DBRS: Nelnet’s 3Q Results Sound with Acquisitions and Servicing Growth Offsetting Legislative Impact

Summary:
• Nelnet reported net income attributable to the Company of $85.2 million in 3Q14 compared to $62.8 million a year ago.
• On an underlying basis, results were sound with adjusted revenues slightly lower while growth in operating expenses remain controlled.
• DBRS rates Nelnet, Inc. Senior Unsecured Debt at BBB (low) with a Stable trend.

DBRS, Inc. (DBRS) views Nelnet, Inc.’s (Nelnet or the Company) underlying 3Q14 financial results as sound with Nelnet reporting underlying net income, which excludes the impact of derivative market value and foreign currency adjustments, of $67.2 million compared to $69.0 million in the prior quarter.

DBRS calculated - adjusted revenues were slightly lower quarter-on-quarter (QoQ) at $227 million with the revenue mix shifting due to federal budgetary provisions, recent acquisitions and growth in the student loan servicing portfolio. Rehabilitation collection revenue declined notably in the quarter to $4.4 million from $13.7 million on a sequential basis. DBRS notes the reduction was expected as it was driven by Congressional legislative action that reduced the Department of Education’s (ED) payments to guaranty agencies for defaulted student loan rehabilitation activities, effective July 1, 2014.

On a positive note, higher revenue from the ED servicing contract, growth in Tuition Payment Processing and Campus Commerce (TPCC) segment revenue and continuing strong performance of the FFELP student loan portfolio mitigated the impact from the federal budgetary provisions. Revenue from the ED servicing contract increased 20% YoY due to the volume of student loans serviced by Nelnet for the ED increasing to $130.8 billion. TPCC related revenues grew 21% in the quarter, reflecting a full quarter of benefits from the RenWeb acquisition. TPCC revenues also benefited from organic growth in new school customers and managed tuition payment plans, as well as an increase in campus commerce volumes. Net interest income generated from the Company’s $28.8 billion FFELP loan portfolio grew sequentially, reflecting an increase in the core student loan spread to 1.53%. The increase in the spread was attributable to higher fixed rate floor income earned during the quarter, as recent loan portfolio acquisitions have increased the overall proportion of Nelnet’s FFELP portfolio that is earning fixed rate floor income. DBRS sees the higher revenue from these sources as evidence of the progress Nelnet is making in reshaping the business to generate more revenue from fee-based businesses, while acquiring existing student loan portfolios when opportunities present themselves.

Ongoing investment in fee related businesses resulted in the growth rate of operating costs to outpace revenues. Specifically, total operating expenses were 4% higher QoQ at $117.4 million. Ongoing expense reduction in the Enrollment Services segment was more than offset by higher personnel related expenses, due to further increases in headcount to support the growing loan servicing volume.

DBRS’s Senior Unsecured Debt rating for Nelnet, Inc. is BBB (low) with a Stable trend.

Note:
All figures are in U.S. dollars unless otherwise noted.