Nelnet, Inc. (NNI) 2010 Q2 法說會逐字稿

Great day everyone. And, welcome to the Nelnet, second 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.

Thanks John. Good morning, and welcome to Nelnet's 2010, second 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 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 non-GAAP financial measure, which the company defines as base net income. A description of base net income, and reconciliation of GAAP net income, to base net income, are included in our second quarter, 2010, Supplemental Earnings Disclosure, which is posted on our investor relations website, at nelnetinvestors.com. After Terry 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. And, good morning, everyone. We are pleased with our performance in the second quarter, and for the first half of the year. With each successful period in which we delivered strong operating results, and progress towards key objectives, we are financially stronger, more diverse, and ready to make the most of opportunities we see lying ahead.

Each of our three primary education product lines, loan servicing, payment processing, and enrollment services, are growing and give us reasons to be optimistic. For the second quarter, 2010, we reported base net income of $1.17 per share. Compared with $0.60 a year ago, and for the six month period, base net incomes with $2.31 per share.

Our continued success is due to the progress we are making toward four key objectives, that we have stated in the past. The first is growing and diversifying our fee-for-service business. Each of our fee generating business reported revenue growth for the quarter.

Our payment processing enrollment services revenue grew 19%, or $7.6 million, compared with last year. Loan servicing revenue from the Department of Education contract, increased from $3.5 million, in the first quarter, to more than $6 million, in the second quarter. At the end of the quarter, under this new government contract, we were servicing more than $12.8 billion in loans, for more than 1.5 million borrowers. We anticipate significant volume will be added to our system in the third quarter, and forth quarter, and beyond.

The second objective is managing our operating costs. For the second quarter, compared to last year, operating expenses increased $2.4 million, or 3%, even though we have added significant servicing volume to our system.

Third, we are focusing on maximizing the value of our existing portfolio. In the current low interest environment, we continue to generate significant cash flow from our student loan portfolio. In the second quarter, net interest income increased to $97.4 million, compared to $57.1 million, last year.

Fourth, we are continuing to use our liquidity to capitalize on market opportunities. We purchased $1.9 billion of student loans in the quarter at prices that will be immediately accretive to earnings. And, we repurchased $118 million, of asset backed securities, for a pre-tax gain of $8.8 million.

In addition to these objectives, we continue to focus on resolving legal and regulatory issues. On friday, our motion for summary judgment in the Oberg lawsuit, was delayed by the US District Court, and we were ordered to enter settlement discussions with the plaintiff. We are prepared for the trial, which is scheduled to begin August 17. We believe we have strong defenses to the allegations brought by Oberg, and we remain confident in our ability to achieve a reasonable outcome.

Lastly, we are maintaining a strong capital base. We continue to evaluate all possible uses for deployment of capital, including additional investment into our existing business lines, portfolio acquisitions, debt and stock repurchases, and dividends. Now, I'll turn the call over to Terry to discuss our financial results in more detail. Terry.

Thanks Jeff. We continue to be encouraged by operating results and are very optimistic for the future. Our base net income was $1.17 per share, for the current quarter, and $2.31 per share, for six months ended June 30, 2010. This compared to $0.60 per share, for the second quarter, 2009, and $1.26 per share, for the same six months last year.

GAAP net income was $1.00 per share for the current quarter. This compared to $0.16 per share, for the same quarter a year ago. We were able to repurchase an additional $118 million in debt, during the second quarter. Generating a gain of $8.8 million, or $0.11 per share.

Although market conditions continue to stabilize, and the amount of debt we have available to repurchase has declined, we will continue to look for opportunities to reduce our debt, and generate value, going forward. Excluding the gains on sale of loans, and buy-back of our debt, our earnings were nearly double what they were a year ago. And, up $0.05 per share, compared to the first quarter of 2010. Total fee base revenues increased 19% for the quarter, and year-to-date, when compared to prior year.

We are starting to see significant increase in loan servicing volume from the Department of Education, and we also experienced strong results during the quarter, from guarantee servicing operations. This causing total loan, and guarantee servicing revenue, to increase $6.9 million, or 19%, compared to prior year. Our payment processing, and enrollment services revenue, grew 8%, and 23%, respectively, compared to the same quarter last year. We are well positioned for continued growth, and additional product development, in all of over fee based businesses.

