NewtekOne, Inc. (NEWT) Q3 2008 Earnings Report, Transcript and Summary

Good day, and welcome to the Newtek Business Services third quarter 2008 earnings results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to the CEO and Chairman of the Board, Mr. Barry Sloane. Please go ahead, sir.

Thank you very much. I'm Barry Sloane, CEO and Chairman of the Board; and here with me today is Seth Cohen, our Chief Financial Officer. Before we begin I would like to call your attention if you like to follow the presentation as we go through it we have a PowerPoint presentation that you can find in the investor relations section of our Web site, newtekbusinessservices.com. With that I'd like to ask Seth Cohen, our Chief Financial Officer to read the Safe Harbor statement.

Good afternoon. The statements in this slide presentation including statements regarding anticipated future financial performance, Newtek believes the expectorations, intentions or strategies for the future maybe forward-looking statements under the Private Securities Litigation Reform Act of 1995. All forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from the plan, intentions and expectations reflected in are suggested by the forward-looking statements. Such risks and uncertainties include among others, intensified competition, operating problems and their impact on revenues and profit margins, anticipated future business strategies and financial performance, anticipated future number of customers, business prospects, legislative developments, and similar matters. Risk factors, cautionary statements and other conditions which could cause Newtek's actual results to differ from management's current expectations are contained in Newtek's filings with the Securities and Exchange Commission and available through www.sec.gov. Also I need to point out that our Capcos operate under a different set of rules in each of the eight jurisdictions and that and that these place of varying requirements on the structure of our investment. In some cases, particularly on Louisiana and New York, we don't control the equity or managements of a qualified business, but that cannot always be presented orally or in written presentation. I will return this to Barry.

Thank you very much. Looking at Q3 2008 today we're going to cover financial results at a snapshot. We will discuss continued positive momentum of growth in our EPP segment, current web hosting initiatives, small business finance initiatives, cost reduction measures, and overall financial review in 2008 outlook that Seth Cohen will give us. Looking at Q3 2008 financial results we are happy to announce that we met previously stated 2008 consolidated pretax loss guidance. And looking at the various different segments, the electronic payment processing segment, came in at $16 million of revenue, or 14% over Q3 2007. Our Web Hosting segment came in at $4.6 million, up 10% over Q3 2007, and our small business finance unit came in at $1.6 revenue, down 40% over Q3 2007. In total, we booked the pretax loss of $2.7 million, which was in the guidance of – previously given guidance of $3.3 million to $2.6 million. Important to mention that depreciation and amortization created a non-cash expense on a quarterly basis of approximately $1.8 million in Q3 2008, and unfortunately, our lending segment clearly adversely affected our Q3 2008 earnings. Company has a strong cash position, equating to approximately $0.76 in cash per share. We had $27.5 million at the end of September 30, 2008, down slightly from 28 million in June 30, 2008. Our Electronic Payment Processing segment continues to do very well, particularly, given what other electronic payment processing providers are experiencing in the market. Our revenue growth was up 14%, over Q3 2007. Our EBITDA margins remain constant at 7.5% for Q3 2008, that's been consistent with our EBITDA margins in Q1 and Q2. The challenges in the electronic payment processing space obviously merchant attrition, particularly with small, medium sized businesses going out of business, as well as…

Thank you, Barry. In the third quarter of 2008, we recorded a loss before benefit for income taxes and discontinued operations of $2.7 million as compared with a loss before benefit for income taxes and discontinued operations of $4.6 million one year ago. Although the third quarter 2008 loss was expected in that previously stated guidance, the segment components of the loss differed from guidance. Small business finance performed worse than expected due to credit market destruction, while corporate activities performed better due to cost cutting. Net loss is $2.7 million or $0.08 per share in the third quarter of 2008 compared to a net loss of $4 million or $0.11 per share in the third quarter of 2007. Revenues increased by $1.2 million or 5.1% to $24.2 million in the third quarter compared to prior year. This is primarily attributable to growth in our electronic payment processing and web hosting segments. We would now like to review the performance by segments. If you could turn your attention to Slide 17 in the PowerPoint presentation, you will see the comparison of third quarter 2008 versus our results in the third quarter of 2007. Electronic payment processing segment revenue increased by $2 million or 14% to $16 million in the third quarter of 2008. Revenue increase is predominantly due to organic revenue growth of 13%, which resulted from a 14% increase in the average number of active processing merchants offset by 1% decrease in the average monthly processing volume per merchant. Income before taxes increased 21% to $1.1 million over the third quarter of 2007. However, third quarter 2007 results reflected a $300,000 charge back expense to a single merchant. If the comparison purposes this charge back loss is eliminated from the 2007 period electronic payment processing cost, the income before…

Operator, that concludes our presentation and we certainly would open up the call to questions.

