Nelnet, Inc. (NNI) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the Nelnet first quarter 2010 conference call. Today's call is being recorded and broadcast live over the internet.

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

Good morning and welcome to Nelnet's first quarter 2010 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 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 factors 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 measures which the Company defines as base net income. A description of base net income and a reconciliation of GAAP net income to base net income are included in our first quarter 2010 supplemental earnings disclosure which is posted on our Investor Relations website at Nelnetinvestors.com. After Terri and Jeff have concluded their formal remarks we'll open up the call for questions. Thank you. I will now turn the call over to Jeff.

Thanks, Phil. Good morning, everyone. We are pleased to have put together another quarter with strong operating results. Importantly, we are optimistic about the future and the opportunities we have to deliver value to our customers. We continue to focus on growing and diversifying our fee for service businesses including the primary product lines of enrollment services, payment processing, and loan servicing. The highlights of the quarter include base net income of $1.14 per share, an increase in revenue from all our fee generating businesses including $6.3 million or 14% from our payment processing and enrollment services businesses. Strong cash flow from our operations and portfolio and finally, current annualized period return on equity of 28% increasing our equity to $839 million.

In addition to the strong operating results for the first quarter we believe we're in a good position to capitalize on changes in the student loan market. Although our current portfolio is amortizing, we have and will continue to look for opportunities to add loans to our portfolio. Since April 1, we have purchased $2 billion of FFELP loans at attractive prices that will become immediately accretive to earnings. We remain very encouraged with our servicing partnership with the Department of Education. To remind you, we began servicing loans under the contract last September. At December 31, we were servicing 450,000 new borrowers on our system and over 1 million borrowers at the end of the quarter.

To put this in perspective, we were servicing 2.3 million borrowers under our existing FFELP servicing business at March 31. The Department of Education is rapidly becoming a major new servicing customer for the Company right in the core of what we have been doing for over 30 years. Our systems have the capacity for growth. We have the infrastructure to support the growth, we have capital to drive the growth, and our deep commitment to customer service will sustain the growth. Even though new FFELP loan originations will cease on July 1, 2010, as mandated under the healthcare legislation, our long-term fundamental business strategy of diversification and to fee generating businesses is serving us very well. The bottom line is we are quickly moving from a finance company with a companion processing business to a processing company with a legacy finance business.

In summary, we have growing stable well established fee for service businesses with recurring revenue. We are generating significant cash flow from operations and our student loan portfolio. We are confident, 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 in more detail. Terry.

Thanks, Jeff. We're very optimistic for the future. Our base net income excluding carryover restructuring charges was $1.14 per share for the current quarter. This compared to $0.64 per share for the first quarter of 2009. GAAP net income was $1.08 per share for the first quarter compared to $0.51 per share for the same quarter a year ago. We were able to repurchase an additional $274 million in debt during the first quarter generating a gain of $10.2 million or $0.13 per share. Although the market is stabilizing, we will continue to look for opportunities to reduce our debt and deliver value going forward. Excluding the gains on the sale of loans and the buyback of debt, our earnings were about double what they were a year ago and up slightly $1.01 per share versus $0.98 per share compared to last quarter.

Our total fee based revenues increased more than 19% compared to last year. We are starting to see a significant increase in loan servicing volume from the Department of Education and we also experienced strong results in our guaranteed servicing operations which included $10 million of collection revenue related to rehabilitation loans. Our payment processing and interactive marketing revenues grew 12% and 21% respectively. We are well-positioned for continued growth and additional product development in all of our fee-based businesses. Our core student loan spread was 145 basis points for the current quarter compared to 144 basis points for the fourth quarter of 2009. While stable compared to the fourth quarter, we did see substantial improvement compared to this time last year when core spread was only 94 basis points. This increase was driven by the narrowing of the CP LIBOR spread and the low interest rate environment.

