Altisource Portfolio Solutions S.A. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Altisource is a Luxembourg-based provider of services, marketplaces and technology to the mortgage and real estate industries. All financial figures below are in U.S. dollars; amounts are in millions unless otherwise stated.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $46.0 | $95.3 | $96.5 | $216.8 |
| Gross profit | $2.0 | $12.7 | $2.3 | $39.6 |
| Gross margin on service revenue | 5% | 14% | 3% | 19% |
| Operating loss | $(14.6) | $(17.8) | $(33.1) | $(21.9) |
| Net loss attributable to Altisource | $(18.5) | $(35.1) | $(40.5) | $(46.7) |
| Loss per share, diluted | $(1.17) | $(2.25) | $(2.57) | $(3.00) |
- Six-month operating cash flow was negative $22.8 million, compared with negative $11.2 million in 2020. Investing activities provided $2.3 million, including $3.0 million received from the sale of the rental property management business; financing used $1.5 million.
- Cash and cash equivalents were $35.3 million at June 30, 2021, down from $58.3 million at December 31, 2020. Restricted cash was $4.8 million. Total assets were $222.1 million and total deficit was $123.7 million.
- Long-term debt carrying value was $243.4 million; senior secured term loan principal was $247.2 million, at a 5.00% interest rate, and matures in April 2024. No borrowing was outstanding under the $15 million term-loan revolver. The company’s leverage ratio exceeded 3.50:1.00, restricting access to that revolver.
- A related-party revolving facility entered in June provides borrowing capacity that declines from $20 million to $10 million over its term, bears 9% interest and is secured by the equity of the company’s main India subsidiary. No amount was drawn at June 30; the company borrowed $6 million on July 6, 2021.
- Current assets of $72.2 million were approximately equal to current liabilities of $72.2 million. Management expected cash, available facility borrowings and anticipated cash flows to cover liquidity needs for the next 12 months, including operating expenses, interest and lease payments.
Material changes versus the prior comparable period
- Second-quarter revenue fell 52%; six-month revenue fell 55%. Field Services revenue declined 76% in the first half and Marketplace revenue declined 53%. Management attributed the downturn primarily to pandemic-related foreclosure and eviction moratoriums, borrower forbearance, and migration of certain Ocwen referrals to other providers.
- Origination service revenue increased 16% in Q2 and 39% in the first half, partly offsetting weaker default-related activity. Revenue from customers other than Ocwen, NRZ and RESI grew less than 1% in Q2 and 6% in the first half.
- Cost reductions lowered first-half cost of revenue 47% and SG&A 33%, but not enough to offset the revenue decline; first-half gross margin contracted to 3% from 19%.
- Net loss improved year over year, but comparisons include prior-year items: 2020 included a $12.6 million first-half unrealized loss on RESI shares and $8.7 million of restructuring charges. Neither was recorded in the first half of 2021. Excluding these items, the filing does not provide a directly comparable adjusted result.
Outlook, management commentary and risks
- No formal quantitative earnings or revenue guidance is provided. Management expects the default business to grow in 2022 and stabilize during 2023 as post-moratorium foreclosures progress to REO sales; timing and volume remain uncertain. The Mortgage Bankers Association forecast cited in the filing projected full-year 2021 mortgage origination volume down 7% from 2020.
- In May, