The First Marblehead Corporation (NYSE:FMD)
Q2 2016 Earnings Conference Call
February 09, 2016 5:00 PM ET
Suzanne Murray – General Counsel
Dan Meyers – Chairman and Chief Executive Officer
Alan Breitman – Chief Financial Officer
Chris Donat – Sandler O’Neill
Ann Heffron – Zacks Investment Research
Good afternoon, and welcome to The First Marblehead Second Quarter Fiscal 2016 Earnings Conference Call. All participants will be in listen-only mode [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Suzanne Murray, General Counsel. Please go ahead.
Thank you, and good afternoon. Welcome to First Marblehead’s earnings call for the second quarter of fiscal 2016. On today’s call, we have Dan Meyers, our Chairman and CEO and Alan Breitman, our CFO.
Before we begin, please note that various remarks that we may make about the company’s future revenue, expenses, and other financial and operating results, expectations, plans, and prospects, including with regard to Tuition Management Systems, Cology LLC, and Monogram based loan programs the litigation and regulatory proceedings pertaining to our Massachusetts State income tax returns and the prospects of the private education finance industry, constitute forward-looking statements for the purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are not a representation by us of the future results, plans, estimates, or expectations expressed or implied by us will be achieved. Matters subject to forward-looking statements involve known and unknown risks and uncertainties, including economic, legislative, regulatory, competitive, and other factors, which may cause our actual results or the timing of events to be materially different than those expressed or implied by our forward-looking statements.
Important factors that could cause or contribute to those differences include; demand for our Monogram platform, the successful marketing and sales of our clients’ Monogram based loan offerings, and the products and services offered by TMS and Cology, the volume, timing, and performance of disbursed loans, the resolution of litigation and regulatory proceedings pertaining to our Massachusetts State income tax returns, our ability to further reduce our operating expenses without adversely affecting our business, the general interest rate and consumer credit environments and the other factors set forth under the caption Risk Factors in our quarterly report on Form 10-Q filed with the Securities and Exchange Commission on February 09, 2016.
Any forward-looking statements represent our views only as of February 09, 2016. Although we may elect to update our forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our views change. Therefore, you should not rely upon these forward-looking statements as representing our view as of any date subsequent to February 09. During the call, we’ll refer to net operating cash usage, which is a non-GAAP financial measure. A reconciliation to loss from continuing operations before income taxes, to the most directly comparable GAAP measure, is included in the earnings press release posted on our website under the heading For Investors.
I’ll now turn the call over to Dan.
Thank you, Suzanne, and welcome to this afternoon’s call. Before I talk about our operating results for our second fiscal quarter, in the first six months of fiscal 2016, I want to step back and provide some context on the higher education finance market. In November 2015, the College Board released its updated Trends in Student Aid report. According to this report, in the 2014, 2015 school year, the private student loan market totaled $9 billion, a 5% increase from the previous year.
Meanwhile, the federal government issued $96 billion in federally guaranteed student loans during the 2014, 2015 school year. In other words, for every dollar in private loans that was made last school year nearly a $11 in federal loans were issued. In the 2007, 2008 school year, when the private loan market peaked a $24.1 billion, the federal loan market was $78.5 billion. So for every $1 in private loans that were made during the 2007, 2008 school year, the federal government made just over $3 in loans.
The drastic change in a ratio of federal loans to private loans over just the last seven years from 3 to 1, to 11 to 1 is a result of the tightening of credit in the private loan market and increase in federal loan limits and expanded federal loan programs. The College Board also highlights a dramatic statistic in its report that is worth noting. Of the federal student loan borrowers who entered repayment in 2011 and 2012, 9% of those who completed their programs and 24% of those who did not graduate, defaulted on their federal student loans within two years of entering repayment.
This is only the beginning of their repayment horizon, which points to more trouble ahead for federal loan borrowers. In our Monogram loan portfolio, the default rate was less than 1% of the loans in repayment, as of December 31, 2015. We believe it’s clear that this 11-to-1 ratio was unsustainable and unhealthy for the higher education marketplace.
We also believe that the private sector can and should play a bigger role in financing college expense as ultimately the private sectors daily driven experience in passing credit risk and structuring products, will help more middle class students and their families make more informed decisions about what school to go to? What degree to pursue? And what repayment options fits their circumstances best?
