Nelnet, Inc. (NNI) 2009 Q3 法說會逐字稿

Good day everyone and welcome to Nelnet's third quarter 2009 conference call. Today's call is being recorded and broadcast live over the Internet.

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

Thanks. Good morning and welcome to Nelnet's 2009 third 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 we may discuss 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 factor are discussed in the Company's Form 10(K) and other filings with the SEC. 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 the reconciliation of GAAP net income to base net income are included in our third quarter 2009 supplemental earnings disclosure which is posted on our Investor Relations website at Nelnet investors.com. After Terry and Jeff have concluded their formal remarks we will open up the call for questions. Thank you. I will now turn the call over to Jeff .

Thanks, Phil, and good morning everyone. We are extremely pleased with our operating results for the third quarter of 2009. I hope we are not beginning to sound like a broken record. However, once again we had a great quarter and we are optimistic about the future. Our fee based revenues continue to grow. Net interest margin has increased. Expenses have decreased. Our liquidity needs are virtually zero. Our capital position continues to strengthen. And given our strong cash flow we continue to opportunistically repurchase outstanding debt to create significant tangible value for our shareholders. We considered stopping here for questions but we will continue for bit longer to give more detail about the third quarter.

In the third quarter we recorded base net income of $1.01 per share compared to $0.47 in the third quarter of 2008. We continue our transformation to a fee for service processing Company and as we look forward we are focused on meeting our primary objectives of growing and diversifying our fee for service businesses and maximizing the value of our existing portfolio. We remain quite optimistic about the remainder of 2009 and the foreseeable future. In September, we began servicing loans for the Federal Government under the new contract. Given our relative size this contract will become a significant and recurring source of revenue for the company. We look forward to growing this important new business line in 2009 -- for 2010 and beyond by providing the best possible service to students and schools under the contract. We know an ongoing important topic related to our Company is the President's budget proposal to eliminate the FFELP that program. In July the House passed a bill for the proposal but the Senate has yet to debate the proposed legislation. Regardless of the outcome of the budget proposed we have positioned our business to be successful buy helping families, schools and financial institutions navigate an increasingly complex education system.

We have no doubt the fundamentals of our business model remain strong we have stable well established fee for service business with recurring revenue. We are generating significant cash flow from our business and student loan portfolio. We believe we are well positioned for growth in a very dynamic education services market. Now I will turn the call over to Terry to discuss our financial results. Terry.

Thanks, Jeff. We did have a very strong quarter. We were proactive in our approach and decisions at the beginning of the financial crisis and while there are still challenges in our economy today those challenges will present opportunities for growth and diversification and we are well-positioned to capitalize on those opportunities. Our base net income excluding certain restructuring and liquidity related charges was just over $50 million or $1.01 per share as compared to $23 million or $0.47 per share a year ago.

Year to date our base net income excluding restructuring activities was $114 million or $2.30 per share compared to $65 million or $1.33 per share a year ago. The financial highlights related to our third quarter that I want to discuss today include our fee based businesses, our operating costs, our portfolio and our liquidity.

First as relates to our fee for service businesses and revenue diversification. Our fee for service revenues make up more than 50% of Nelnet's total revenues. These businesses have high customer retention, have opportunities to grow revenues from existing customers and to grow market share by adding new customers. The expanding volume under the government servicing contract will provide additional leverage and growth opportunities. While our total fee for service revenues were relatively flat for the quarter our revenues from tuition payments plans, campus commerce and lead generation product lines grew more than 17% or $5 million when compared to last year.

During the quarter we also started servicing loans under the government contract. We are currently servicing more than $2.5 billion in contract volume, but perhaps more importantly $740 million is volume that we did not have in our servicing system previously. These businesses are not capital intensive. They are generating significant cash flow and earnings and have opportunities for growth and leverage. Needless to say we are optimistic about their future.

