Good day, ladies and gentlemen, and welcome to the Newtek Business Services, Inc. Third Quarter 2012 Earnings Conference Call [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Barry Sloane, President and CEO. You may begin.

Good afternoon everyone and thank you for attending the third quarter 2012 financial results conference call. We really appreciate you attending today particularly with all the weather issues that we've had back on the East Coast. Today joining me for the call is our Chief Accounting Officer, Jenny Eddelson. And for those of you that are following the call, we like you to take a look at our PowerPoint presentation which is on the Investor Relations section of our website at thesba.com. Jenny, may I ask you to read the safe harbor statement?

Sure. The statements in this Slide presentation, including statements regarding anticipated future financial performance, Newtek's beliefs, expectations, 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 plans, intentions and expectations reflected in or suggested by the forward-looking statements. Such risks and uncertainties include among others, intensified competition, operating problems and their impacts 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.

Thank you, Jenny. I'd like to bring everybody up to Slide 3 on the PowerPoint and take a look at our conference call agenda for today. We will go over our third quarter 2012 consolidated financial performance, our segment performance and revenue growth, our 2012 revised guidance, our 2013 guidance, our growth strategy at Newtek, our marketing initiative and future initiatives that we're going to have to try the revenue growth. Focusing on Slide 4, our consolidated performance. For the third quarter of 2012, the company had pre-tax income of $2.9 million, an increase of $2.6 million over the year prior quarter and 776% increase. Net income increased by $1.5 million or an increase of $620,000 or 70.5% increase compared by the same quarter, same period in 2011. Modified EBITDA, which we have defined and we can go over in the Q&A period, of $4.9 million with an increase of $2.9 million or 145% over the quarter earlier in the year. For the 3 months ended September 30, the company had earnings per share of $0.04 versus $0.02 in the comparable quarter a year. For 9 months ended September 30, the company had EPS of $0.11 per diluted share. That's for the first 9 months of this year versus $0.03 for the comparable 9 months in 2011. On Slide 5, you can take a look at a graphic description of the growth of the company's pretax income, net income and modified EBITDA quarter-over-quarter 2011 versus 2012. On Slide #6, you can take a look at the earnings per diluted share on, obviously a post-tax basis with a nice growth in $0.04 over $0.02 and $0.11 over $0.03. On Slide #7, which we'll talk about a little bit more, we obviously took a look at our 2012 guidance that we'd previously…

Thank you, Barry. For the quarter ended December 30, 2012, the company's consolidated revenue grew by 9.1% and we had consolidated pre-tax income of $2.9 million, both significant improvements from the third quarter of 2011 and driven primarily by our EPP and SBF segments. Our earnings per share doubled from income of $0.02 per diluted share September 30, 2011 to $0.04 per diluted share September 30, 2012. Please turn to Slide 45 for a summary of revenue and pre-tax income or loss by segment for the third quarter of 2012. Electronic Payment Processing segment revenue increased by $980,000 or 5% period-over-period to $21.7 million. The increase was due predominately to a combination of growth and processing volumes, selected fee increases and in addition to services provided to our merchants. Pre-tax income increased by $777,000 or 63% to just over $2 million to the third quarter of 2012 compared to $1.2 million recorded in the same period last year. The increase is due primarily to a $662,000 improvement in dollar margin of operating revenues, less Electronic Payment Processing costs resulting from the introduction of new higher margin products and services during 2011 as well as the impact on revenue and EPP costs resulting from debit card pricing and interchange cost adjustments. In addition, depreciation and amortization decreased by $208,000 period-over-period due to intangible assets becoming fully amortized. Managed Technology Solutions segment revenue totaled $4.5 million for the third quarter of 2012, a decrease of $261,000 compared with the year-ago period. This decrease was due to a reduction in the total number of web hosting plans sold as well as a decrease in web design revenue for the period, which was offset in part by improved revenue per plan. The increase in the average revenue per plan reflects the growth in average…

Operator, we're ready for questions.