Now on to the business, during the first six months of fiscal 2016, we facilitated $682 million of private education loan volume, 21% more than in the same period of the prior fiscal year excluding our former subsidiary Union Federal Savings Bank. We’ve facilitated $110.5 million of Monogram based loan volume, a 13% increase over the same period last year, excluding Union Federal. While Cology LLC facilitated $571.5 million in loan volume, a 23% increase over the same period last year.
We’ve dispersed $489.8 million of private education loans during the first six months of fiscal 2016, which consists of $72.3 million of Monogram based loans and $417.5 million of loans dispersed by Cology LLC, which represented increases over the six month period ended December 31, 2015, excluding Union Federal of 17% and 32% respectively.
As of December 31, 2015, we have received over $4.24 billion in application volume in our Monogram based loans programs and there was $343 million of Monogram based loan volume outstanding. This $343 million in outstanding Monogram based volume does not include loans sold to parties.
The credit metrics of Monogram-based loans continued to be both remarkable and stable, as of December 31, 2015, the weighted average FICO score was 754, 92% of the loans were cosigned, 53% of loans were cash loan and 79% of the borrowers shows repayment terms of 10 years or less.
As a reminder, we earned an annual revenue tied to the outstanding Monogram based loan portfolio, so as that program continues to grow year-by-year. Our annual revenues resulting from the outstanding portfolio will also continue to grow. As loan volume grew at a healthy pace, so did our revenue. Across the entire company, our revenue for the first six months of 2016 fiscal year was $29.4 million, a 16% increase over the same period last year. The overall increase in revenues included $1.8 million in additional Tuition Management fees, $1.2 million in additional Monogram based fee revenues, $744,000 in additional fee income from Cology LLC and $473,000 in additional portfolio management services fees.
Our continued focus on expenses resulted in a 21% reduction of the Company’s expenses compared to the first six months of fiscal 2015, a savings of $8.4 million for the six-month period in fiscal 2016. This $8.4 million in expense reduction was aided by a $5 million legal settlement accrued during the first six months of fiscal 2015. We also reduced our compensation and benefit expenses by $2.5 million, our occupancy expenses by $1 million and our third-party service expenses by $916,000.
At Tuition Management Systems, we facilitated $3.06 billion in tuition payments during the first six months of fiscal 2016, 3.2% more than we did during the first six months of fiscal 2015. The refund management product continued to grow with 74 schools signed as of December 31, 2015. As a result, we processed more than $380 million in refund payments from the first six months of fiscal 2016, 28% more than during the same period in the previous fiscal year. We continue to believe that TMS is well position to grow in all of its product lines.
Turning to our Massachusetts State income tax matters, as I discussed in last quarter’s earnings call, in May 2015, we filed a cert petition with the Supreme Court of the United States appealing the decision of the Massachusetts Supreme Judicial Court in the cases pertaining to GATE Holdings taxable years ending June 30, 2004, 2005 and 2006. On October 13, 2015, the U.S. Supreme Court issued an order granting our cert petition, summarily vacating the decision issued by the Mass SJC and remanded the case to the Mass SJC for further consideration in light of the U.S. Supreme Courts holding in the Comptroller of the Treasury of Maryland versus Wynne.
The Mass SJC instructed the parties to file supplemental briefs setting out there positions on the proper application to GATE Holdings of the internal consistency tests in-light of Wynne. We filed our supplemental brief on November 30, 2015 and the Massachusetts Commission of Revenue filed its supplemental brief on December 30, 2015.
On January 30, 2016 we filed our reply brief. The Mass SJC has scheduled all arguments for March 07, 2016 and generally issues its opinions within 120 days of oral arguments.
With that I will now turn the call over to Alan Breitman our Chief Financial Officer. Alan?
Thank you Dan, and good evening everyone. For the second quarter of fiscal 2016, the company continued its trend of progressive improvement in its operating results. I would like to highlight some of the specifics for the quarter. Revenues from continuing operations for the company were $12.9 million a $1.7 million or 15% increase over last quarter ended December 31, 2014.
$8.6 million of revenues were generated by tuition payment processing fees at TMS, this was a $700,000 or 9% increase over last year’s $7.9 million generated by TMS in the second fiscal quarter. The increase in revenues was primarily a result of greater credit card convenience fees and enrollment fees partially offset by a lower late-fee revenues.
$3.85 million of our revenues were generated by administrative and other fees, which primarily included a Monogram based fee income and revenues from Cology. This was a $900,000 or 33% increase over last year’s $2.9 million earned in the second fiscal quarter. The increase in revenues was primarily a result of increased disbursement volumes and increased fees tied to the outstanding Monogram based loan portfolio.