Our core student loan spread was 154 basis points for the current quarter, compared to 145 basis points for the first quarter. And, 109 basis points, compared to the second quarter of 2009. The increase in spread, compared to last quarter, is due to a decrease in deferred amortization costs, and the narrowing of the CP/LIBOR spread.

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 rates swaps, and will continue to evaluate our position going forward. During the quarter we added $1.9 billion of loans, and expect opportunities to continue to grow the portfolio, through acquisition. In addition, we currently have $2 billion of loans, classified as a held-for-sale, and we plan to put these to the Federal Government during the forth quarter, resulting in a gain of approximately $30 million to $33 million.

And finally, as it relates to our operating expenses. Operating expenses have increased slightly due to growth in fee based businesses, up just over 3% for the quarter, when compared to last year. We expect operating expenses to grow, as we increase volume under the government contract, and expand our other fee based business segments. Sequentially, operating expenses increased less than 1%. And, we are recognizing the benefit of consolidating our student loan operations in Denver and Lincoln, and will continue to look to leverage the existing infrastructure.

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 opportunities to acquire additional portfolios. Our strong business model focused on diversification is working, and fee based revenues are growing. Specifically, we will see growth in our three core business lines, servicing, payment processing, and interactive marketing. And finally, our expenses in infrastructure are well positioned for growth. While we will see expansion of personnel, and certain other investments related to security, technology, and segment specific costs, we have significant opportunities for operating leverage. I'll now turn it over to the Operator, for questions.

Thank you.

(Operator Instructions)

Our first question comes from Mike Taiano, with Sandler O'Neill.

Hello, good morning guys. Just a couple questions. I guess one more strategic, and one more, I guess, accounting related.

Just -- Terry, just in terms of looking at the cash flows on the legacy portfolio as you've outlined, just want to make sure I'm not double counting, you know, what's in those cash flows relative to what you've already recorded on your balance sheet. So, I guess in terms of what's on your balance sheet, and on the accrued interest receivables, roughly $400 million, as well as the unamortized deferred acquisition costs.

Is that basically -- are those numbers reflected in those cash flow estimates? So, we would be double counting if we, sort of, looked at your book value in addition to that?

Specifically on deferred amortization cost, they are not included in that cash flow -- future cash flow run. The accrued interest receivable would be the earnings that are accrued-to-date, that would -- the future cash flow would be offset against that book value of accrued interest receivables.

So, the accrued interest receivable would be included in that future cash flow, on the portfolio. The deferred amortization cost is cash already paid, and that would not.

Okay. Got it. And then just on a strategic side. I mean, there was an IPO of a company that sort of is in some of your businesses, Higher One, you know, over the last few months. And, I was just curious, your thoughts in terms of the businesses that they're in.

Are those businesses that you either compete in now, or plan to compete?

And, just looking at one of your larger competitors, is contemplating doing a spinoff of some of their fee related businesses. And, just looking at the multiples at a company, like a Higher One gets.

Is this something that you guys would could consider, at some point down the line? Perhaps, you know, in order to let investors more clearly see the two respected pieces of your businesses?

Sure, Mike. This is Terry. I mean, to start, as it relates to Higher One, we do compete with Higher One. They are a competitor in the higher education market.

Our primary focus in the payment processing, or our largest market in the payment processing area, is the private K-12 parochial schools. We do compete in terms of the payment processing in the higher education market. Our business model is slightly different.

We're focussed on the transactions, and focused on developing the relationship with the schools, and helping them out. Higher One has a slightly different business model, focused on their primary product, is a preloaded refunds debit card. We think -- we are going to continue to look at expanding our product offering there. So, we think we've got some significant opportunities for growth.

As it relates to your question regarding potentially splitting off the businesses, we will continue to look. We try to make sure that we include enough disclosure on all fee based businesses. That's something we will continue to look at, but it's not something we're focused on at this point and time.

Great. Thanks a lot.

Our next question comes from Sameer Gokhale, with KBW.

Hey, guys. This is actually Brendan Sheehy, pinch hitting for Sameer.

Terry, can you just provide a little more color on the decline, sequential decline, on the premium amortization in the quarter. Was there any accretion, in terms with your loan acquisitions?

Yes. That was the primary reason for the drop.

Okay. Then last question, I guess bigger picture. In terms of loan acquisitions, have you guys seen any changes, I guess in the attitude of potential sellers? Are they more eager, or motivated, to sell now?

