NextCard Mixes Good News, Quicker Profitability, With Bad, CEO's Departure

With its stock down two-thirds this year amid skepticism about its business model, NextCard ( NXCD) was never going to find it easy to announce that its visionary CEO and co-founder, Jeremy Lent, is stepping down.

So the fast-growing Internet-based credit-card lender decided to throw some good news into the mix. Along with details of Lent's abdication, released Monday, was a second press release from NextCard that predicted the money-losing company would break even earlier than it had once expected.

San Francisco-based NextCard's decision to fire off two press releases is a good example of how Internet companies have become savvy managers of corporate events. But since the spring plunge in tech stocks, investors are getting wise to the game. No surprise then that NextCard's moves Monday were getting extra scrutiny in the market.

NextCard stock dropped 3/32, or 1%, to close at 9 19/32.

Here are the basics of Monday's publicity flurry. On Aug. 10, NextCard's board plans to hand over the CEO post to John Hashman, currently the firm's president and chief financial officer. Lent, whose intense Internet-age rhetoric has wowed and irritated investors in equal measure, will remain chairman and assume the new role of chief strategy officer.

Lent has vacated the CEO post because he needs more time to care for his sick wife, Molly, a co-founder of NextCard. After an operation a few years ago, she suffered serious nerve damage and may need to have surgery soon to improve her situation, according to Hashman. At the start of this year, prompted by Molly's state, NextCard's board and Lent began contemplating a search for a replacement chief exec, Hashman explains.

But if Lent is handing over the CEO role for personal reasons and not because of any performance-related issues, why did the company feel the need to issue the press release on profitability? "We wanted to say that we're making this change at a time of strength," says Hashman. One analyst remains puzzled about Lent's stepping aside, however. "It surprises me that someone who was so passionate about the business leaves after only a year," says Meredith Whitney, an analyst at First Union Securities, which rates NextCard a hold and has done no underwriting with the lender.

What's more, the wording of the profitability release could be considered misleading. In addition, it came out only three days before the company's scheduled earnings release on Thursday, when investors would have been expecting operational forecasts like this.

"NextCard Inc. announced it is bringing in its anticipated break-even date from 2002 to late 2001, a full year earlier than the break-even date anticipated when it went public last year," the company's release said. Not bad, a whole year's jump, one could be forgiven for thinking. But what NextCard didn't say was, since it went public in May 1999 at $20 per share, it has been bringing in that break-even date. In fact, on Monday the company really only advanced by a single quarter the date at which it stops making losses. NextCard now expects to break even or show a profit in the fourth quarter of 2001, instead of the first quarter of 2002. Analysts had been expecting NextCard to make a 13 cent loss per share in the fourth quarter of 2001, according to First Call/Thomson Financial.

NextCard's biggest challenge is to convince the market that it can amass more Internet-based customers than highly profitable existing credit card providers like Providian ( PVN) and Capital One ( COF). Since the beginning of last year, Providian claims to have gathered over 1 million accounts over the Internet, while NextCard had 337,000 accounts at the end of the last quarter.

Hashman's appointment as chief executive is getting mixed reviews. On the one hand, some observers feel that Lent's hyperbolic conference call performances scared off traditional financial services investors. But others believe that Internet companies need big-talking frontmen like that. Hashman responds, "I am very happy that we'll still be having Jeremy here, operating in the chief strategist role."

It's hard to find much evidence that operating shortcomings influenced the CEO switch. Hashman says loan growth will be "higher than expected" and the yield on the loan portfolio will be better than the year-ago and preceding quarters. Bad loans will be "in line with expectations," while the cost of acquiring customers will be in the $80 to $100 range of the first quarter, he adds. "I think it's going to be a good quarter," says Matthew Vetto, analyst at Salomon Smith Barney, who gives NextCard a neutral rating. (Salomon hasn't done underwriting for NextCard.) The company is expected to lose 47 cents per share in the quarter, according to First Call.

While the company and most analysts are upbeat, others will be looking for signs that NextCard is growing by acquiring too many customers with low creditworthiness. For that reason, the most-watched number will be the bad-loan level. Analysts will take the number of bad loans, or charge-offs, in the quarter and then annualize it. Then they'll calculate that as a percentage of total loans as of six months ago. (They use the six-month-old number because credit card loans don't go bad immediately.) In the first quarter, the bad-loan value was 4.8%, and Hashman says it'll be "more or less the same" in the second quarter.

The CFO post at NextCard, which had $639 million in loans outstanding at the end of the first quarter, will be filled by Bruce Rigione, the firm's senior vice president for international business development.

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