Now turning to expense. Total operating expenses from continuing operations for the quarter were $17.8 million of which $7.6 million were attributable to compensation benefit expenses which was a $800,000 or 10% decrease over last year’s quarter. In addition $10.2 million was attributable to general and administrative expenses, which was a $5.6 million or 36% decrease over last year’s quarter.
The decrease in compensation and benefits expenses was primarily attributable to the increased severance and retention expenses lower non-cash stock compensation expenses and lower salaries expenses due to lower head count. The decrease in general and administrative expenses was due to the $5 million accrual recorded for the NC Residuals Litigation Settlement during the three months ended December 31, 2014, as well as lower occupancy cost and travel and entertainment cost partially offset by higher merchant processing fees paid by TMS.
I would now like to turn to some of the specifics for the six months ended December 31, 2015. Revenues from continuing operations for the company were $29.4 million. A $4.1 million or 16% increase over the first six months of last fiscal year ended December 31, 2014. $18 million of our revenues were generated by tuition payment processing fees of TMS.
This was a $1.8 million or 11% increase over last year $16.2 million generated by TMS. For the first six months ended December 31, 2014. The increase in revenues was primarily the result of greater enrollment fees and credit card convenience fees partially offset by lower late fee revenues. $10.2 million of our revenues were generated by administrative and other fees, which primarily included Monogram based fee income and revenues from Cology. This was a $2.4 million or 31% increase over last year’s $7.8 million earned in the first six months ended December 31, 2014. The increase in revenues was primarily a result of disbursement volumes and increased cumulative Monogram balances.
Now, turning to expenses. Total operating expenses from continuing operations for the six months ended December 31, 2015 were $40.2 million. Compensation and benefits expenses of $15.8 million was a $2.5 million or 14% improvement over the first six months of last fiscal year ended December 31, 2014. General and administrative expenses of $24.4 million was $5.9 million or 19% improved over the first six months of last fiscal year ended December 31, 2014.
The decrease in compensation and benefits expenses were primarily attributable to lower non-cash stock compensation, lower severance expenses, lower retention expenses and lower salaries expenses. The decrease in general and administrative expenses was primarily due to the $5 million accrual recorded for the NC Residuals Litigation Settlement during the first six months of fiscal 2015, as well as decreases in occupancy cost and third-party services expenses partially offset by increased merchant processing fees related to payment processing services by TMS.
As for liquidity, at December 31, 2015, our unrestricted cash, which we define as cash, cash equivalents and short-term investments totaled $49.1 million down $13.9 million from June 30, 2015. The change was primarily the result of $6.6 million to fund operations coupled with fundings for participation interest accounts in the amount of $5.2 million, which represents what we believe to be approximately 68% of our current fiscal year obligation and $2.1 million in cash outflows for accrued expenses and prepaid assets.
Our net loss from continuing operations before income tax for the three months ended December 31, 2015 was $4.6 million compared to a net loss from continuing operations before income taxes of $12.6 million for the same period last year.
Our net operating cash usage, a non-GAAP financial measure for the three month ended December 31, 2015 was $4.7 million compared to $12.4 million for the same period last year. The $7.7 million a 62% decrease was primarily due to the improved results from continuing operations.
As a reminder, we’ve recorded $5 million accrual for the NC Residuals Litigation Settlements in the second quarter of fiscal 2015.
Our net loss from continuing operations before income taxes for the six months ended December 31, 2015 with $10.4 million compared to a net loss from continuing operations before income taxes of $22.9 million for the same period last year.
Our net operating cash usage for the six months ended December 31, 2015 was $6.6 million compared to $18.5 million for the same period of last year. The $11.9 million or 64% decrease was primarily due to the improved results from continuing operation and as I noted a moment ago, we recorded $5 million accrual for the NC Residuals Litigation Settlement during the six months ended December 31, 2014.
We remain focused on our core business and growth efforts for fiscal 2016. I continue to manage our net operating cash usage through anticipated growth in revenues coupled with actively controlling our expense base.
I will now turn the call back to Dan.
Thank you, Alan. I will now turn the call back to the operator for questions.
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Chris Donat of Sandler O’Neill. Please go ahead.
Good afternoon, Dan and Alan. How are you guys doing?
One quick one first on just wasn’t coping things down. Dan you were talking about – with Massachusetts taxes and you have the oral arguments on March 7. I didn’t catch how many days it would be until you expected a ruling, I didn’t hear the number.