[Operator Instructions] We have a question from Marc Silk of Silk Investment Advisors.

In a sub-2% GDP environment, how are you able to achieve these type of revenue growth going forward?

Well, I think, Marc, whether it's plus 2%, flat or minus 2%, small medium-sized businesses represent about 50% of GDP. So it's a big number. And our goal, relative to being able to do business in the market is not based upon a growing economy. We'd certainly love to have it. I'd love to have strong new business formation, I'd certainly like to have an environment where businesses are wildly optimistic and wanting to spend money. We're able to grow in this particular business because I think we're positioned in the market with the right products at the right time. From a countercyclical perspective, we're in the lending business where nobody else is in it. We got capital available and a good program to lend. We've come through the credit crunch and the lending crisis with good accounting, good reserves and a good discipline and we think we can grow that business because we're well positioned for it. When other people were blowing up because they took accounting gains, we stayed the course. So that's one aspect of it. The second aspect of it is the one thing you can count on is the world and business is constantly changing. So we're real happy and proud of our position in the market, particularly given what you've seen with Hurricane Sandy, to be able to offer to small and medium-sized businesses, cloud computing solutions that are significantly going to save on their infrastructure, and in a market today where people, they're stranded, they can't get into work, their data is destroyed and they would love to have their data or business applications on a tablet. We're happy to rollout the Newtek Advantage and be able to drive that into businesses. In the Electronic Payment Processing space, I guess we could have gone to an independent rep model like everybody else has done over the last 5 to 10 years and have independent reps in the market going out, trying to get business done. We have a virtual sales and marketing effort using the new tracker system which we recently got approved as patent from the U.S. Patent Office. We're lined up with some of the largest institutions in the world, Navy Federal Credit Union, Morgan Stanley, Near Community Bank [ph] and others to drive their small businesses to us using technology. We give them full transparency into our back office. There's a new tracker system, it's like the salesforce.com for business services and referrals. So the way that we can grow and are succeeding is because we're well positioned. We're in a segment of the economy that is not going away. Small businesses is going to continue to thrive and we think we've got superior products and that's why we're able to continue to grow revenues and drive a good bottom line.

Okay. You mentioned Newtek Advantage, so how big could this be and why is it meaningful to your business?

Let me say this. I'm extremely proud of the Newtek Advantage as a product and to be able to drive business applications to a tablet or smartphone. And we've also filed a patent on the Newtek Advantage as well. The secret to the sauce is our ability to execute on it. So I don't want to -- if you'll pardon, I know you're from New England, Marc, I don't want to be Rex Ryan and say we're going to get to the Super Bowl because it invariably works against you. But that business application is really good. So we've got to do some heavy lifting, get it out in the market, promote it and really demonstrate to people we've got a great product and get people to use it. That's why we're doing the launch at the NASDAQ. Personally, I think it's a big deal, particularly in e-commerce space. It is not going to be easy for other people to try to enter the market with that application off of that operating management platform, because you have to be a host, be a processor and have your own gateway and have them all linked together and have them all be able to drive data together into one reporting mechanism. And we know how long we've worked on this now and how hard it is to get in this, plus you got a patent on it. So we think that this is important. You are going to start to see ads on it. I don't think it's going to be a significant contributor in 2013, it could be. But I think it's an important -- Newtek Advantage is an important business process that we're going to drive to small to medium-sized businesses down through the next several years to drive revenue growth for this company. Business, owners are going to be operating their business from mobile app devices, from tablets and smartphones. And we're very well positioned to do that and we could layer multiple products onto that platform.

So there was an article in Boston Globe and it said Eastern Bank, for the fourth year in a row is the biggest SBA lender in Massachusetts and the number was a whopping $23 million. I think they've got about $8 billion in assets. So what is it with these banks, is it not profitable as other venues or because -- little guys like you are crushing them, that performer in Boston?

