market disruption has put additional pressure on the economic viability of new loan originations. But before I talk about new loan originations, I want to spend some time talking about the portfolio of existing loans in our balance sheet. We currently have $26.3 billion in par value of student loans on our balance sheet at a carrying cost of 1.7% of unamortized premium. Roughly $18 billion or 70% of those loans are financed to term or matched to maturity with term ABS securities at very attractive fixed spreads to three-month LIBOR.

Since we don't use gain on sale accounting, we have a significant amount of unrealized value in these loans. We estimate the future earnings and cash flow in this portfolio over its life will be in excess of $1.2 billion assuming a normalized historical spread between LIBOR and commercial paper. Our highest priority is the term financing or refinancing of loans in our short-term warehouse vehicle. The facility includes provisions requiring us to roll or refinance a portion of the loans annually.

It also includes provisions that if we are unable to agree on renewal terms of the liquidity support we can term out the facility through 2010 at a minimal step-up in cost. The facility also includes an advanced rate provision subject to a valuation formula based on current term ABS market criteria. As ABS spreads have widened, advance rates have been reduced to require equity support for the funded portfolio.

So our focus on refinancing is twofold. One, reduce the maturity mismatch of this portfolio, and, two, reduce the volatility related to the equity support of our portfolio to the appropriate level for government guaranteed assets. We will be working to refinance or term out this portfolio over the very near term, as well as continuing discussions related to the extension or renewal of the liquidity provisions. The refinancing or renewal will come at a price.

Our current costs related to the warehouse is less than 30 basis points over LIBOR. Historically, we have been able to achieve financing efficiency in the term market, refinancing the portfolio to achieve a reduction in funding costs. Going forward, we know that will not be the case with this $7 billion portfolio. Costs are likely to increase 40 to 60 basis points, either as a result of renewal or as a result of refinancing in the term ABS market.

The next obvious question relates to future loans and the availability of capacity and liquidity. Jeff indicated we are committed to our mission of helping families plan, prepare and pay for their education. We have made significant investments in loan origination and delivery platforms and we've developed a broad array of services to help our school and student customers. We have $600 million in equity capital and access to a $750 million unsecured credit line.

Today more than $400 million of that credit line remains undrawn and $200 million of the amount drawn is providing funding support for our warehouse portfolio of high quality government guaranteed assets. We are positioned in the Company for the 2008-2009 lending year. However, Jeff also indicated we will not generate volume for volume's sake. If we cannot secure economically viable capacity for new loans, we will shift our efforts to other product and service lines including our fee-based origination and servicing activities to help our school and lender clients.

It is also important to note that because of our economies of scale and efficient operations we have a greater ability to achieve those economically viable risk-adjusted returns necessary for us to remain in the asset generation and acquisition business long term as compared to other industry participants. So in summary, what are we doing related to our funding and capacity in 2008? We are going to refinance a significant portion of our warehouse portfolio at wider spreads relative to historic ABS levels and our warehouse funding cost if done under the current market conditions.

We will look to renew or renegotiate a new warehouse facility and extend the liquidity provisions on our existing facility. The cost will be substantially higher than historical levels, but likely limited to a one-year agreement giving the term ABS markets time to settle and recover. We will use our equity and capitol to support our warehouse and term ABS issuance in the short term, to retain the accumulated value in our portfolio. We will continue to monitor the viability of new loan generation and acquisitions given the developing market conditions.

It is also important to note that we are in a seasonally driven slow origination period. If we do not see the appropriate signs of market correction prior to certain peak origination periods, we will take prudent steps to keep the Company financially strong. We have already taken the steps to reduce our operating costs and we maintain the flexibility to dial up or dial down loan production.

That brings us to our overall strategy, plan and performance objectives for to 2008 and beyond. We will continue to execute our business plan focused on diversification. We will continue to deploy our capital and resources to retain and generate value and we will be proactive in dealing with the very challenging and dynamic business and capital market environment related to the education finance portion of our business.