Thank you, Mr. Sloane. (Operator instructions) And we will take our first question from Steven Silk with C. Silk and Sons. Please go ahead. Steven Silk – C. Silk and Sons: Good afternoon. Barry, I'm interested in your competitors and where you fit in as far as the electronic payment processing in the web hosting in the sense of are there, are there fragmented groups, small companies that might be having difficulty going on in this environment in their perhaps ways to pick up business, maybe out of bankruptcy or extremely discounted prices so that you could start adding to capacity?

I think, Steve, that this has been a market that a lot of participants have gotten into because it's – there's just been such a huge grounds well of growth that was just organic based upon more utilization of cards and merchants accepting cards more and more. And I think a lot of our competitors created a business and borrowed and grew the balance sheet through debt. Some of them are really having tremendous difficulties right now because the portfolios aren't growing with same-store sales, sales are shrinking. And, (A), they are having attrition through merchants, (B), the volumes are less. And we think there is going to be opportunities in working with lenders where we can pick up those portfolios, add them on to our existing infrastructure, take them over and being able to service them, so maybe able to do acquisitions that having the right check, but basically to service the debt based upon real good solid forecasts of reduced expectations and cash flow coming in. We think that could be the same in the hosting business as well. There are – as difficult as the market is today, there's still money. It's not like there is zero money, it's just rare and expensive. So if you can price assets at the right price, and the prices aren't very pretty, because this is – we are in a deflationary environment. So asset valuations, in all segments of the market are coming down. That's why we're seeing stock prices down 40% to 45%, real estate prices down, so we think that this is a good opportunity to take advantage of the asset deflation and add these types of portfolios on in the hosting space as well as in the electronic payment processing space on to our infrastructure that is very efficient, very cost effective and scalable. Steven Silk – C. Silk and Sons: I haven't noticed stock prices were down and real estate was down. I'll have to look in to that. What –

(inaudible) Steven Silk – C. Silk and Sons: In the environment that you're in and the difficulty you're in where the price of the stock is, and the valuation, at some point, do you think somebody would come to you with the client – client base that you have and – do you look at yourself as a potential to be acquired, or maybe are you looking at the opportunities of taking the company private to be somewhat under the radar screen while this environment goes that you can be a stronger company down the line without really having to focus on meeting quarterly numbers?

I think – I think, Steve, that we have worked pretty hard, although it's not that easy to simplify the company and clean up our balance sheet. As I'm looking at the balance sheet now, I think we're at about $160 million of assets. I could remember not too long – a year ago, it was at 217, so our balance sheet is shrinking. Capco is becoming less of an issue. I think with some of the expenses that we're pairing across the board, I think people are going to be able to look at our 90,000 plus customer base or business account base. I think the number is 93,000, but I'm not 100% sure, and say, hey, these guys have a very good methodology of acquiring customers. When you look at the snapshot of our business service suite, and our insurance portal, you walk away from that and go “Wow! This is a one stop shop for business.” We are now aggressively out bounding to our existing customers and letting them know we are in all these different businesses. We've had these conversations on calls before, we sort of an adamant that we don't want to make those calls, but we actually had the in-house software and technology through a centralized beta base to be able to contact the customer and have the full customer record in front of us. We now have that customer record in front of us. So we're contacting customers lately, and we're being extremely well received. “Gee, I didn't know you did that. Oh, really, you do that, you can help me” In this environment calling somebody up and saying “Gee, do you have receivables? We would like to finance them for you or give you a merchant cash advance in your Visa or MasterCard. For that matter let us take a look at your workmen's comp, your general liability insurance, maybe we can help you out, save you money on health and benefits. You are doing business with payroll with ADP or pay checks. We've got a better solution; can probably save you some money there,” very, very well received, so we believe in our strategy. We believe in our structure, and when you put it all together, we think it's a valuable asset that obviously isn't coming up in the stock price, but we believe will be recognized at some point in time. Steven Silk – C. Silk and Sons: I agree with that. I assume being able to bundle more services to other clients would allow you to offer individuals at lower prices because you can make it up – hopefully make it up with larger overall sales.

Well, you get margin pool, and you get more revenue per customer. Customers tend to be a little bit more sticky in that way, so frankly, we think we're just beginning in this downturn to hit our stride, and really perform the rationale for why the Company was created, which is not just to have four, five, six, or seven different disparate businesses working in the market independently of one another, but really are working as a team and as a concept to approach small business customers and say “We understand your business.” When they call in it sound like they're far and we know exactly what they did, who they dealt with in the past, who assembled their loan, who quoted their recent insurance, what their experience was and why they are doing business with us. Steven Silk – C. Silk and Sons: What is a value added as far as your customer service? That's what you are, right?

