ASPS

Business Context and Reporting Period

Company: Altisource Portfolio Solutions S.A.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: Altisource provides high-value, knowledge-based services focused on real estate and mortgage portfolio management, asset recovery, and customer relationship management. The company operates through three segments: Mortgage Services, Financial Services, and Technology Products. A significant event during the period was the February 2010 acquisition of The Mortgage Partnership of America, L.L.C. (MPA), which manages the Lenders One alliance.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 44% year-over-year for the quarter and 43% for the nine-month period. Mortgage Services revenue surged 85% (quarter) and 95% (nine months), driven by the MPA acquisition and growth in Ocwen's loan portfolio.
• Profitability: Net income attributable to Altisource rose 14% for the quarter and 62% for the nine-month period compared to the prior year.
• Segment Performance:
  • Mortgage Services: Strong growth in asset management and default management services.
  • Financial Services: Revenue declined 8% (quarter) and 8% (nine months) due to reduced placements from a major customer, though operating losses narrowed.
  • Technology Products: Revenue increased 4% (quarter) and 7% (nine months), primarily driven by REALSuite services.
• Acquisition Impact: The MPA acquisition contributed $11.4 million in revenue and $3.9 million in EBITDA since the acquisition date in February 2010.
• Working Capital: Accounts receivable increased significantly to $46.8 million (from $30.5 million at year-end 2009), reflecting expanded asset management services.

Guidance, Outlook, and Risks

• Outlook: Management expects EBITDA margins to improve in the fourth quarter as the company realizes benefits from Ocwen's acquisition of the HomEq residential loan portfolio. The company anticipates continued growth in Mortgage Services and expects to begin revenue recognition from a new significant asset management client in the fourth quarter.
• Capital Allocation: The company maintains a share repurchase program authorized for up to 3.8 million shares. As of October 25, 2010, 151,415 shares had been repurchased. Management intends to deploy excess cash for disciplined investments and limited acquisitions.
• Risks and Contingencies:
  • Customer Concentration: Ocwen remains the largest customer, accounting for approximately 50% of consolidated revenue for the nine months ended September 30, 2010.
  • Market Conditions: Results are sensitive to general economic conditions, real estate market trends, and the volume of mortgage originations and defaults.
  • Foreign Currency: The company incurs costs in Euros and Indian Rupees, exposing it to foreign exchange fluctuations.
• Unusual Items: The 2009 period included one-time separation costs and facility closure costs not present in 2010. The 2010 period includes increased equity-based compensation expense ($2.1 million for nine months) due to performance criteria being met.

Investor Verification Checklist

• Customer Concentration: Verify the stability of the relationship with Ocwen, which represents ~50% of revenue, and the impact of Ocwen's own portfolio changes on Altisource's future bookings.
• MPA Integration: Assess the long-term profitability and retention of MPA members, as this acquisition was a primary driver of recent growth.
• Working Capital Trends: Monitor the increase in accounts receivable and unbilled fees to ensure collection rates remain healthy as the business scales.
• Financial Services Turnaround: Evaluate the strategy to improve margins in the Financial Services segment, which reported operating losses, amidst declining revenue.
• Share Repurchase Execution: Track the pace of share buybacks under the authorized program as a signal of management's confidence in cash flow generation.