I think that if you look at the SBA 7a business, which is a unique type of a loan program, the policy and procedure manual from the Small Business Administration is 1,600 pages. You have to have a dedicated group of underwriters, servicing people, collectors, to follow that policy and procedure guidelines. So for major money center banks, it's not big enough to move the needle. And for community banks, they can't put out enough of this business in their own market to make it profitable. So we're a bit unique that we have a national platform. We're unique in that our new tracker system in relationship with alliance partners allows us to aggregate a lot of opportunities, look at a lot of deals and take in the kind of deals that we want to do. Most banks are running after this type of business with 6-figured salary bankers that are typically more familiar with other types of conventional loan programs that they did throughout the last decade. So there are barriers to entry and frankly most community banks and major money center banks are not well suited to the product and that's we're well positioned for it.

But somewhere down the line, it might make sense for a bank to just say, okay instead of putting all this infrastructure, let's just agree [ph] with Newtek at a very big premium. Anyways, you don't have to comment on that. So the people you're advertising with, I know you didn't mention CNBC. Are their rates just so out of whack to the others that you mentioned?

I think that our primary strategy in advertising is to make sure that we go after the SMB -- business owner and that's not to say that we won't look at CNBC in the future, but those are the current channels that we're on, that we're getting the best deals for at this time.

Okay, because my argument, as always most money managers big and small are going to watch that channel and I know it's -- and then last, you're putting a lot of money into awareness of your stock on the investment side. How has the interest been in your company, the last 6 months or so?

The interest you're talking about in the stock in general?

Yes, by investors, money managers, et cetera?

We have added Hayden Investor Relations. Their phone number is -- and contact information is on a PowerPoint externally. We've also added an internal resource, Jayne Cavuoto, who has worked for us previously in investor relations and we feel pretty good about the renewed effort in investor relations at this point. And I think you could see how the stocks trading. It's somewhat evident of that.

The next question is from Greg Cole of Sidoti & Company.

Just the first question was kind of a clarification. When you're talking about referrals, I guess just describe exactly what that is?

Okay. Because of the way we do our business, using the Internet and the new tracker system, which basically is the frontend aggregation tool, any client, business client, that comes to us and says, hey, I'm interested in the business loan, I'm interesting in web design, I'm interested in a business owner's protection policy, I'm interested in health insurance, whatever it might be, we have a product, that's considered a referral. And that comes from predominately the Alliance partners, it also comes from our TV commercials, it comes for an Internet search. So the way business owners reach us, it's an untraditional way not through feet on the street salespeople typically or branches or bricks-and-mortar, it's through referrals. And in each one of these divisions, we track these referrals nightly, we look at the close rates, we look at where the referrals are coming from, we track them by product, et cetera. So it really gives us a very good database of information. Plus you might have a business that comes in for a referral, you can't do the business but now you've got the client's information in the database to cross-market and put him on the monthly newsletter which now goes out in excess of 60,000 businesses across the U.S.

Okay. So it is very similar to an application?

It's actually less than an application because you might have somebody that might come in and apply for a loan and they don't own a business. However, in the merchant space and in the hosting space and some of the other spaces, it's a little bit closer to an application, but it a step before an application.

Okay. I guess have you -- has it been long enough to see if there is a different close rate between the -- I guess these new referrals and what you were doing prior to the commercials?

It's a little early on the TV news because we're probably -- let's see, September, October, we're 6 weeks into the program which is too short of a cycle for a loan close, but we are tracking that pipeline pretty closely and the quality of the referrals that are coming in is pretty good. So we're satisfied with the results that are coming in from that business. Now obviously the margin on the loan is a lot greater and bigger than the margin on a $72 website or maybe what you might get in revenues for health insurance of -- or the products, but you should get a lot more units in the other areas. So it is will be an interesting discussion going forward as we look at the data and analyze it. But right now, we're very happy with the value that we've gotten from the national TV campaign so far.

Okay. And then -- I guess the Aurora purchase, those are just servicing, right? So it's essentially 1% is the annual profit or, I guess, revenue from off of that $30 million. Is that the right way to think about that?

