EX-99.1 2 exhibit99111818earningsrel.htm EXHIBIT 99.1 Exhibit


Nelnet Reports Third Quarter 2018 Results
•
GAAP net income $1.05 per share, $1.14 per share excluding adjustments
•
Board of Directors appoints Preeta Bansal as new member
•
Quarterly dividend increased from $0.16 to $0.18 per share

LINCOLN, Neb., November 8, 2018 - Nelnet (NYSE: NNI) today reported GAAP net income of $42.9 million, or $1.05 per share, for the third quarter of 2018, compared with GAAP net income of $46.3 million, or $1.11 per share, for the same period a year ago.

Net income, excluding derivative market value and foreign currency transaction adjustments, was $46.9 million, or $1.14 per share, for the third quarter of 2018, compared with $41.5 million, or $1.00 per share, for the same period in 2017. For additional information on these non-GAAP metrics, including reconciliations to GAAP net income, see "Non-GAAP Performance Measures" below.

During the third quarter of 2018, the company recorded an impairment charge of $3.0 million after tax, or $0.07 per share, related to certain external servicing software development costs that were previously capitalized. As part of integrating technology and becoming more efficient and effective in meeting borrower needs, the company continues to evaluate the best use of its servicing systems after the acquisition of Great Lakes Educational Loan Services, Inc. (Great Lakes) on February 7, 2018.

In addition, in the third quarter of 2018, the company determined an additional allowance for loan losses was necessary related to a portfolio of federally insured loans that were purchased in 2013 and 2014, and recognized $3.8 million after tax, or $0.09 per share, in provision expense related to these loans.

"We are pleased with the operating results and performance of our core businesses," said Jeff Noordhoek, chief executive officer of Nelnet." A year after the acquisition agreement was announced, we are pleased with the progress we have made with Great Lakes to provide an exceptional borrower experience. Our payment processing business rebranded its K-12 businesses and consistently increases its revenue yearly. Our ALLO Communications business is ahead of schedule in the build-out of its fiber network in Lincoln and is experiencing strong demand for its products. We are also pleased to add a talented leader to our board and again increase our quarterly dividend."

Nelnet operates four primary business segments, earning interest income on loans in its Asset Generation and Management segment, and fee-based revenue in its Loan Servicing and Systems, Education Technology, Services, and Payment Processing (formerly known as Tuition Payment Processing and Campus Commerce), and Communications segments.

Asset Generation and Management

For the third quarter of 2018, Nelnet reported net interest income of $59.8 million, compared with $75.2 million for the same period a year ago. The company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Derivative settlements for each applicable period should be evaluated with the company's net interest income. The company recognized income from derivative settlements of $22.3 million during the third quarter of 2018, compared with an expense from derivative settlements of $0.6 million for the same period in 2017.

The company's average balance of loans decreased to $23.0 billion for the third quarter of 2018, compared with $23.2 billion for the same period in 2017. Core loan spread increased to 1.30 percent for the quarter ended September 30, 2018, compared with 1.19 percent for the same period in 2017.

Loan Servicing and Systems

On February 7, 2018, the company acquired Great Lakes from Great Lakes Higher Education Corporation. The company paid $150.0 million in cash for 100 percent of the stock of Great Lakes. Beginning February 7, 2018, the operating results of Great Lakes are included in the company's Loan Servicing and Systems segment.

Revenue from the Loan Servicing and Systems segment was $112.6 million for the third quarter of 2018, compared with $56.0 million for the same period in 2017.

As of September 30, 2018, the company (including Great Lakes) was servicing $464.9 billion in government-owned, Federal Family Education Loan (FFEL) Program, private education, and consumer loans, as compared with $207.8 billion of loans serviced by the company as of September 30, 2017.





Nelnet Servicing, LLC (Nelnet Servicing) and Great Lakes are two companies that have student loan servicing contracts awarded by the U.S. Department of Education (the Department) in June 2009 to provide servicing for loans owned by the Department. As of September 30, 2018, Nelnet Servicing was servicing $179.3 billion of student loans for 5.8 million borrowers under its contract, and Great Lakes was servicing $232.7 billion of student loans for 7.5 million borrowers under its contract. These contracts are currently scheduled to expire on June 16, 2019.

The Department's Office of Federal Student Aid has a federal student loan servicing procurement in progress. Nelnet is part of a team that has responded to or will be responding to the four currently ongoing components of the procurement.