Well, number one, we're clearly value added in terms of how we have dealt with our customers within each of these divisions and silos. Now customers are finding out that we can do other things for them. And the fact that we did a great job for them in hosting and did a great job for them in EPP, really bodes well for us, asking for the business in the other areas, and customers today are very interested in forthright saying, “Hey, if you can help me, that's great.” Here is my workmen's comp policy, or here is my electronic payment processing statement or gee, you could advance me money against my Visa and MasterCard, I'll take a look at that borrowing opportunity.” Steven Silk – C. Silk and Sons: Within the lending segment, Barry, can you talk about – well, since you're carrying more loans – generating you're going to carry them through probably longer than you wanted to. How are they performing? Are you seeing any drop-off? Are you still below the level of what the normal SBA lender has been doing? How is that going?

I think, Steve, our reserves are approximately – I'm going to say 8.5% against the portfolio. Those are – that's a pretty healthy reserve. We have had an experience in August and September, what I'll say slight credit deterioration. Thank god we look at this pretty closely, October came in pretty well. We've been very conservative in our – in our underwriting. So our loss is in the lending segment, have not – and I'm knocking wood, been because of credit deterioration. Now, needless to say, but all have not been historically, but all of the news that's out there – it does concern me. Our losses historically have been based upon not being able to generate enough volume to cover our overhead and infrastructure. The sad part of it is we were finally in a market where we built up a real big pipeline of opportunities and then the bond market fell apart for the government guaranteed portion. Seth is pointing out our reserves are at 10% at this point in time so I feel pretty good that we're in a good position relative to where – where our loans are, and Seth, the basis of our loans, based on our accounting is, we owe the uninsured what like $0.80 in the dollar.

Or less effectively.

Yes, so we've used extremely conservative accounting, because when you get the premium on the government guaranteed piece, that gets applied to the basis in the loans, so I have had people say, “Well, gee, in the lending business, how couldn't you book big gains?” But we didn't do what everybody else did which was to capitalize, book the gains on sale, run up the income and sort of leave it there. So we are pretty comfortable with where we are in the marketplace, we are not happy with our stock price, but we think we have built the good infrastructure and a good business for the future, and built the company to last. We have to work our three – work our way through this strange financing market right now, where nobody wants to lend, but I think we'll be okay. Steven Silk – C. Silk and Sons: What about factoring? I know you were trying to get in to do some of that. Has that been successful? Is that something you could present to your EPP customers where you know that you already have some flow through to the payments where you can pay in advance or they would need it? I mean I would think that would be a beneficial to customers that you already know and have a longer-term relationship with.

That's our merchant cash advance business, and – and we are also offering those clients receivables financing. And we're happy with how receivables finance business has grown. We don't report that segment separately, but I do think that's going to be a very good engine for profits and growth going forward. We've just passed a critical point in Newtek business credit, where we're – just crossed over a path to profitability, but I'm very optimistic about our position in the receivables finance business. Wells Fargo was a vote of confidence, and I would assume good business judgment Steven Silk – C. Silk and Sons: Yes.

From their perspective just extended our facility another three years, and kept the facility outstanding at $10 million, so we're happy about that. When people are extending their credit in these markets, you got to be thankful. That's obviously the case with our Capital One line, which is a $10 million line and our Wells Fargo line and obviously our outstanding GE facility. Steven Silk – C. Silk and Sons: So, just to wrap up I guess if you can kind of keep your head above water in these turbulent times and is it encourage yourself I guess with the customers to be there when (inaudible) of the economy probably should put you on some solid footing when things turn up and lead you to opportunities to grow when your end customer bases start growing as well?

Absolutely. Build the business, build the enterprise value, we believe we have done that. We – we have managed our finances, we are not over levered, we are paying our bills, we are growing our customer base, we've satisfied our customers. And way back when people used to want to invest in companies that did that. And then it sort of turned to this earnings per share, debacle which has frankly what's created the problem on Wall Street today. Everyone pressed themselves, they levered themselves, put themselves, with the extent of credit conditions, put themselves in a precarious position without really paying attention to the risk. Steven Silk – C. Silk and Sons: Alright, Barry, I appreciate the time. I'll leave it up to somebody else to pick up the question. Thank you.

Okay. Thank you, Steve.

(Operator instructions) And gentlemen, it appears there are no further questions at this time. Mr. Sloane, I'll turn the call back over to you for closing comments.

Great. Thank you very much, operator. We clearly appreciate the attendance on the call today. We had quite a few people attend. We appreciate your investment and interest in the Company, and look forward to a good fourth quarter and continuing to build the business and do a good job and during tough times. So thank you, everybody. Have a good evening.

Thank you.

Ladies and gentlemen, this will conclude the Newtek Business Services third quarter 2008 earnings results conference call. We thank you for your participation and you may disconnect at this time.