As we look specifically to 2008, it will be a year of volatility, continued transition, continued diversification and positioning. Accordingly, we are not going to provide definitive earnings guidance. We can tell you where we will focus our efforts in terms the business dynamics and some of the areas that are sure to impact our performance. Namely, we will not focus on funding assets on our balance sheet in 2008. At this point in time, we anticipate being active in the asset generation and acquisition area. But it is dependent upon our ability to fund the asset profitably over the long term than secure reasonable, risk-adjusted returns.

We expect our spread to contract specifically as it relates to the roughly $7 billion of our portfolio currently funded in our short-term warehouse vehicle. The extent and the impact is dependent on the amount of loans we refinance, the stability of the term ABS markets and our ability to renew liquidity for our warehouse program.

We expect new opportunities to grow our third party servicing revenues and profit contribution. However, we expect new legislation to reduce guarantee outsourcing revenues by as much as $9 million in 2008. We expect continued growth and strong performance in our tuition payment and campus commerce segment. We expect continued opportunity for revenue growth in our enrollment services segments and we expect to improve our operating margins here taking advantage of integration and scale.

And finally we have undertaken steps to aggressively control our costs and will continue to do so while balancing the need for innovation and investment in technological developments. With that, I will turn it back over to Jeff for closing comments and discuss what lies ahead for Nelnet.

Thank, Terry. I'm going to take a few minutes to describe what we feel could be in store for the entire student loan market and particularly students and their families, which is what really matters in these large public policy debates.

We believe the combined effect of the College Cost Reduction Act passed in September coupled with the global credit crisis is already starting to affect students and will only worsen throughout 2008 if something does not change. As all lenders are choosing where to invest their shrinking pool of available funds, the first to feel the effect will be the students attending higher default/low graduation rate schools.

You have heard us and each of our public competitors state we are pulling away from this market. As capital flowing into the broader student loan market continues to wither our fear is this could quickly roll into the for-profit education sector and the community college market where smaller loan balances and higher delinquencies and defaults equate to higher servicing costs and lower margins.

This would be a needless failure for our country as thousands of people who have had the opportunity to gain the most from education are served by these colleges. Ultimately, if something does not change, four-year college and graduate students will also start to feel the pinch as most banks and finance companies would be constrained in their ability to fund this growing amount of low margin assets on their balance sheets.

There are some people publicly stating that the direct loan program will simply pick up the volume left by the FFELP program lenders. We think this strategy is very risky and it is our opinion the direct loan program does not have the infrastructure in place to more than double or triple in a short period of time without a massive disruption of service to schools and students. In addition, total FFELP volume is expected to exceed over $500 billion in the next five years which if funded under the direct loan program would get added directly to our national debt.

The September 2007 legislation was designed to channel more grant aid to students which we all agree makes sense. What will not change is the reality that the growing cost of higher education will mean that most students will also continue to need these loans.

Grants and loans go hand in hand. If the loan market is disrupted there will not be students in place to benefit from grants. The good news is that this is not too late to head off this gathering storm. The industry is actively discussing ideas with multiple constituencies on how to infuse liquidity into the student loan market to ensure no interruption of access occurs as it never has in the over 40-year-old history of the FFELP program.

I will almost exactly quote my closing statements from our last quarterly call as they are so important to understanding our Company. First, let me reiterate that these recent events will not change our mission of helping families plan, prepare and pay for their education.

Our core values which include our customer focus, our commitment to associates remain unchanged, as do the core underpinnings of our business model which we remain committed to, diversifying and increasing our fee-based revenue streams, deploying capital efficiently, utilizing our scale and capacity to create efficiencies, and generating high quality assets when a proper return on investment can be achieved.

What does lie ahead for Nelnet? Growing and diversifying fee-based businesses will be the major driver of future shareholder value creation. These businesses will represent a substantially larger piece of our income stream and a majority of our bottom line. We believe they will ultimately fill the void created by the lower contributions from loan assets over the long term.

Additional growth in the education space outside of FFELP to reduce political credit and straight risk. Revenue diversification will continue to make us stronger and the new products and services we add will create value to our customers while creating sustainable long-term cash flows for our Company. We see an ever increasing opportunity to expand our third party servicing as other market participants look to piggyback on our scale, efficiency and world class servicing operations.