Yes, you could use that a good rule of thumb. And in the Aurora transaction, we assumed that servicing performance containing for it. And that's approximately the revenue in servicing that S&P-rated securitization. So that's the -- although we've done 2 transactions ourselves, but we combined into one, this is the second rated Standard & Poor securitization that we're servicing.

Okay. And are there good referral opportunities from there?

Yes.

Okay. I mean do you -- I guess is there any way to quantify that?

Well, one way to quantify it is that every borrower in that book of business has qualified for a small business loan and I think most of those loans were done in 2005 and 2006 and there's been some pay down. Those are good customers, they're well healed. They could take other products. There's also a clean-up call in that deal that will enable us to effectively, at a price, buy the loans out and put them into another transaction and possibly refinance loans out of that transaction.

Okay. And then the last caller was talking about community banks and their SBA lending and I guess you gave a pretty good response as to what your competitive advantage is, but I guess have you seen a lot of community banks trying to have this as -- to try and increase fee income? Can you talk about that a little bit?

Yes, I think with -- as markets go back and forth, there's no question that this particular market is being looked at but you really can't snap your fingers and walk into this business. It takes years. So I think people look at it and -- but the one thing you can take a look at to gauge the reality of that question is look at the changing participants of the top 20 or 30 SBA lenders and then they really don't change very much.

The next question is from Harold Elish [ph] of UBS.

To follow-up on the previous question, your sense of -- did you have any data that suggests, with new tracker, the log in cost that the average person that comes in from a referral, the average opportunity is increasingly being led to other aspects of the business that Newtek can offer them?

I think the cross selling opportunity from lending is a bit misunderstood in that our lending book is 900 to 1,000 business accounts, of an excess of 100,000. On the other hand, the account to [ph] lend money to typically tend to be in the top quartile size and they do make good referring participants for the other products. I will tell you that we have a product to ensure business owners against PCI compliance risk for security breaches for Visa, MasterCard cards for merchant acquirers. And I would say about 8,000 to 9,000 of our clients that process with us also have purchased that insurance product. So we have had real good success in cross selling and cross marketing. We're going to continue to do that by educating and training our processing staff, both customer service reps and business service specialists. And as our applications like Payroll in the cloud here get rolled out, we drive real-time Payroll information to a business owner's tablet, the ability to also provide the health insurance and the workman's comp and drive that to the tablet is going to enable our ability to bundle. When you look at our e-commerce in the cloud product, you've got merchant processing, web hosting, gateway fees all rolled up into one product offering. So we think as we rollout the Newtek Advantage and business owners become more familiar with Newtek as the national brand, the ability to cross sell and cross market into the customer base become more apparent. As our newsletter distribution gets larger, we're excited about on a monthly basis, demonstrating to business owners that we do have other products and services. We have about 12% to 13% open rate on our newsletters, so we're pretty happy about that. So we're pretty happy with our cross selling and cross marketing opportunities. It's not easy as many institutions have tried this and been road kill [ph] before us, but with our technology, we think it really makes a lot easier as well as the fact that we got real good products.

And one thing we haven't discussed on these calls, to my knowledge is do businesses get a pricing advantage for each incremental service that they're willing to contract with you? I mean if somebody is on the web with you and decides to do Payroll or decides to do their insurance, do they get a price break or how does that impact your margins or where do you go with that?

We have real good prices on an individual basis. So when you look at prices comparably, we are very competitive. We don't want to sell on price. We think that's a bad strategy. We really want to sell on ease of use, customer service, state-of-the-art products with competitive pricing. So we don't want to go out and say basically, buy this get this free as that's not a real good long-lasting strategy. Our preference is to get our clients to use our operating platform such as the Newtek Advantage, lay your products on top of it, becomes so comfortable and familiar with the application, they just don't want to switch out. But always be competitive. We want our clients to know that when they use our business products, they have great value. So we've had situations like in the last couple of days, where we got customers come to us on Payroll for example, they can't get into the office, they can't make Payroll. It really becomes very problematic. So we want customers to use our products and services in a bundled format because a, the pricing is good, they're easy to use. And we really don't want to be discounting for taking additional products at this point. There's really no need to.