Second, related to operating costs. Excluding restructuring charges and direct costs to certain lead generation activities our run rate expenses were down almost $17 million or 20% compared to the same period a year ago and 9% sequentially. These reductions are the direct result of proactive changes made to our business model because of legislative and economic conditions. We will continue to look for efficiencies and manage our operating costs. However, as we grow our fee based businesses and increase our volume under the government servicing contract we would expect operating expenses to stabilize.

Moving to the portfolio. Almost all of our loan assets are financed at term at rates we estimate will generate more than $1.3 billion in future cash flow. We expanded the disclosure related to our portfolio to emphasize the value of the annuity stream. Our core student loan spread continued to improve in the third quarter, increasing to 127 basis points. CP LIBOR spreads have narrowed and the historically low interest rate environment increased current period earnings. And finally as relates to our liquidity.

Last quarter we announced a new $500 million revolving warehouse facility that will provide funding through July of 2012. We also recently issued a $430 million securitization of consolidation loans at attractive rates. We have access to funding for current year originations and with the ability to put these loans to the Federal Government we have no short term liquidity issues related to our portfolio. Accordingly we were able to use our strong performance and cash flow to reduce our outstanding debt through repurchase activities.

In the third quarter we repurchased approximately $183 million of debt generating a gain of just over $5 million. Subsequent to quarter end we were able to buy an additional $140 million in debt which will generate a gain of approximately $14 million in the fourth quarter. Based on our strong quarterly results and substantial resolution of our liquidity concerns, the Board recently announced the reinstatement of a $0.07 per share quarterly dividend. For the current quarter it will be paid on December 15, to shareholders of record as of December 1. So when we recap the quarter from a financial perspective I would focus on the following. Our base net income was $1.01 per share or roughly $50 million. We continue to grow and diversify our fee for service revenues. The government servicing contract will supplement our growth and continue diversification. We continue to manage our operating costs with expenses down 20% compared to prior year and nearly 14% year to date. We have expanded the disclosure on our portfolio which continues to serve as a valuable annuity stream. The improvement in CP LIBOR combined with the low interest rate environment increased our core student loan spread to 127 basis points. And we have virtually eliminated our liquidity risk related to our student loan assets. And we've begun to systematically reduce our outstanding operating debt. At this time we'd be happy to take your questions.

(Operator Instructions) We'll take our first question from Sameer Gokhale from Keefe Bruyette and Woods.

Just a few here, the first one is, one of the competitors talked about exploring the sale of the Federally guaranteed student loan portfolio. Have you also been in similar discussions perhaps with potential acquirers? Is that something you're considering now given that you've broken out and provided more details about the future cash flow stream from your portfolio or is that something still off the table at this point?

Well, obviously we are going to continue to look at all the options. We have a very valuable annuity stream that we financed to term. It's not necessarily high on our priority list right now but we will continue to look at organizational opportunities to make sure we capture the maximum value of the portfolio as well as the maximum value of our fee based businesses.

Is it fair to say that you haven't reached the point where you are actually talking to other potential acquirers and right now you are just exploring initially or are you further along in that process of maybe talking to potential buyers. Can you share that with us today?

No, we are not talking to any potential buyers at this point. We are exploring opportunities.

That's very helpful. The other thing is on the operating expenses. I know there was some commentary about the outlook for OpEx and how they might stabilize but let's say the FFELP were completely eliminated how much in additional cost could you take out of your system related to the FFELP program going forward?

Sure, Sameer, this is Terry. Obviously we were pretty proactive in our approach when legislation changed so we've taken a substantial cut at our operating expenses given the change in our business operations. We would probably be able to eliminate some additional marketing and origination costs but I don't think it would be substantial.

Okay. Terrific. Then just my last question, in terms of the government servicing contract when we look at your disclosure as far as revenues that you generate in the quarter and the size of the portfolio I think the rough math works out to 20 basis points. Is that unusual that 20 basis points number, should that number be actually higher or is there some revenue not included in that figure for the third quarter?

I'm sorry, Sameer, can you repeat that. I'm not sure I understood the question.

Yes. We just looked at your revenues that you disclosed in the 10-Q from the government servicing contract, the new one that you got. If you take those revenues and you divide them by that servicing portfolio that you also received it works to about 20 basis points as the revenue margin as a percentage of the portfolio. Is there something that is not being counted in the third quarters revenue number that would be counted in future quarters so that the 20 basis points is actually higher or is the 20 basis points a run rate as a percentage of that portfolio?

No, I think, Sameer, I think the key point is the timing of when it came on. It came on very late in the quarter.

Okay. And is there more specifics you can give us? Is it late in the quarter, when was it, was it in September or maybe--?

It was in late September and it will continue to grow as we move into the fourth quarter. We'll continue to provide additional information as we add volume under that contract and as we gain additional visibility to that volume.

Okay. Excellent. Thank you.

(Operator Instructions) Now we'll hear from Mike Taiano with Sandler O'Neill.

A couple of questions. I guess first on the servicing contract could you maybe share with us the portion that was not originally on your servicing platform, the $740 million. How was that -- how did the government determine to give that you volume? Was it basically allocated equally amongst the four servicers, any context you can give us for how that was divvied up.

Sure, it's Jeff, Mike. The way it's working is if you originate the assets, the assets are on your system and you put those assets, you retain the servicing if you're one of the four servicers. Then all of the additional volume, it's not in the four servicers at this point in time, it's put to the government, we believe that the methodology is that it's being split by quarters. So a fourth to everyone at this point in time.

Okay. So--. Go ahead.

Yes, that said, we expect a large amount of volume to come on to our system as the puts grow over the end of the fourth quarter and the first quarter of next year. And then also as time goes and there are performance measurements amongst the servicers we expect that more volume will go to those servicers that are performing better and that -- we are excited about that.

So there hasn't been a formal declaration by the department as to sort of the go forward volume allocation at this point yet?

Not at this point.

Okay. And then second question relates to the pending legislation and I think you made a comment in the supplement about expecting it to potentially linger on into 2010. Just curious like what makes you feel like that's the case? Do you think you still will probably go through the budget reconciliation path or are there some other things that make you believe that this probably isn't going to get resolved in 2009?

Sure, just a few things on the legislation that I'd point out. For one, if history serves as a guide, then as the legislation gets near to completion we expect the gloves to come off and prepare ourselves for mud slinging against the industry and for the politically motivated to use their power and attempt to tarnish the industry. That said, we are currently sitting our bill in the Senate health committee behind the healthcare debate. We first belief there has to be resolution on healthcare before education because reconciliation can only be once and they have to be combined together if they have to use reconciliation on either one. We expect the healthcare debate to play out and that's anybody's guess when that will occur, if it's at the end of this year or next year. Again, that said as an industry as you know we have provided a plan that gives the government all of the savings or profit they are going to generate under the Obama plan. It will save thousands if not tens of thousands of jobs across the entire industry and it will retain the competition of a public plan and a private plan. It also eliminates the transition risk of forcing thousands of schools and millions of students from one program to the other. So from our perspective we can't understand why anyone wouldn't vote for the alternative plan because it gives everything that the first plan does and does a lot more.

Right. Okay. Great. Just last question, in terms of the asset-backed securities you repurchased I guess subsequent to the end of the quarter, what are you buying? Are those mostly AAA securities, can you maybe give us a context of what the components are there?

It will vary based on opportunities that we see in the market to buy back different pieces of debt that make sense for us given the performance. So it will vary by type.

Okay. Thanks.

There are no further questions. I will turn it back over to Mr. Jeff Noordhoek for any closing rocks.

In closing I want to re-emphasize that our business has and will continue to deliver great operating results. We have stable, well established, fee generating businesses with recurring revenue. Our business generates significant cash flow from operations and from our portfolio. We are well-positioned for growth in a very dynamic market. I want to thank you for your participation on the call and want you to have a great day.

Ladies and gentlemen, that does conclude our conference for today. Again, thank you for your participation.