Maintaining our relationships with our existing school customers and our target market is critically important. However, the market and how we approach the market has changed significantly. By way of example, in a typical year we were likely to receive approximately 40 lender lists RFPs from colleges and universities. Since last September we have received and responded to over 500 RFPs.

Asset generation will be intently focused on high quality low default FFELP assets and maximizing their value by either balance sheeting new loans that meet our return targets before flowing them to strategic third parties.

Finally, before we take your questions I want to proactively address what we plan to do in terms of regulatory filings, earnings release and investor outreach during 2008. We believe our public filings contain the information necessary to evaluate our performance and understand our business operation.

This is where we focus our public disclosure and transparency. We believe it is important information for our investors and should be reviewed and considered in conjunction with our comments and discussions. Going forward, our quarterly calls will be scheduled after we have filed our 10-K or 10-Q. Mike, Terry and I will now take your questions.

Thank you, sir. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). We'll pause for a few moments. Our first question comes from Sameer Gokhale with KBW. Please go ahead.

Hi, good morning. I think you had mentioned that you were currently in discussions with certain constituencies about thinking of perhaps thinking of ways in which to inject liquidity into the funding markets for student loans.

Would you willing to discuss any specific proposals that you have submitted and perhaps who you might have spoken to or approached so far? I know Hank Paulson, the Treasury Secretary has been approached by some lawmakers on this issue and I was wondering if you had pursued that line as well? Just would love to get your thoughts on this issue?

Sure. This is Jeff, Sameer. What I would say is that the industry as a whole, many participants and industry trade groups have approached multiple levels of government.

That would will local, state and federal levels at all different types of agencies to have discussions about what is going on in the student loan market, what is going on in the capital markets and what it means for students and families in the United States. So I would tell you that there have been multiple discussions at multiple levels across government on this issue.

I mean is there anything more specific you can give us as far as proposals, perhaps to have the government provide some sort of backstop liquidity support, to the extent that ABS investors are kind of hesitating to invest in even government guaranteed ABS and maybe by providing that backstop liquidity you get more of these investors into the market? I mean is it along those lines or would you discuss specifically what kinds of ideas you have been thinking about?

Some of the discussion -- this is Mike Dunlap -- has gone down the line of if you look at the some of the other market segments, like housing you have the Federal Home Loan Bank and the Federal Farm Credit System for the agriculture area, Ginny Mae, Fanny May and Freddy Mac in the mortgage sector.

The student loan sector did have direct access when Sallie Mae was a GSE through the federal financing bank. Some of discussions we've had is should the Federal Home Loan Bank or the Federal Financing Bank be allowed to provide liquidity directly into student loan assets or asset-backed securities with a number of different players in government. There's some of the different ideas we have talked about.

That's terrific. That's very helpful color. The other thing I was wondering about is I think this warehouse facility that I think is due for renewal in May of this year, I think you mentioned if it weren't renewed it would become a term facility, you mentioned a modest step-up in cost there. Would you be able to share with us what the incremental step-up in costs on that facility would be if you were to just leave the assets in there and term it out?

10 basis points.

10 basis points compared to what you are doing now. Okay, and the last thing I was curious about was on your fee-based income, I know there was some commentary given, I mean Q4 in your other fee-based income there was a pretty big sequential increase. Was that pretty much all due to seasonality, or was there one business in particular that was performing better than the others?

It was primarily seasonality. We have seen really solid growth in terms of our tuition payment and campus commerce segment as well as with the CUnet and the Peterson's, our enrollment services had a good quarter as well as our lead generation activities.

Okay. Great. Thank you.

(OPERATOR INSTRUCTIONS) We will pause for another moment. We have a question from Robert Kirkpatrick with Cardinal Capital. Please go ahead.

Good morning. Could you talk a little bit about where you are in your restructuring process with the one that was announced in January? Are you all the way through that at this point, and can you give us some guidance as to where your cost structure is relative to that which you reported in the fourth quarter, please?

Sure, Robert. This is Terry. We are largely through our restructuring process. We do have, as we exit some associates there will be carry-over, severance and other costs that will flow into the second quarter but we are largely through that.

In terms of our cost structure and run rate we expect, as we announced previously with the restructurings, we would expect a cost savings in the $25 million to $50 million range from a standpoint of our 2007 run rate perspective. We would start to expect to see that in 2008, starting to take effect in the first quarter, however, with some of our carry-over, we will see the main impact in the third quarter of 2008.

And what accounts, first of all what's the 2007 run rate? Is that the rate at which you exited the year or is that the rate for the whole year?

That we exited.

Okay. And what contributes to a variation of $25 million to $50 million, or nearly 100% swing in your assessment of the costs being saved?

It would somewhat depend on the level of asset generation activities that we actually undertake in 2008.

Okay. And could you go back to the point that you made during your prepared remarks about the loan portfolio having, I think I wrote it down right, $1.2 billion of future value and explain that a little bit greater detail for us?

Sure. This is Terry. We have got, we have got, of our $26 billion portfolio, we have $17.5 billion to $18 billion that is funded using the term market with fixed spread to three-month LIBOR.

When we run that out through the life of the portfolio, the cash flow and earnings generated on that portfolio over its life is in excess of $1.2 billion which would include the excess spread, the servicing revenue that we would largely generate for ourselves because we are servicing it and the administration releases from the trust estate. That assumes a historical level or spread between commercial paper and LIBOR, as well as certain prepayment rates, et cetera.

The point we wanted to make, though, is that we have that portfolio financed to term with very attractive spreads and we have locked in the value on that portfolio, and since we don't use gain on sale accounting we will recognize that value over the life of that portfolio.

What is the term you have locked in, what's the average term of that $1.2 billion?

They vary by asset type. A substantial portion of those are consolidation loans, so they have a very long life, probably in the neighborhood of 10 to 20 years in terms of an average useful life.

Okay. And your equity market value today is a little less than that?

Yes.

Great. Thanks so much, gentlemen. Appreciate your time.

Thank you.

(OPERATOR INSTRUCTIONS) We have a question from [Sauro Bettini] with Credit Suisse.

Hi, good morning. I'm calling, my question has to do with your funding profile. If you could just maybe discuss what is coming due in 2008. I think you've talked about the $6.6 billion warehouse facility which you plan to term out. And then I think there's $2.9 billion in auction rate loans. How do you plan on refunding that given the current situation?

Sure. You are correct. We have about the $6.9 billion or $7 billion warehouse line which, although it has a final maturity of May of 2010, the liquidity is renewed annually, and so with that renewing in May of this year, we have got that as a, as coming due this year.

In addition, the auction rate is reset annually. Those we are experiencing dislocation in the rates. However, I think it is also important to note that some of those loans in those financings have lower floor characteristics to them.

So those are still economically viable trust estates. We are going to look to refinance those into an alternative source to reduce our funding costs there, but our first priority is to refinance our term, our short-term warehouse portfolio.

Are you referring to the $6.6 billion?

Yes.

But even if you, with this you can always term it out until 2010, right, if it can be refinanced?

We do have that option, yes. We are trying to make sure we put ourselves in the best, most flexible position as we move into 2008 and beyond.

And the $2.9 billion in auction rate funding, what's plan B if you can't refinance that?

As I said, those have the ability to, those are not coming due, they're reset periodically, and we have the ability to leave those in the auction rate or variable rate demand mode. It is just going to be more efficient for us to refinance those to the extent we can because they're currently earning at the max rate. They've gone to their max rates. We want to refinance those to gain efficiency.

Okay, I understand. When are they coming due, those?

They have varying maturities. Most of them are probably going be anywhere from 12 to 30 years.

Okay. Great. Thank you.

We will take our next question from Shane Wilson with QVT Financial.

Hi. I was wondering when you speak about increasing revenue from third party servicing if that service basing your general assessment of the state of the market now, or if you had specific conversations with specific other industry participants?

There's all kinds of different opportunities that are popping up as people are looking at ways to become more efficient. They're looking at companies like ours that have the scale and efficiency to help them do things more efficiently. We always have had a sales pipeline in our servicing area. That's increased significantly in the last three to six months as turmoil has kind of rocked the market.

Okay. Thanks.

And our next question comes from Charles [Tesorillo] with Cedar Hill.