Given the sustained low interest rate environment, we expect to continue to earn significant floor income. We are hedging a portion of our portfolio with fixed rate swaps and will continue to evaluate our position going forward. The continuing low nomina rates have actually caused a slight increase in future value of our existing portfolio. We also expect to see opportunities to grow the portfolio through acquisitions having added $2 billion since quarter end. We'll fund most of this in the government conduit program which is available for the next four years. Finally, as it relates to our operating expenses, operating expenses were effectively flat, up just over 1% for the quarter when compared to last year. We would expect operating expenses to grow as we increase volume into the government contract and expand our fee-based revenue segments. Sequentially, we did see an increase in personnel expenses as we consolidated our loan servicing operations in Lincoln and Denver and ramp up with the volume from the government servicing contract. The increase in other operating expenses relates to noncash amortization charges of intangibles and a change in estimate related to our amortization of list costs.

So as we look forward, we have significant value related to our portfolio which is not yet recognized in our financial statements and we expect to see opportunities to acquire additional portfolios in the short-term. Our strong business model focused on diversification is working, and our fee-based revenues are growing. Specifically, we will see growth in our three core business lines, servicing, payment processing, and interactive marketing. Finally, our expenses and infrastructure are well-positioned for growth. While we see expansion of personnel and certain other investments related to security, technology, and segment specific costs, we have significant opportunities for operating leverage. With that I'll turn it over to the operator for questions.

(Operator Instructions) Our first question comes from Mike Taiano from Sandler O'Neill. Your line is open.

Good morning, guys. Just had a question on the acquisition front and the $2 billion that you I guess acquired subsequent to the end of the quarter. Could you give us maybe some additional color on that in terms of like how many third parties were involved sort of relative returns that you were expecting on the portfolio compared to your existing portfolio and how it is going to be financed?

Sure, Mike, this is Terry. The acquisitions did include one large acquisition. There were multiple parties involved in it, though, in terms of the $2 billion. There were purchased at very attractive prices. I would expect the return to be consistent with our variable student loan yield. We're going to be able to finance a substantial majority of that in the government super common or the straight A funding vehicle. We do have capacity in terms of our warehousing conduit and we -- as you know we have accessed the market with securitizations at least twice this first -- in the first quarter, so we have multiple opportunities to fund it.

Thank you. Our next question comes from Jordan Hymowitz from Philadelphia Financial. Your line is open.

Hey, guys, thanks for taking my call. Two questions. Can you state if you paid any premium to par on the deal?

This is Terry. We acquired them at attractive prices. It is a very competitive industry. We're not going to talk about the price.

Okay. CIT announced on their call that they're looking to sell almost 10 billion of their student loans. Would that be a portfolio that you would be interested in bidding on?

We expect to see opportunities to acquire portfolios from various parties. Where we are focused on is the combination of growing our servicing operation, our fee-based businesses and continuing to diversify our revenue streams, but we will take advantage of opportunities as they're presented.

And my last question is you said you got a billion in servicing customers at the end of the quarter?

Yes, Ed, as of April 30th we've got about 1.2 million borrowers under the government servicing contract, and we have about 2.3 million other borrowers under our FFELP servicing, various FFELP servicing systems.

And that 1.2 million of borrowers, what percentage would you say that is of the stuff that's become available in the past few months? In other words, there's four service splitting the business, is it almost a 25-25-25-25 split or do you have any sense of what that number is?

I think we are -- I am not sure we can estimate the actual split because initially the borrowers that were coming on, we kept the borrowers that were on our system. The other servers kept the volume that was on their system. We have gotten pickup of new borrowers on our system and would expect to do so. As we go forward to pick up the direct lending going forward, we expect that we're very well-positioned and would expect to pick up our share given four different servicers of the volume on a go-forward basis.

And finally, what was the floor income number in the quarter?

About 35 million.

Thank you.

Thank you. We do have a follow-up question from Mike Taiano. Your line is open.

I must have got cut off there. I guess the question I was trying to ask is effectively how much capacity do you have the additional 500 million you added? Looks like the rate goes up though if it goes above 500 million. What's the rationale on that and then just how much of the cash on your balance sheet do you think is -- would be available to do acquisitions?