Yes. The number was well, it’s generally 120, but we’re not in control of that…
Right, right, okay. And then from something just from a different angle here, as you guys have decreased your net operating cash usage, can you give us a sense of where we are with expenses like Alan just said you are going to continue actively managing expenses. It seems like you got to be near the end of some of the elevated legal fees. I know severances decreased I’m just wondering if we are starting to lap some of those comparisons. And then are there other expense like occupancy is that sort of are you now at a run rate, anyway with those three items on expenses can just sort of comment on where we are in reducing those.
Yes. We generally don’t give guidance on expense levels, obviously just a couple of things, on legal expenses, one would hope that, that those decline overtime as issues get resolved in, as issues get resolved favorably for the company. Sometimes we have to spend money to try and make that happen as we certainly did on all the tax matters involved. On occupancy expenses the only thing I can say is that we’ve really managed that situation as we relocated all the Boston personnel to our Medford processing facility.
And on a future basis, we have issues like the current cost of marketing dollars and things relative to the generation of revenue and volume. And those issues get managed on a day by day basis, so something that we really pay attention to.
Okay. And then just lastly from me on the revenue side, forgive me if I missed it, but did you make any comments about credit scoring, making any contribution to revenue this quarter, are you keeping that under your hat.
No, we didn’t. There is no discussion in the call. I think that what you are probably referring to is the discussion of us licensing the score card.
Efforts in – we think that those are ongoing and we expect them to grow overtime and we think it’s a good business for us. I think on revenue, I did one of the things that’s tied to that is the growth of Monogram on a forward basis. And if you recall from last quarter’s call, I commented that we did more Monogram volume – Monogram based volume in August than we did in the first two years of the program, just in that month. So the program is clearly growing and accelerating. And our team is that – we want to see material increases in revenue as we also see material decreases in expenses. And Alan, go ahead.
Yes, and Chris one other thing if you read through MD&A, we do talk to – we saw an increase in revenues from portfolio management, primarily related to the fees in connection with late fee and service agreement that we’ll entered into.
So we do open that info in there.
Got it, okay. I’ll take a look at that.
So it’s in the final.
Thank you, sir.
The next question is from Ann Heffron of Zacks Investment Research. Please go ahead.
Hi, Dan. Hi, Alan. How are you all today?
Well. It’s cold up in Massachusetts, but we’re doing just fine. How are you, Ann?
Yes, same here. It’s cold here in Chicago. My question really has already been asked and answered, but I’m going to just try to pry a little bit more. Is it actually where – first of all, let me just say that I think you did very well on both sides of the equation I thought your revenues were much better than I thought, they were going to be and your expenses were much lower particularly compensation cost. And just – but just a follow-up on the – a little bit you say that there is part of this is non – a decline in non-cash compensation. And to me, I mean I understand that you can do that for a while, but at some point, if there is going to be to be sort of a rebellion. And then second thing is just getting back to the other comment was that – yes the severance cost have to start ending at some point. I am saying, and so I’m just sort of wondering if you can fill us in a little bit more on that?
Yes. I will have Alan give a couple of comment, but a rebellion, no we’ve got very happy fulfilled people here and they really believe that what we’re doing is the right thing to do
Also they support that.
Yes, I think that we have a very motivated team here, and they think that the Company is doing the right thing and they’re pleased by the progress we’re making. So managing staff and expectation and compensation is part of the day-to-day operations of the business. Alan, do have something to add to that?
Yes, part of the reason why we saw a change in non-cash compensation with last year there was some options – some RSUs granted that where immediate debt. So we had to take a charge last year. We did not have that accrue this year. That’s the primary reasons why we’re seeing that reduction.
Okay. But that was just for one quarter, right? This quarter?
Okay, okay. While I’m glad to know that everybody’s on board that’s an important piece of the puzzle today, that everybody expectation are being met. Okay, well thank you that’s about all I’ll have to say ask on my side.
Thank you, Ann.
Thank you very much Ann.
There are no other questions at this time; this concludes our question-and-answer session. I would like to turn the conference back over to Dan Meyers for closing remarks.
Thank you, for attending the call and I also want to thank our team here for their continued diligent efforts in bringing about these results, they don’t happen by themselves it is a collective result of all these people working very hard. So, thank you, very much.
The conference has now concluded. Thank you for attending today’s presentation and you may now disconnect.
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