Hey, guys. I was wondering if you could just delineate a little bit better for me or us the derivatives you added in the quarter. It looked like you had some activity there and what is hedged and what's not hedged and what the exposures are?

Sure. This is Terry. Let me start with some of the exposures that we were trying to hedge. As you may recall, in our assets are set off the average daily rate of the 90-day commercial paper. So our assets set daily. The majority of our debt will reset every three months based off LIBOR. So in a rising rate environment, we benefit from our assets resetting daily and our debt resetting discretely every 90 days.

When rates leveled out we recognized that volatility and wanted to hedge against that in a declining rate environment, and so we added a total of about $24 billion in terms of hedges that are outlined in our K that come on at varying points in time which hedge that average versus discrete difference in the reset provisions of our assets and our debt. That's one of the risks we have hedged and that we have benefited from in terms of the recent substantial decrease in rates.

So those are basis hedges?

Yes. The other area that we have undertaken hedging activity is we have a portion of our loans that, about $3.5 billion that have the ability to earn variable rate floor income if rates drop substantially because they were reset last July.

Rates have dropped substantially. We actually earned variable rate floor income to the extent that commercial paper will drop below about 4.9%. We have hedged or put on about $2 billion in hedges against that $3.5 billion portfolio which lock in a rate of 4.18%. So we have effectively locked in or hedged about 72 basis points of variable rate floor income on $2 billion of our, of our portfolio that could be eligible.

We have an additional $1.5 billion to $2.4 billion that could be eligible for additional variable rate floor income because of T-Bill rates or commercial paper rates that we will earn a spread on as rates drop. We will earn variable rate floor income between the difference of about 4.8% to 4.9% and the the commercial paper rate which currently is running probably around 3%. So we have the ability to earn an additional 1.75% to 2% on that additional $1.5 billion of loans that are reset based on commercial paper.

We also have about $800 million of loans that have the ability earn variable rate floor income that are reset off the T-Bill. However, because we don't have really any debt that is matched or based off the Treasury Bill, while we earn variable rate floor income we really don't receive the economic benefit of that because of the wide [ted] spread. That's the variable rate floor income component of it.

Then on the fixed rate income, we our fixed rate floors we have about $2 billion that is earning at the fixed borrower rate of about 7.5%. And we will have locked in, because of hedges we have locked in about 120 basis points of fixed rate floor income on that $2 billion portfolio.

$1 billion of it was earning at fixed rates at year end and $1 billion was added after year end, or additional $1 billion converted to fixed rate after year end because of the continued decline in interest rates.

Got you. That's great. Appreciate it.

Our next question comes from Lance Ettus with Mortar Rock Capital Management.

I actually have a few questions. First, I know you said your locked in part of your portfolio is worth $1.2 billion. I was just wondering if you could comment on from what you are seeing ut there whether the part that is not locked in, if you could still sell those loans, I would think you could sell those loans at a slight premium to book value? In other words you can sell them at 1.005 or 50 basis points above at least.

Obviously, there's a substantial amount of disruption in the capital markets and the availability of capacity and liquidity has become challenging. I think it has become irrational in terms of the impact on the, but what's assets would be sold for. We believe they have significant value and we are looking to retain that value by terming out some of them out of our warehouse, but we will continue to look for ways to capture that value including potential sale.

Okay. And I am just also, if you could comment, one, on your servicing business, what's been the growth there of the part that, that's not your assets, and, two, you mentioned diversification efforts before, diversifying sort of outside the payment arena, could you comment on what sort of products we should expect coming in the pipeline?

Sure. This is Terry. Let me first address the servicing. As we grew our portfolio historically, we have been able to grow our assets on balance sheet,. And through consolidation, we actually saw a run off in our third party servicing portfolio.

So that has been actually declining over recent years because of the consolidation as well as our focus on growth of assets on our balance sheet. With the reduced consolidation impact and the reduced economics and people looking for efficiencies, as Mike indicated, we see some opportunities to add some additional lenders and also grow, for lenders to grow our third party servicing going forward.

While that has historically seen a decline, a run-off, we see some opportunity to grow that going forward. And then your other question on diversification, can you repeat that?

