Nelnet, Inc. (NNI) 2009 Q1 法說會逐字稿

Please stand by. We are about to begin. Good day, everyone and welcome to Nelnet's first quarter 2009 conference call. Today's call is being recorded and broadcast live over the Internet.

At this time, Mr. Phil Morgan, Nelnet's Head of Investor Relations will begin with opening remarks. Please go ahead, sir.

Thanks. Good afternoon and welcome to Nelnet's 2009 first quarter earnings conference call. On today's call we have Jeff Noordhoek, President; and Terry Heimes, Chief Financial Officer. Please note that during the conference call we may discussion predictions and expectations and may make other forward-looking statements. Actual results may differ from those discussed here based on a variety of factors. These factors are discussed in the Company's Form 10-K and other filings with the Securities and Exchange Commission. The Company does not intend to update any forward-looking statements made during the call.

During the course of the call we will refer to our non-GAAP financial measure which the Company defines as base net income. A description of base net income and a reconciliation of GAAP to base net income are included in our first quarter 2009 supplemental earnings disclosure which is posted on our Investor Relations website at www.nelnetinvestors.com. After Jeff and Terry have concluded their formal we marks we will open up the call for questions. Thank you. I will now turn the call over to Jeff.

Thanks, Phil. Good afternoon, everyone. We are clearly pleased with our operating results for the first quarter in which we reported base net income of $0.64 per share. We continue our transformation to a fee-for-service processing Company and are focused on the following objectives.

One, growing and diversifying our fee generating business; two continuing to reduce operating expenses; three, maximizing the value of our existing portfolio; four, reducing our liquidity exposure; and five reducing our debt. We have made significant progress towards these objectives in the first quarter, in particular our revenue diversification, decreased operating expenses and improved liquidity. Importantly, the education market at a high level remains dynamic, strong, and a good fit for our products and services. Enrollment and the cost of education continue to increase. In addition families often find the process of planning and paying for school challenging. We have positioned our business to help families navigate this increasingly complex system. These products and services include tuition payment plans, enrollment service, electronic campus commerce and test preparation to mention just a few.

Despite the development and performance of these fee for service businesses we know an important topic relating to our Company is the President's budget proposal to eliminate the FFELP program. First and foremost, we applaud the administration's goal of making higher education more affordable for many Americans. As you all know, the administration has proposed to eliminate the FFELP program by funding all new loan originations through the Federal government, and use the projected savings to make Pell Grants a permanent entitlement program. It is important to note however that the vast majority of the so-call savings are not produced by eliminating the FFELP program and related subsidies. In fact lenders in the FFELP program have not received subsidies on new loan originations since to 2006. The so-called savings is actually profit between what the government will charge the student, currently 6.8% and the projected government's projected low US treasury rates the next ten years.

Over the next several months, Congress will make many important decisions on the future of the federal student loan programs. There are alternative proposal that is have been presented that accomplish the government's goal of creating profit to increased funding for Pell Grants but also retain the private lender infrastructure to originate in service loans. These hybrid proposals give the Government the vast majority of its projected profit, retains the key component of competition which drives innovation and strong customer service and retains thousands of jobs in the private student loan industry. These proposals also eliminate the execution risk of converting more than 4,000 schools from one program to another in less than a year. We trust Congress will carefully consider what the truly in the long term interest of students in the country by creating a better Pell program, reserving customer service and the infrastructure for private investment education while retaining tens of thousands of jobs in America.

Another significant opportunity for us is our response to the RFP to service loans for the Department of Education. We are unable to discuss the details of our bid as the process is ongoing. However, due to our large scale, efficient operating structure, superior service and outstanding performance history we are confident we provided a competitive bid and a compelling proposal. The department has indicated they will announce the results of this bid process by early June. If given the opportunity, we look forward to serving students and families through this contract. Regardless of the outcome of the budget proposal and servicing contract, our business model is uniquely positioned within the education industry for future success. Consider the following--we we will continue to invest and grow fee generating businesses that have strong operating margin and cash flow. We will continue to originate loans to all students at all schools through the 2009, 2010 academic year. We have a $26 billion portfolio that will generate cash flow of $1.4 billion over its life and we will continue to service a $35 billion portfolio for over 2 million borrowers. Now I will turn the call over to Terry to discuss our financial results. Terry?