Sure, Mike, this is Terry. The addition or the increase in the warehouse line of the additional 500 million was really a temporary increase to allow us to shift the -- get the loans on our books and then shift it into the straight A funding vehicle. We expect to have acquisition capacity through our existing warehouse line as well as market, so we do not anticipate capacity being a restriction on us given the current market.

Okay. And I would assume the service servicing fee, you retain servicing and would that be similar to the fee that you're getting on third party FFELP portfolios right now?

I am not sure I follow your question.

The 2 billion that you purchased, you will get the servicing on those loans?

Sure, and some of it was servicing that was already on our system. We acquired it from parties that we serviced for, but we're excited about the fact that we can grow our volume as well as leverage our servicing operation.

Okay. Thank you.

Thank you. Our next question comes from Sameer Gokhale with Keefe, Bruyette & Woods.

The question I had was during the quarter you recognized revenue related to those rehabilitated loans and what I was curious about is just the portfolio that you purchased also, was any component of that related to rehabilitated loans so that the second quarter you will recognize kind of get the benefit of large portfolio of loans and then also be able to generate more of those fees related to rehabilitating the loans, so should you -- is that how you're viewing that business going forward as additional maybe guarantees in fees, try to sell their portfolios as well? Is that the right way to think about that?

I think there is going to be an opportunity as the guarantee agencies look to increase their collection dollars, the market for loan sales at the guarantee agency for the rehabilitation loans is increasing, so we think we're going to have opportunities there because we have capacity. We will be seeking out those opportunities as well, and so I think we're going to have an opportunity to see additional revenue not only from our guaranteed servicing operations but opportunities to acquire loans.

Okay. And then I had a question about your fee-based businesses to the extent that you're generating capital and your business, the new business has relatively low capital requirements. You're clearly using some of the capital to buy back debt at discounts and you are paying a dividend currently and you could raise the dividend as well, but how are you thinking about capital management going forward, maybe increasing the dividend or are you looking specifically to expand into other fee-based businesses through additional acquisitions? Are there any particular areas that interest you at this point?

Thanks, Sameer. I think you hit on a lot of our approach to evaluating capital. You mentioned we have bought back debt. We have acquired additional loans. We are currently paying a dividend. We have opportunities to buy back stock. We have opportunities to expand our fee-based businesses through organic growth. We have opportunities to expand the fee-based businesses through acquisition, and we look at all of those opportunities consistently. Management is also significant shareholders, and so we will evaluate all of those various opportunities as we look to deploy capital.

Okay. Thank you.

Thank you. Our next question comes from Matt Snowling with FBR Capital Markets.

It is Bill Jackson for Matt Snowling. I guess one of the things we think about is as the industry landscape changes, you talked about loan purchases and some additional opportunities for guarantor servicing business. Have you started to see any interest in -- from legacy servicers to kind of how are you guys out to subservice legacy FFELP assets and if so, is that something that you would pursue and how do you think about that business?

Bill, it is Jeff. We're seeing lots of interesting opportunities in the market, and when something like this happens, when legislation comes through and completely alters the existing landscape, we have always looked at that as an opportunity, so the short answer is we do think there will be short-term the next couple of years opportunity to pick up legacy servicing business and put it onto our system, and it is something going back to Sameer's last question, it is a possible way of using capital to do that that we definitely see those opportunities and are pursuing those opportunities.

Thanks.

Thank you. (Operator Instructions) I am showing no further questions at this time.

To summarize our key points from today's call, they are our strong business model focused on diversification is working, and our fee for service revenues are growing. We have the scalability and capacity and are quickly growing our direct loan servicing volume. We have significant value related to our portfolio which is not yet recognized in our financial statements. Our strong liquidity position is providing opportunities for growth through portfolio acquisition and offering rights acquisition. We have significant cash flow from operations from our legacy portfolio. So we want to thank you for participation on today's call and thank you for trusting us with your investment in our Company. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude your program. You may all disconnect and everyone have a wonderful day.