Education Technology, Services, and Payment Processing

For the third quarter of 2018, revenue from the Education Technology, Services, and Payment Processing segment was $58.4 million, an increase of $8.1 million, or 16.0 percent, from the same period in 2017. Prior period revenues were restated, without any impact on prior period net income, in connection with the implementation of a new revenue recognition accounting standard effective January 1, 2018. The increase in revenue was primarily driven by growth in managed tuition payment plans, campus commerce customer transactions and payments volume, and an increase in the number of customers using the operating segment's education and technology services.

On October 16, 2018, the company terminated its investment in a proprietary payment processing platform. This decision was made as a result of decreased pricing and advancements in technology by established processors in the industry. As a result of this decision, the company will record an impairment charge of approximately $8 million during the three-month period ending December 31, 2018. The charge represents computer hardware and external software development costs related to the payment processing platform. The decision will not impact the company's existing payment processing revenue or customers. The company is continuing to evaluate other costs that may be incurred as a result of this decision, but currently believes such costs will not be material.

Communications

Revenue from ALLO Communications was $11.8 million for the third quarter of 2018, compared with $6.8 million for the same period in 2017. The number of households served as of September 30, 2018, was 32,529, which nearly doubled from the number of households served as of September 30, 2017.

For the third quarter of 2018, ALLO recognized a net loss of $7.7 million, compared with a net loss of $4.6 million for the same period in 2017. The company anticipates this operating segment will be dilutive to consolidated earnings as it continues to build its network in Lincoln, Nebraska and other communities, due to large upfront capital expenditures and associated depreciation and upfront customer acquisition costs. ALLO's management uses earnings (loss) before interest, income taxes, depreciation, and amortization (EBITDA) to eliminate certain non-cash and non-operating items in order to consistently measure performance from period to period. For the third quarter of 2018, ALLO had positive EBITDA of $0.2 million, compared with negative EBITDA of $2.7 million for the same period in 2017. For additional information on this non-GAAP metric, including a reconciliation to ALLO's GAAP net loss, see "Non-GAAP Performance Measures" below.

ALLO incurred capital expenditures of $66.8 million year-to-date through September 30, 2018, including $21.7 million during the third quarter of 2018. The company currently anticipates total network expenditures for the remainder of 2018 will be approximately $25 million; however, the amount of capital expenditures could change based on customer demand for ALLO's services. In August 2018, ALLO began to provide its services in Fort Morgan, Colorado, increasing households in current markets to 142,602. ALLO plans to add communities in Nebraska and Colorado over the next several years. The number of residential households passed, which represents the estimated number of single residence homes, apartments, and condominiums that ALLO already serves, and those in which ALLO has the capacity to connect to its network distribution system without further material extensions to the transmission lines (but have not been connected), increased to 110,687 as of September 30, 2018, compared with 71,426 as of December 31, 2017.

Liquidity and Capital Activities

For the first three quarters of 2018, the company generated $193.6 million in net cash from operating activities. In addition, as of September 30, 2018, the company had a total of $83.5 million in cash and cash equivalents and $57.4 million in available-for-sale investments, consisting primarily of student loan asset-backed securities. The company also has a $350.0 million unsecured line of credit. As of September 30, 2018, $160.0 million was outstanding on the line of credit and $190.0 million was available for future use.





The company paid cash dividends of $6.5 million, or $0.16 per share, during the third quarter of 2018.

The company intends to use its liquidity position to capitalize on market opportunities, including: FFEL Program, private education, and consumer loan acquisitions; strategic acquisitions and investments; expansion of ALLO's communications network; and capital management initiatives, including stock repurchases, debt repurchases, and dividend distributions. The timing and size of these opportunities will vary and will have a direct impact on the company's cash and investment balances.

Board of Directors Appoints New Member

The company announced that its Board of Directors appointed Preeta D. Bansal as a Class I member of the board to hold office for a term expiring at the annual meeting of the company's shareholders in 2021. Ms. Bansal will serve on the board's Compensation, Compliance, and Risk and Finance committees.

"We are delighted to add Preeta Bansal and her expertise and insights to the Nelnet Board," said Executive Chairman Mike Dunlap. "Preeta is a distinguished global business leader and lawyer with tremendous experience in banking, financial services, government, regulation, public policy, and academia. Her insights and leadership on a number of business, compliance, and policy issues will be an asset to Nelnet."

Ms. Bansal has been a lecturer, senior advisor, and visiting scholar at the Massachusetts Institute of Technology (MIT), and is co-founder and CEO of Social Emergence Corporation, a not-for-profit, social benefit organization.

