Nelnet, Inc.

Nelnet reported third-quarter base net income of just over $50 million, or $1.01 per share, versus $23.4 million, or $0.47 per share, in the third quarter of 2008. Year-to-date base net income was $114 million, or $2.30 per share, compared with $65.2 million, or $1.33 per share, a year ago. Fee-based revenues were relatively flat overall, but several product lines grew more than 17%, or $5 million, year over year; operating expenses were down almost $17 million, or 20%, versus the prior year and 9% sequentially. Core student loan spread increased to 127 basis points. For liquidity, the company cited a new $500 million revolving warehouse facility through July 2012 and a $430 million securitization; it repurchased about $183 million of debt in the quarter for a gain of just over $5 million, and another $140 million after quarter-end for an expected gain of about $14 million in Q4. No next-quarter EPS or revenue guidance was given, but management said the government servicing contract began in September, was already servicing more than $2.5 billion in volume, and should grow materially in Q4 and into 2010 and beyond.

Jeff Noordhoek struck a very upbeat tone, calling the quarter another “great quarter” and saying the company was optimistic about the future. He framed Nelnet’s strategy as an ongoing transformation into a fee-for-service processing company, with emphasis on growing and diversifying fee-based businesses while maximizing the value of the existing loan portfolio. He also said the new federal servicing contract should become a significant recurring revenue source and that Nelnet is positioned to succeed even if FFEL is eliminated.

Terry Heimes highlighted the financial improvement: base net income was just over $50 million, or $1.01 per share, and year-to-date base net income reached $114 million, or $2.30 per share. He emphasized that fee-for-service businesses now represent more than 50% of total revenue, that expenses were down almost $17 million year over year, and that the company expects operating costs to stabilize as servicing volume grows. He also pointed to a stronger liquidity position, including the $500 million warehouse facility, the $430 million securitization, the $183 million of debt repurchased in the quarter, and the reinstated $0.07 quarterly dividend.

Analysts focused on whether Nelnet might sell its federally guaranteed student loan portfolio, and management said it is not talking to potential buyers but is exploring opportunities and will continue to evaluate ways to maximize value. Questions also centered on the new government servicing contract; management said the contract came on late in September, so revenue will build in future quarters, and that the $740 million of new volume not previously on Nelnet’s platform should grow as the fourth quarter and first quarter progress. On legislation, management said FFEL-related risk remains uncertain and could linger into 2010 because of healthcare debate timing and reconciliation constraints.