I think that it's kind of all over the map. You see people at different stages of where they -- what they want to do with their portfolio. So there's nothing definitive at this point in time, relating to the market, that we see activity and discussions going on.

Okay. Great. Thanks.

Our next question comes from Jordan Heimowitz, with Philadelphia Financial.

Thanks. Are you servicing business with the government, that's now ramping up. What share do you think you're getting at this point? Are all the four [departments] getting you at the same 25% share?

Hello, Jordan. It's Jeff. So far we've had departments publish two quarters of survey results. And in this first year, we believe the share to be broken up roughly equal amongst the four services.

We have not had any indication yet from the department on how they're going to approach it on a go-forward basis, for the coming year. And so, if you look at the survey results, they are essentially coming out statistically equal, among the four services. Like again, I said, there is no definite pronouncement either way, on how the volume's going be broken up on a go-forward basis.

Okay. Also, you're at $9.7 million revenues in this line item -- for the six months. Can you see what the revenues were in the most recent month? I don't care if it's July, or June.

We actually are going to focus on disclosing that on a quarterly basis, and so we'll continue to update that each quarter.

But, I'm just trying to get the ramp up there, in terms of -- but it should be exponentially ramping up, and each month should be more than before, see what i'm getting at. Or, maybe if you just say the number of borrowers, in the most recent month. The number of borrowers at period end. As opposed to the average.

Do you have 1.5 million borrowers, is that the number at period end? Or is that the average?

That's the number at period end.

Okay. So that's good enough. All right, thank you very much.

(OPERATOR INSTRUCTIONS)

I have a question from Moshe Orenbuch, with Credit Suisse.

Thanks. You talked a little bit about, you know, expenses, and some plans to get them under control.

Can you just talk a little bit about, how you think you balance again the growing fee businesses? And what they kind of look like, at the time, when you consider that to be done?

Sure, Moshe. I think where we expect to, as volume ramps up, and as revenue grows, we will expect to see expansion of the operating expenses.

I think the biggest thing that we will expect to see is continued strong margins. Especially in the servicing, we've seen a slight drop in the operating margin, as we've added the government servicing contract. Largely driven by a significant increase in volume, at a slightly lower rate.

But, we would expect to continue to achieve very strong margins across our fee based businesses.

So we should be focused on the margin you are saying?

Yes.

Okay. Thank you.

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

Hello guys. It's Bill Jackson, for Matt.

I guess on rehabilitation fees, how much opportunity is there, of going forward, for additional pieces to kind of help offset the decline in some of the origination related guarantor servicing fees? Is there a big pipeline of delinquent loans, that could potentially generate fees off of?

The rehabilitation revenue actually represents collection revenue. That is recorded by guarantee agencies, and some of the guarantee agencies that we serve.

If you go back historically, in the middle of the credit crisis, there wasn't an opportunity to generate that collection revenue because there really were buyers for those rehabilitated loans. Following the credit crisis, the buyers have come back. We have some opportunity to buy those loans. So we would expect to continue to see opportunities in that, for that collection type revenue, through the rehabilitation loans.

So it will continue to be a little choppy, in terms of how, and when, those revenues occur. But importantly, they will continue to be an important revenue source for the guarantee agencies, and -- that we serve -- and accordingly a component of our revenue.

Great. And then specifically, sticking with the guarantors, I think there's another question about servicing opportunities.

Are you seeing anything there yet, with some of these state agencies that are either -- not necessarily for sale. But, increasingly looking for, kind of third party guarantored servicing partners, to kind of boost that line a little bit going forward?

Yes. We're seeing people talking about it, and trying to figure out what they are going to do. But there hasn't been any definitive thing happen in the market, in recent times.

But, there is a lot of conversation going on, and we're waiting, cautiously, to see how it all plays out.

I think the main thing is, we believe we're very well positioned to help those various agencies, if they are looking to do something different. We've got a lot of different opportunities to serve in that manner.

Thanks, guys.

I'm not showing any other questions in the queue. I'd like the turn it back over to Jeff, for closing comments.

To summarize our key points from today's call. Our strong business model, focused on diversification, is working, and our fee-for-service revenues are growing. We had the scalability, and capacity, and are quickly growing 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, both from portfolio acquisitions, and servicing rights. And, we have significant cash flow from operations, and from our legacy portfolio.

I want to thank you for your participation in today's call, and thank you for trusting us with your investment, in our company. Have a great day.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.