Previously, Ms. Bansal served as general counsel and senior policy advisor for the president of the United States in the Office of Management and Budget, which oversees and coordinates all of the budgetary, regulatory, and management activities and initiatives of the departments and agencies of the federal government on behalf of the president; was global general counsel for litigation and regulatory affairs for HSBC Holdings in London; was a partner and practice chair of the international law firm Skadden, Arps, Slate, Meagher & Flom LLP in New York City; served as Solicitor General of the State of New York, where she helped lead 600 attorneys in the New York Attorney General’s Office; and served as Chair of the U.S. Commission on International Religious Freedom, a federal government human rights commission focused on promoting U.S. foreign policy interests in religious freedom and interfaith cooperation around the globe.

She is a graduate of Harvard Law School and Harvard-Radcliffe College, and was a law clerk to U.S. Supreme Court Justice John Paul Stevens.

Ms. Bansal is on the Advisory Board of the Johnny Carson Center for the Emerging Media Arts at the University of Nebraska; the Program Committee of the EN Thompson Forum on World Issues; the Chancellor's Board of Counselors of the University of Nebraska Medical Center; and the Community Advisory Committee of the Superintendent of Lincoln Public Schools. She is also an Honorary Board member of the Interfaith Center of New York, and on the Advisory Committee of the Pluralism Project at Harvard University. She has lectured on ethics and policy with respect to emerging technologies at MIT and at Singularity University in Silicon Valley. From 2015-2016, she served by appointment of the president of the United States as a member and committee chair of the President’s Advisory Committee on Faith-Based and Neighborhood Partnerships, focusing on poverty and inequality in America.

Board of Directors Declares Fourth Quarter Dividend

The Nelnet Board of Directors declared a fourth quarter cash dividend on the company's outstanding shares of Class A common stock and Class B common stock of $0.18 per share. The dividend will be paid on December 14, 2018, to shareholders of record at the close of business on November 30, 2018.

Non-GAAP Performance Measures

The company prepares its financial statements and presents its financial results in accordance with U.S. GAAP. However, it also provides additional non-GAAP financial information related to specific items management believes to be important in the evaluation of its operating results and performance. A reconciliation of the company's GAAP net income to net income, excluding derivative market value and foreign currency transaction adjustments, and a discussion of why the company believes providing this additional information is useful to investors, is provided below.





 
Three months ended September 30,
 
2018
 
2017
 
(dollars in thousands, except share data)
GAAP net income attributable to Nelnet, Inc.
$
42,927

 
46,303

Realized and unrealized derivative market value adjustments
5,226

 
(21,429
)
Unrealized foreign currency transaction adjustments
—

 
13,683

Net tax effect
(1,254
)
 
2,943

Net income attributable to Nelnet, Inc., excluding derivative market value and foreign currency transaction adjustments
$
46,899

 
41,500

 
 
 
 
Earnings per share:
 
 
 
GAAP net income attributable to Nelnet, Inc.
$
1.05

 
1.11

Realized and unrealized derivative market value adjustments
0.12

 
(0.51
)
Unrealized foreign currency transaction adjustments
—

 
0.33

Net tax effect
(0.03
)
 
0.07

Net income attributable to Nelnet, Inc., excluding derivative market value and foreign currency transaction adjustments
$
1.14

 
1.00


"Derivative market value and foreign currency transaction adjustments" include (i) both the realized portion of gains and losses (corresponding to variation margin received or paid on derivative instruments that are settled daily at a central clearinghouse) and the unrealized portion of gains and losses that are caused by changes in fair values of derivatives that do not qualify for "hedge treatment" under GAAP; and (ii) the unrealized foreign currency transaction gains or losses caused by the re-measurement of the company's previously Euro-denominated bonds to U.S. dollars. In October 2017, the company remarketed its Euro-denominated bonds to denominate those bonds in U.S. dollars. "Derivative market value and foreign currency transaction adjustments" does not include "derivative settlements" that represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the company's derivative instruments based on their contractual terms. The tax effects in the preceding table are calculated by multiplying the realized and unrealized derivative market value adjustments and unrealized foreign currency transaction adjustments by the applicable statutory income tax rate.

The company believes these point-in-time estimates of asset and liability values related to its derivative instruments and previously Euro-denominated bonds that are or were subject to interest and currency rate fluctuations are or were subject to volatility, primarily due to timing and market factors beyond the control of management, and affect the period-to-period comparability of the results of operations. Accordingly, the company’s management utilizes operating results excluding these items for comparability purposes when making decisions regarding the company’s performance and in presentations with credit rating agencies, lenders, and investors. Consequently, the company reports this non-GAAP information because the company believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance.

A reconciliation of ALLO's GAAP net loss to earnings (loss) before net interest expense, income taxes, depreciation, and amortization (EBITDA), is provided below.