[Operator Instructions] The next question is from Eric Duncan of Moloney Securities.

I had a couple of questions surrounding new customers and new customer growth. Is it fair to say that your alliance partners are your primary method of new customer acquisition?

Yes, our alliance partners have historically been the big driver of growth and at one point that's probably 95% of our new clients that were coming in from the alliance relationships. Now it's probably down to 80%.

Given that you have these other referral sources?

Given that our national campaign is generating referrals and our website is generating a lot of opportunities with increased traffic and the blogging and other activities, yes.

Okay, good. Do you have any kind of a metric where we can see the sheer number of customers you have now had in the past trend along those lines, do you -- is that a public -- is that something you publicly state?

We have it in our MD&A. And when we publish our Q this quarter, you'll be able to dig that out and I think we'll take a look at that for the fourth quarter when we do the annual to give that type of information as well as maybe try to come up with some metrics for average revenue per customer, which will be interesting, given that we've got all these different products.

Okay. And kind of speaking to that, you have a nice recurring revenue element to this business model. What would you say your annual customer retention rate is or maybe possibly on the net basis, relative to new customer adds?

Sure. The -- in the small medium-sized business market, where you look at the payment processing business and the hosting business. The attritional rates are industry standard typically between 20% and 25%, which might sound alarmingly high. I mean, the fact of the matter is, there's a lot of small to medium-sized businesses with a preponderance of them being new start-ups grow our business quite frequently. So it's not like we're losing away. Particularly in a tough economy, you have a high level of business failures. Putting that aside, in our payment processing space, we're typically towards the low end of that range and our hosting space historically, we've been underneath that. I will say, however, right now, share hosting plans which we have quite a few of at the low end of the range are something an endangered product. Although it will be interesting to see what happens, going forward with Facebook; does Facebook become the major player with SMBs or do they flame out? Does the small and medium-sized business think they're getting a free website and hosting plan with Facebook, whether they've been giving Facebook all their sensitive information or if they did it with us for $72 a year. So I think that the concept of attrition is clearly important to us and our goal is to continue to attract new businesses and start-ups, through your farm [ph] team. Those are always going to attrite at a high level, but to make sure that we keep our larger customers that are generating the bigger revenue dollars. So there's sort of attrition on a revenue basis, there's attrition on the unit basis and we'll look at producing more of that information in the future.

And this attrition, is that net of new customers or simply static?

That's gross. I mean we're growing our -- I know we're growing our customer count in the EPP business. I think in the last couple of years, our customer count in the technology business has declined. I see that trend reversing itself and in all the other businesses it's growing.

Okay, good. Let me think here. The other question is, you certainly are starting to focus more on the loan servicing element and as such, you seem to have a view, very unique parts to this business. Do you have a goal in mind, relative to margins going forward for say 2013 or beyond? Where do you see a stable margin either on an EBIT basis or any other one you had one you hadn't thought of?

Well, I think the biggest margins in our business are in small business lending. The smallest margins are in probably the payment processing space. Now, the double-edged sword in the payment processing space is trading at the biggest multiples. So the biggest margin business is trading at the lowest multiples. So to be frank with you, I don't have -- in a company, at this point in time does not have a real philosophy with respect to what we want to target. What I will tell you is if you look at our projected 2013 EBITDA midpoint which is a range between $21 million and $22 million and what we closed, at a $70 million market cap and the fact that our revenues are growing at around double digits, slightly over like 12% next year, as an investor, I'd be pretty happy with that.

There are no further questions in the queue at this time.

All right. Thank you very much and I appreciate everyone's attendance. I'm heading over to the Gerri Willis show. I'll see you all at 6 o'clock on Fox Business News. Take care. Thank you.

Ladies and gentlemen, this concludes today's program. You may now disconnect. Good day.