You commented before that you were looking to diversify outside the core payment products in your other fee businesses. If you could just comment on that, what a little more specific there if you could?

One area we have seen opportunities here has been in our software and technical services area. We have been able to develop products that really have appeal to constituencies outside of schools and students. And we have been able to start to develop a market in that area. Right now it is, it is really immaterial in terms of the overall contribution, but we see opportunities to continue to diversify specifically in the software and technical areas outside.

In addition, we also see opportunities to continue to diversify the product and service offered under our Nelnet enrollment services area by example where traditionally that has been focused on planning and preparation as well as lead generation, with lead generation taking the lion's share of the activity there. We see opportunities to expand the product service offering to schools and students outside of that as we move forward.

Okay. Thank you.

We have a follow-up question from Sameer Gokhale with KBW.

Hi, just actually a couple of quick follow-ups. You know on that, on that warehouse facility and the $6.6 billion of loans in there, assuming that facility isn't renewed, as those loans pay down does that create additional capacity back up to the $6.6 billion or is that just basically fully amortizing then at that point in time? I just wanted to get some more detail on that?

If we were to term the facility with the providers, it would just amortize down.

Okay. And then the other question I had was on the portfolio where you talked about the future cash flows, I am assuming that doesn't take into account any of the operating costs associated with servicing that portfolio. So if one were to try to do a MPV on that piece of the portfolio, what would you envision your OpEx would be if you were to just do a minimal amount of servicing on that and you cut out all the infrastructure related to the origination part of that business? How should we think about from an MPV perspective if we are thinking about valuing that whole earnings stream?

Well, on that earnings stream, the largest portion is go to be the net spread. The servicing is provided out of the cash flow that is there. Our servicing is done, one of the developments or one of the things we have been able to develop is a significant amount of scale. So our cost is very efficient in that regard.

As it relates to there's a lot of different factors that can come into the net present value. Our focus was to make sure that we provided guidance on the amount that would flow off of that portfolio to demonstrate the value that's there.

Well, let me see if I can ask the question another way. If I were just trying to value within run-off so you don't leverage off the scale of new loans you might add on there and service those. If you were just going to run the portfolio off, your OpEx ratio right now, I don't know if in the current quarter just related to that business if it was about 80 basis points or so.

If you were to just do a minimal amount of servicing on that portfolio, cut out all of the origination costs, et cetera, perhaps that would be 40 basis points of expenses you are left with in a burn down scenario, where you are just running the portfolio off, is that the way I should be thinking about it and not take into account, not assuming growth in the business but just assuming a burn down run-off analysis from an MPB perspective. Do those numbers make sense?

You are still high in terms of the true, true cost associated with a run off scenario. Again, a substantial portion of those are high balance consolidation loans so our servicing costs, true marginal incremental servicing costs is going to be very low, substantially less than the 40 basis points you referenced.

How about the all-in cost of that portfolio? Would it be lower than 40 basis points not looking at margin again and because just assuming a run-off for the portfolio? So service that existing portfolio with the cost that I should assume, should that be 40 basis points or all in, including your fixed cost infrastructure, et cetera?

It would be less than that. The key, though, is our ability to manage our fixed cost infrastructure is how we continue to grow our fee-based businesses, the opportunities that are provided to continue to focus on the growth of our servicing business, the ability to expand our enrollment services areas, the ability to continue to grow our tuition payment campus commerce. So all of those play into our ability to manage our fixed cost infrastructure.

Okay. Thanks, Terry.

And there are no further questions at this time. I would like to turn the conference back over to our speakers for any additional or closing remarks.

We have diversified our revenues and reduced our reliance on net interest margin in government funded programs. We have established viable entry points for school and lender customers. We have developed significant economies of scale in our loan servicing and tuition payment plan operations and are developing similar economies of scale in our enrollment services areas.

We have accessed the necessary capital to expand our business in profitable areas. We have the management experience and expertise to take advantage of business opportunities and we have demonstrated the ability to execute on our business plan and strategies in challenging times. We want to thank you for participating in our call. Have a great day.

That concludes today's teleconference. Thank you for your participation. Have a good day.