funny i was just re-reading the transcript and came across your post. i know i will get accused of sticking my head in the sand, but being the ostrich that i am i'll do it anyway.
the tax issue - ok i get it if people are spooked about it. it sounds like a big scary number. but it's been out there a while (3+ years) and will probably be there another 3+ years and lots of people have looked at it pretty thoroughly and come away with the same conclusion as FMD. is it a risk? sure, but again, i don't think it's an immediate risk and it doesn't really sound like the IRS has a leg to stand on. they're challenging that it wasn't a legitimate sale and that therefore the company shouldn't be entitled to the refund and that it should owe taxes on income that the trust received after they actually sold it. how that conclusion was arrived at i have no idea.
the quarter on paper looked weak, but when you dig into the details i actually found them to be ok. it sounds like the nonsense going on in congress over the student loan interest #$%$ set the start of the peak lending season back and that this could conversely boost the upcoming q1. cash burn was a little over $10 mill but that included $2.5 million or so of one time expenses related to taxes ($1.5 million) and severance that will go away. So cash burn of $7.5 million would mark a substantial improvement over last year.
when i take a step back and think about this business from an overview bigger picture kind of view, the thing that has me excited (still) longer term is the pieces they're putting in place to make this kind of an all encompassing one stop shop for servicing the private student loan market. the private student loan business is a big recurring revenue business, right? every year there are new students in need of loans, some $10 billion or so every year. FMD comes in with TMS, cology, partnered lending, loan origination and all of the other services they offer, they're providing pretty much every solution you need to get into the private lending business.
its pretty clear that financial institutions want to get back into this market. FMD basically is in the show me stage. show me that you can originate loans that don't sour on me. show me that i can rely on these loans and generate nice recurring revenue streams from them. if you can do it for a few years then i'm sold and i'll partner with you. FMD has 1,100 colleges they work with. they've spent a lot of money flying out to these schools, doing on site visits with contacts there, getting rental cars, staying in hotels, dining out with them to get on their vendor lists. these expenses are already embedded in the value of those vendor lists. the financial institutions looking to get into the private student lending market weigh incurring these same costs vs partnering with a company that has already done it and that has a suite of ancillary services to offer. and the partners they work with (banks, credit unions, etc) can now be sold and cross sold on a variety of services. each new bank/CU that comes on may potentially add 4 revenue streams down the road vs just one a year ago.
and the nice thing about the biz model is the costs go down significantly going forward. staying on the vendor lists involves a few phone calls / emails a year and proof that their loans are working for the school and the student. that's a lot cheaper than the flights/car rentals/hotel/etc to initially get on that list.
the further away from the launch date of monogram (2011) that they get, the more data they have on the performance of their loans and that higher the likelihood they sign on lending partners and also securitize the loans they have on their books.
the reduced cash burn + later start to the peak lending season could very well result in a much better q1 than people are thinking. maybe a couple of financial institutions sign on as lending partners and then in q2 we get a securitization. i don't think this is out of the realm of possibility.
so i guess i'm saying that there's really no reason to panic sell here. nothing has changed. it still seems to me they're putting together the pieces that could make this a pretty successful and diversified business, certainly more stable than it has ever been in the past, even when it was at $50 a share. we shall see. tomorrow will probably begin as a bloodbath. but my bet is that within 4 months or so you see a better q1 than expected, a lending partner or two, and possibly a re-entry into the securitization market.