Thanks, Jeff. We reported strong performance for the first quarter of the year despite some significant challenges related to continued disruption in the credit markets and importantly the continued dislocation of commercial paper and LIBOR interest rate indices.

Our GAAP net income for the first quarter was $25 million or $0.52 per share, and our base net income was $31 million or $0.64 per share. Our results include $0.10 per share related to the retirement of a portion of our unsecured debt due in 2010, and $0.04 per share related to the contingency payment on the sale of Premier Credit last year. Excluding these items our base net income was $0.50 per share compared to $0.31 per share last year. I would like to discuss our financial results as they relate to our core objectives that Jeff mentioned earlier.

First revenue diversification. During the first quarter we experienced growth in revenue and operating margin from our fee-based businesses. Our enrollment services, tuition payment plan and campus commerce businesses, grew $3.3 million or 8%. These businesses are not dependent upon the Federal Student Loan Program and we believe they are well positioned for future growth.

Second, strong portfolio performance. Complemented by our hedging activities and our portfolio composition, our core student loan spread and net interest margin remain stable during the first quarter and we would expect similar levels or 90 to 100 basis points as we look to the second quarter. We use derivatives as part of our strategy to maximize the value of our portfolio and during the first quarter, we recognized over $20 million in derivative settlements. In addition, the low interest rate environment resulted in additional fixed rate floor income earned on our existing portfolio.

Our hedging strategy and the portion of our portfolio that earns at a fixed rate helped offset the continued disruption in the CP LIBOR and the inconsistent application of special allowance formula by the Department of Education in the first quarter as compared to the fourth quarter of 2008. The continued distortion between CP and LIBOR remains an important issue for student loan bond investors and the industry and a long term legislative solution is needed.

Third, reduced operating expenses. In addition to the growth of our fee-based revenue and the performance of our portfolio, we also continued our aggressive and proactive approach to managing and reducing our operating costs. Excluding certain charges in 2008, operating expenses for the quarter decreased nearly $10 million or 10%. They also decreased $4 million or 4% compared to the fourth quarter of last year. While we believe our first quarter would represent a reasonable run rate for operating expenses we will continue to look for additional opportunities to gain efficiencies. The combination of these factors allowed us to generate positive bottom line results this quarter and position us well for the future.

And finally, improved liquidity. During the first quarter we issued a privately placed asset backed securitization reducing the amount of loans at our FFELP warehouse facility to $1.2 billion. Of the remaining loans, approximately $850 million are eligible for the straight A funding vehicle which began funding this week. We would anticipate systematically refinancing or moving loans into this facility over the next few months. We continue to generate cash flow from operations to bolster our liquidity as well. Currently we have over $500 million in cash and unencumbered assets and generated more than $50 million in cash flow from operations this quarter. Given the continued challenges ad market volatility we are pleased with our performance. We believe we have taken and will continue to take the proactive and prudent steps to position the Company for continued success. At this time we would will happy to take your questions.

Melissa, we are ready for questions.

(Operator Instructions) We will take our first question from Michael Taiano with Sandler O'Neill.

Hey. Good afternoon, guys. A few questions. Terry, could you maybe give us a sense of what your core spread would have been had we been in a more formal CP LIBOR environment where it's traditionally been 8 to 10 basis points? I know you got some benefit from that through the fixed rate floor income, but would you still be around 100 basis points or would you be closer to like 120 if you didn't have the CP LIBOR issue?

If the CP LIBOR for example if we were to have the same -- were we to have the same special allowance calculation as the fourth quarter we probably would have been 6 to 10 basis points higher. And so it wouldn't have been the full 26 that was the difference in terms of the calculation due to our hedges and also our portfolio composition. If the CP LIBOR were to return to a more normalized situation, we would pick up some but not all of that normalization because some of our fixed rate floor would go away.

Okay. Second question is could you just remind us what your covenant levels on the $750 million unsecured line? I think there's two, a few covenants, one is consolidated net worth and one is EBITDA, to interest expense, can you just remind us what those are and then where you were at the end of the first quarter?

Sure. One was a consolidated net worth, we were, I can't recall the minimum off the top of my head but we were well above that. The minimum was somewhere in the $300 million range that we were above, our current, our current equity level was above the minimum threshold by 200 million to $300 million the other was EBITDA covenant which we were at least double what we needed to be at in terms of the covenant level there.

Okay. Great. And then just last question, you guys seem like you are in a position where you are going generate reasonable amount of cash flow and you talked about the $1.4 billion over the life of the loans that you had to securitize. Can you maybe just give us a sense of how you prioritize as that cash flow comes in, where you expect to deploy that? Would it be more in terms of looking at acquisitions, paying down debt, returning cash to shareholders in the form of dividends or share buybacks, can you maybe give us a sense of what your thinking is on that?

Sure. This is Terry. Obviously we are going to take a look at all of the options that we have in front of us. The -- our -- we believe that in a -- we are still in a volatile credit environment and a volatile market. So liquidity is a premium. So we are going to focus on continuing to improve our liquidity position, and then we are going to, after that we are going to continue to look for opportunities whether that be in the form of reducing our outstanding debt or other ways that we can deploy the cash in a manner that will drive long-term value and long-term cash flow.

Okay. Thanks.

(Operator Instructions) Our next question comes from [Sameer Volkalay] with [Keith Bruitt].

A couple of questions related to your fee-based businesses. The revenue from fee-based businesses less dependent on Government programs grew about 8% year-over-year. How should we think about the growth rate of that business going forward? I mean has there been some underinvestment in those businesses which is causing the growth rate to kind of be in the high single digits or do you envision with more investments you could have a faster ramp or how should we think about the revenue growth in that business going forward?

Sameer this is Terry. We are actually very pleased given the current market environment that we have been able to sustain growth in those businesses, and we believe we are well positioned to drive that future growth. I think the unique thing about those businesses is they're well positioned for a declining, in terms of a declining economic environment. So we actually feel very good about where that is at. One of the things that also impacts especially the tuition payment campus commerce segment is the reduction in float income and the decline in the interest rate environment and the impact of that business as well. So we are actually very pleased where with we are are at in both of those businesses.

So how should one think about the 8%? It seems like enrollments may be on track to grow at a CAGR of say 1% or so over the next decade or so. So, if we use that as a baseline, maybe that's where enrollments have been growing but on top of that to keep that 8% growth rate, the additional 7% would that come from pricing increases or would that come from taking market share? Maybe it is too specific a question for now, but some perspective would be helpful if you have some thoughts.

Sure, Sameer. I think growth will come in two forms. It will come in terms of growth of market share and it will come in terms of growth within our existing customer base as we expand our products and services to that existing customer base. So those are the two places that we believe we are well positioned and will drive future growth.

Okay. And then in terms of the pretax operating margin, in the tuition payment processing and campus commerce segment, the operating margin year-over-year declined to 39% from 48%. Can you give a sense of what was driving that decrease specifically?

Sure. The primary place is we were making some investments in terms of product development specifically on the technology side.

Okay. And then just sticking with the theme of the fee based business and the enrollment service, the operating margin pretax, increased to 3.6 from 2.7%. I mean the margins there seem to be fairly light currently. Is that the kind of ramp we should expect? It seems like a rather slow ramp on a year-over-year basis in terms of the improvement in the operating margin.

Our goal would be to drive that closer to the 10% operating margin over time.

Do you have a sense for how quickly you could get there? Are we talking about 2010 some time that you can be at that target range?

I would expect that by the end of 2010 we would be in that neighbor, yes.

Okay. That's pretty helpful. I wanted to drill down on these a little bit more because that is kind of future of the business if you will, and these fee business so your perspective is helpful. Thank you.

There appears to be no further questions at this time. I would like to turn the conference back over to Nelnet's President, Mr. Jeff Noordhoek for any additional or closing comments. Please go ahead, sir.

Thank you. In closing it is important to remember the fundamentals of our business remain strong, regardless of the outcome of the President's proposal and the servicing RFP. Approximately 90% of our portfolio is financed to term for the life of the loan at rates which is will create a significant and viable cash flow stream at $1.4 billion. We have capital and liquidity for new loan originations. We have maintained the value of our service and delivery while reducing our operating cost by $10 million compared to the same period last year. We have developed a broad, diversified offering of fee generating businesses with significant growth opportunities and operating margins. And we have a strong capital base with which to create long term value for our shareholders. So I thank you for participation in our call. Hope you have a great day.

This concludes today's conference. Thank you for joining us.