 
Three months ended September 30,
 
2018
 
2017
 
(dollars in thousands)
Net loss
$
(7,741
)
 
(4,602
)
Net interest expense
4,173

 
1,550

Income tax benefit
(2,444
)
 
(2,821
)
Depreciation and amortization
6,167

 
3,145

Earnings (loss) before interest, income taxes,
depreciation, and amortization (EBITDA)
$
155

 
(2,728
)





EBITDA is a supplemental non-GAAP performance measure that is frequently used in capital-intensive industries such as telecommunications. ALLO's management uses EBITDA to compare ALLO's performance to that of its competitors and to eliminate certain non-cash and non-operating items in order to consistently measure performance from period to period. EBITDA excludes interest and income taxes because these items are associated with a company's particular capitalization and tax structures. EBITDA also excludes depreciation and amortization expense because these non-cash expenses primarily reflect the impact of historical capital investments, as opposed to the cash impacts of capital expenditures made in recent periods, which may be evaluated through cash flow measures. The company reports EBITDA for ALLO because the company believes that it provides useful additional information for investors regarding a key metric used by management to assess ALLO's performance. There are limitations to using EBITDA as a performance measure, including the difficulty associated with comparing companies that use similar performance measures whose calculations may differ from ALLO's calculations. In addition, EBITDA should not be considered a substitute for other measures of financial performance, such as net income or any other performance measures derived in accordance with GAAP.

Forward-Looking and Cautionary Statements

This press release contains forward-looking statements within the meaning of federal securities laws. The words "anticipate," "continue," "expect," "future," "intend," "plan," "scheduled," "will," and similar expressions, as well as statements in future tense, are intended to identify forward-looking statements. These statements are based on management's current expectations as of the date of this release and are subject to known and unknown risks and uncertainties that may cause actual results or performance to differ materially from those expressed or implied by the forward-looking statements. Such risks include, but are not limited to: risks related to the company's loan portfolio, such as interest rate basis and repricing risk and changes in levels of student loan repayment or default rates; the use of derivatives to manage exposure to interest rate fluctuations; the uncertain nature of the expected benefits from the acquisition of Great Lakes on February 7, 2018, and the ability to successfully integrate technology, shared services, and other activities and successfully maintain and increase allocated volumes of student loans serviced under existing and any future servicing contracts with the Department; risks to the company related to the Department's initiative to procure new contracts for federal student loan servicing, including the risk that the company on a post-Great Lakes acquisition basis may not be awarded a contract; risks related to the development by the company and Great Lakes of a new student loan servicing platform, including risks as to whether the expected benefits from the new platform will be realized; the uncertain nature of expected benefits from FFEL Program, private education, and consumer loan purchases and initiatives to purchase additional FFEL Program, private education, and consumer loans; financing and liquidity risks, including risks of changes in the securitization and other financing markets for student loans; risks and uncertainties from changes in the educational credit and services marketplace resulting from changes in applicable laws, regulations, and government programs and budgets, such as the expected decline over time in FFEL Program loan interest income and fee-based revenues due to the discontinuation of FFEL Program loan originations in 2010 and the resulting initiatives by the company to adjust to a post-FFEL Program environment; the uncertain nature of the expected benefits from the acquisition of ALLO on December 31, 2015, and the ability to successfully expand its fiber network in existing service areas and additional communities and manage related construction risks; risks and uncertainties related to initiatives to pursue additional strategic investments and acquisitions, including investments and acquisitions that are intended to diversify the company both within and outside of its historical core education-related businesses; cybersecurity risks, including potential disruptions to systems, disclosure of confidential information, and/or damage to reputation resulting from cyber-breaches; and changes in general economic and credit market conditions, including the availability of any relevant money-market index rate such as LIBOR.

For more information, see the "Risk Factors" sections and other cautionary discussions of risks and uncertainties included in documents filed or furnished by the company with the Securities and Exchange Commission, including the cautionary information about forward-looking statements contained in the company's supplemental financial information for the third quarter ended September 30, 2018. All forward-looking statements in this release are as of the date of this release. Although the company may voluntarily update or revise its forward-looking statements from time to time to reflect actual results or changes in the company's expectations, the company disclaims any commitment to do so except as required by securities laws.




