Nelnet 1Q Conference Call Leaves Central Question Unanswered

Originally broadcast on Wednesday, May 13th.  SLA had previously highlighted key items mentioned in the Nelnet 10-Q that was filed on May 11th. 

Conference call participants were:
Jeff Noordhoek:  CEO
Terry Heimes:  CFO

I will focus my attention on Noordhoek's comments which touch on Nelnet's business fundamentals and their thoughts on the Obama budget proposal.  Please note that I have made best attempts to capture the form and content of his remarks and this is not a precise transcript:

Summary:  Pleased with operating results for 1Q...evidence of the company's transformation to fee for service processing company, focused on following five objectives:

• Revenue diversification and growth
  • At high level, education market has solid fundamentals
    • Enrollment and cost of education continues to increase
      
      • Process for planning and paying for school is complicated and Nelnet's products can help out
      • Tuition payment plans, enrollment services, electronic campus commerce and test preparation

• Reduce operating expenses - down 10% in year over year basis; looking for additional opportunities.
  • SLA note:  Nelnet's 10-Q indicated that:
    • "On May 5, 2009, the Company adopted a plan to further streamline its operations by continuing to reduce its geographic footprint and consolidate servicing operations and related support services."

• Maximize value of loan existing portfolio
• Reduce liquidity exposure
  
  • CFO indicated that Nelnet had completed a privately placed ABS transaction in 1Q and have $850 million eligible for Straight-A Funding, the Department of Education's conduit financing vehicle
• Reduce debt

On the President's Budget proposal:

• Agreed with the Administration's desire to increase access to higher education
  
  • We applaud the goal to make higher education more affordable for more Americans..
• Sought to dispel the source of the savings from the government's plan:
  
  • While indicating that the vast majority of the "so-called" $94 billion in savings...is actually profit that government will receive by the interest rate they charge the student (6.8% for unsub. Stafford) and the projected government's low Treasury rates over next 10 years. 
• Identified alternative loan proposals out there without supporting any of them by name:
  • There are Alternative loan proposals that accomplish the goal of government profits that can be used to fund Pell grants while still retaining the private lender infrastructure to service and originate loans...
    • these hybrids can achieve the vast majority of profit (compared to the government's plan), while allowing competition to continue to drive innovation and customer service while retaining thousands of jobs...
    • These plans would also eliminate the execution risk of converting over 4,000 schools to this new system in less than a year;

On the RFP to service federal loans sold to the Department of Education through ECASLA (Nelnet is one of six finalists bidding for this contract): 

• Unable to discuss details of our bid;
• Due to our large scale, efficient operational structure and strong customer service "confident that we have provided a competitive bid and a compelling proposal."
• Department expected to make announcement in early June

During the Q&A, one analyst asked about the decline in the margins of their tuition repayment business and campus commerce business, which saw its pre-tax operating margin drop from 48% to 39% (See Supplemental Financial Information for detail).  That is one healthy margin and seems to indicate that the three major players:  TMS, Sallie Mae and Nelnet are not competing too heavily on price  (I think the term is "cash cow").  The company indicated that this drop in margins was due to investments in product development, which seems to be explained below: 

• Nelnet's Tuition Management Division, FACTS, had this message on their website, which indicated a recent upgrade to their site:

Welcome to the new FACTS Web site!
As you can see, we've updated our site to serve you better. Please take some time to look around.
If you're here to access FACTS Web services, you can still do that via the drop-down menu in the
upper left-hand corner. We hope you enjoy the new FACTS Web site!

One question that wasn't asked and which the company did not discuss in their prepared remarks was further details about the Department of Education's preliminary program review which found the company in noncompliance with prohibited inducement provisions:

"The preliminary program review report contains certain initial findings of noncompliance with the Higher Education Act’s prohibited inducement provisions and requires that the Company provide within 30 days an explanation for the basis of the arrangements noted in the preliminary program review report." 

Given the potential consequences of this damaging review, which include "the assessment of fines or penalties, or the limitation, suspension, and termination of the Company’s participation in FFELP," I would have expected some discussion of this topic.