Newtek Business Services Inc. Reports Operating Results (10-Q)

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May 10, 2012
Newtek Business Services Inc. (NEWT, Financial) filed Quarterly Report for the period ended 2012-03-31.

Newtek Bus Svcs has a market cap of $55.7 million; its shares were traded at around $1.44 with a P/E ratio of 15.1 and P/S ratio of 0.4. Newtek Bus Svcs had an annual average earning growth of 4% over the past 5 years.

Highlight of Business Operations:

Revenue is derived primarily from recurring fees from hosting websites, including monthly contracts for shared hosting, dedicated servers, and cloud instances (the plans). In addition, revenues are derived from contracted services to design web sites. Revenue between years decreased $136,000, or 3%, to $4,693,000 in 2012. The decrease in revenues included a decrease in web design revenues of $44,000 to $458,000 in 2012 and a decrease in web hosting revenue of $92,000. The decrease in web hosting revenue is the result of a decrease in the average monthly number of total plans by 5,085 or 9% between years to 53,004 plans in 2012 from 58,089 plans in 2011. Partially offsetting the decrease in web hosting revenue resulting from the decline in plans was an increase in the average monthly revenue per plan of 7% to $86.19 in 2012 from $80.23 in 2011. The increase in the average revenue per plan reflects a growth in cloud instances and customers purchasing higher-cost plans including additional options and services. The average number of cloud instances increased by 333 to an average of 573 from 240 in 2011 reflecting the Companys introduction of a customer scalable cloud offering in 2011. The decrease in the average total plans occurred in the shared and dedicated segments. The average monthly number of dedicated server plans for 2012, which generate a higher monthly fee versus shared hosting plans, decreased by 390 between periods, or 20%, to an average of 1,600 from an average of 1,990 in 2011. The average monthly number of shared hosting plans in 2012 decreased by 5,027, or 9%, to an average of 50,832 from 55,859 in 2011. Competition from other web hosting providers as well as alternative website services continues to have a negative effect on web hosting plan count and revenue growth.

For the three months ended March 31, 2012, the Company recognized $2,390,000 of premium income from 19 loans sold aggregating $18,287,000. During the first quarter 2011, the Company recognized $3,014,000 in premium income from 26 loans sold totaling $12,217,000 not subject to the premium warranty, and 23 loans aggregating $14,566,000 previously subject to the premium warranty that achieved sale status during the quarter. The decrease in premium income for the three months ended March 31, 2012 as compared with the prior period, was due entirely to the reversal of the fair value adjustment of $1,484,000 associated with SBA loans transferred, subject to premium recourse, which increased premium income for the same amount in the three months ended March 31, 2011. Premiums on guaranteed loan sales averaged 112.20 with 1% servicing for the quarter ended March 31, 2012 compared with 111.36 with 1% servicing for the quarter ended March 31, 2011.

The decrease in the net change in fair value associated with SBA loans transferred, subject to premium recourse is the direct result of all previously transferred loans having achieved sale status during 2011 as well as the SBA removing the warranty provision (as previously discussed above) allowing the Company to recognize premium income concurrent with the date of sale. During the first quarter of 2011, as a result of the elimination of the premium warranty, only two loans transferred were not recognized as sales, while 23 previously transferred loans were recognized as sales, thereby reducing the corresponding fair value adjustment by $1,484,000. The decrease in the change in fair value associated with SBA loans held for sale is consistent with a $2,917,000 reduction in the amount of unsold guaranteed loans at March 31, 2011 and 2012, respectively. As a result of the investor price paid for the senior interest in our unguaranteed loans with respect to our two securitized transactions, adjusted for the estimated servicing and interest income retained by the trust over an estimated repayment term of three years and further adjusted to reflect the estimated default rate on the senior notes based on the default rate on our loan portfolio, assuming a worst case scenario of no recoveries, management reduced the upfront discount taken on its unguaranteed loans, from 11% to 9.5% during the first quarter of 2012, and resulted in a cumulative adjustment in the change in fair value SBA loans held for investment of $445,000 recorded in the three months ended March 31, 2012.

Total revenue increased by $192,000, or 54% for the three months ended March 31, 2012 primarily due a $100,000 gain on the sale of an investment with a zero carrying basis, as well as an increase in insurance commission revenue of $54,000. The increase in insurance commissions in the first quarter of 2012 was due to increases in force placed insurance policy income. Other income related party increased by $22,000, or 100% and represents fees charged by Newtek Payroll Services, LLC to Newtek and subsidiaries which are eliminated upon consolidation.

Net cash flows (used in) provided by operating activities decreased by $9,374,000 to cash used of $(6,559,000) for the period ended March 31, 2012 compared to cash provided by operations of $2,815,000 for the period ended March 31, 2011. The change primarily reflects the operation of the SBA lender, and due almost entirely to a $9,013,000 increase in the broker receivable. The broker receivable arises from loans traded but not settled before quarter end and represents the amount of cash due from the purchasing broker; the amount varies depending on loan origination volume and timing of sales and settlement at quarter end. In the first quarter of 2012, the Company originated $18,683,000 of SBA loans held for sale and sold $18,287,000 compared with $16,126,000 originated and $12,217,000 sold in the prior quarter.

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