Consolidated Statements of Income
(Dollars in thousands, except share data)
(unaudited)
 
Three months ended
 
Nine months ended
 
September 30,
2018
 
June 30,
2018
 
September 30,
2017
 
September 30, 2018
 
September 30,
2017
Interest income:
 
 
 
 
 
 
 
 
 
Loan interest
$
232,320

 
223,371

 
193,087

 
653,414

 
564,173

Investment interest
7,628

 
5,818

 
3,800

 
18,581

 
9,616

Total interest income
239,948

 
229,189

 
196,887

 
671,995

 
573,789

Interest expense:
 
 
 
 
 
 
 
 
 
Interest on bonds and notes payable
180,175

 
171,450

 
121,650

 
487,174

 
341,787

Net interest income
59,773

 
57,739

 
75,237

 
184,821

 
232,002

Less provision for loan losses
10,500

 
3,500

 
6,700

 
18,000

 
10,700

Net interest income after provision for loan losses
49,273

 
54,239

 
68,537

 
166,821

 
221,302

Other income:
 
 
 
 
 
 
 
 
 
Loan servicing and systems revenue
112,579

 
114,545

 
55,950

 
327,265

 
167,079

Education technology, services, and payment processing revenue
58,409

 
48,742

 
50,358

 
167,372

 
149,862

Communications revenue
11,818

 
10,320

 
6,751

 
31,327

 
17,577

Other income
16,673

 
9,580

 
19,756

 
44,449

 
44,874

Gain from debt repurchases
—

 
—

 
116

 
359

 
5,537

Derivative market value and foreign currency transaction adjustments and derivative settlements, net
17,098

 
17,031

 
7,173

 
100,927

 
(25,568
)
Total other income
216,577

 
200,218

 
140,104

 
671,699

 
359,361

Cost of services:
 
 
 
 
 
 
 
 
 
 Cost to provide education technology, services, and payment processing services
19,087

 
11,317

 
15,151

 
44,087

 
37,456

Cost to provide communications services
4,310

 
3,865

 
2,632

 
11,892

 
6,789

Total cost of services
23,397

 
15,182

 
17,783

 
55,979

 
44,245

Operating expenses:
 
 
 
 
 
 
 
 
 
Salaries and benefits
114,172

 
111,118

 
74,193

 
321,932

 
220,684

Depreciation and amortization
22,992

 
21,494

 
10,051

 
62,943

 
27,687

Loan servicing fees
3,087

 
3,204

 
8,017

 
9,428

 
19,670

Other expenses
45,194

 
40,409

 
29,500

 
119,020

 
81,923

Total operating expenses
185,445

 
176,225

 
121,761

 
513,323

 
349,964

Income before income taxes
57,008

 
63,050

 
69,097

 
269,218

 
186,454

Income tax expense
(13,882
)
 
(13,511
)
 
(25,562
)
 
(63,369
)
 
(70,349
)
Net income
43,126

 
49,539

 
43,535

 
205,849

 
116,105

Net (income) loss attributable to noncontrolling interests
(199
)
 
(104
)
 
2,768

 
438

 
8,960

Net income attributable to Nelnet, Inc.
$
42,927

 
49,435

 
46,303

 
206,287

 
125,065

Earnings per common share:
 
 
 
 
 
 
 
 
 
Net income attributable to Nelnet, Inc. shareholders - basic and diluted
$
1.05

 
1.21

 
1.11

 
5.04

 
2.97

Weighted average common shares outstanding - basic and diluted
40,988,965

 
40,886,617

 
41,553,316

 
40,942,177

 
42,054,532






Condensed Consolidated Balance Sheets
(Dollars in thousands)
(unaudited)

 
As of
 
As of
 
As of
 
September 30, 2018
 
December 31, 2017
 
September 30, 2017
Assets:
 
 
 
 
 
Loans receivable, net
$
22,528,362

 
21,814,507

 
22,569,139

Cash, cash equivalents, investments, and notes receivable
330,352

 
307,290

 
490,633

Restricted cash
911,929

 
875,314

 
830,762

Goodwill and intangible assets, net
249,462

 
177,186

 
188,054

Other assets
1,084,820

 
790,138

 
690,122

Total assets
$
25,104,925

 
23,964,435

 
24,768,710

Liabilities:
 
 
 
 
 
Bonds and notes payable
$
22,251,433

 
21,356,573

 
22,240,279

Other liabilities
526,364

 
442,475

 
397,991

Total liabilities
22,777,797

 
21,799,048

 
22,638,270

Equity:
 
 
 
 
 
Total Nelnet, Inc. shareholders' equity
2,316,864

 
2,149,529

 
2,111,851

Noncontrolling interests
10,264

 
15,858

 
18,589

Total equity
2,327,128

 
2,165,387

 
2,130,440

Total liabilities and equity
$
25,104,925

 
23,964,435

 
24,768,710

Contacts:
Media, Ben Kiser, 402.458.3024, or Investors, Phil Morgan, 402.458.3038, both of Nelnet, Inc.