Altisource Portfolio Solutions S.A. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Altisource is an integrated service provider and marketplace for the real estate and mortgage industries. It reports Servicer and Real Estate, Origination, and Corporate and Others; the segment structure changed in 2022, with prior-year segment data restated.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $38.4 million | $43.2 million | $118.3 million | $139.7 million |
| Gross profit | $4.0 million | $2.6 million | $13.7 million | $4.9 million |
| Operating loss | $10.6 million | $14.0 million | $29.3 million | $47.2 million |
| Net loss attributable to Altisource | $14.4 million | $18.3 million | $42.1 million | $58.7 million |
| Loss per share, basic and diluted | $0.89 | $1.15 | $2.62 | $3.71 |
Revenue declined 11% in Q3 and 15% year to date; service revenue fell 13% and 16%, respectively. Gross margin as a percentage of service revenue improved to 11% in Q3 and 12% year to date, from 6% and 4%. Management attributed the improvement primarily to cost reductions and revenue mix, including a greater contribution from higher-margin Servicer and Real Estate activities.
- Segment trends: Q3 Servicer and Real Estate service revenue rose 14% to $29.0 million, while Origination service revenue fell 49% to $7.3 million. For the nine months, the segments generated $85.6 million (up 1%) and $26.1 million (down 43%), respectively.
- Cash flow: Operating cash used was $32.3 million for the first nine months, versus $41.1 million a year earlier. Investing activities used $0.5 million; financing activities used $1.9 million. Cash, cash equivalents and restricted cash ended at $67.4 million, including $63.8 million of unrestricted cash.
- Balance sheet and debt: Total assets were $211.3 million, down from $257.8 million at year-end 2021. Total deficit was $108.5 million. Long-term debt carrying value was $244.8 million; term-loan principal was $247.2 million. The term loan’s stated rate was 6.25% and it matures in April 2024. The company reported no borrowings under its related-party revolving facility and $15 million of borrowing capacity as of September 30.
- Liquidity: Management cited existing cash, expected operating cash generation and anticipated refinancing proceeds as funding sources. The filing does not provide a clear quantified forecast for when operating cash flow will turn positive.
Changes, outlook and risks
- Origination was pressured by mortgage originations falling 46% industrywide year over year for the first nine months of 2022, amid higher interest rates. Management said Lenders One may outperform the market for full-year 2022, citing new customer wins and cross-selling; this is not quantified guidance.
- Foreclosure initiations rose 386% and foreclosure sales rose 45% year over year for the first nine months, but remained 45% and 69% below the comparable 2019 levels. Management expects default-related demand to grow, while estimating that early-2022 referral increases may not materially benefit later-stage auction and REO services until late 2023 or early 2024.
- Ocwen accounted for 45% of Q3 revenue and 40% year-to-date revenue. Ocwen-related regulatory, financial or servicing changes could reduce Altisource’s business, and potentially affect asset values. RITM-related servicing arrangements are another exposure.
- The company sold its majority-owned Pointillist business in December 2021. Altisource received approximately $106 million from the transaction and related receivables; the remaining indemnification escrow was subject to potential claims. Its Working Capital Escrow was received in May 2022.
- Management said it does not expect current litigation to have a material effect, but it is responding to government inquiries whose outcomes and financial impacts cannot yet be estimated. The filing reports no material changes to previously disclosed risk factors.
- Interest-rate risk is material: a one-percentage-point increase in the applicable Eurodollar rate above the loan floor would increase annual interest expense by approximately $2.5 million. The company anticipates refinancing its April 2024 term-loan maturity, but refinancing is not assured.
Important facts for investors to verify
- Progress and terms of refinancing the $247.2 million term-loan principal due in April 2024.
- Cash burn, working-capital movements and the timing of any sustained improvement in operating cash flow.
- Ocwen’s financial, regulatory and servicing developments, and the resulting revenue concentration and referral trends.
- Whether mortgage origination weakness and the delayed recovery in default-related services match management’s expectations.
- Any indemnification claims against the Pointillist escrow and the amount ultimately collected.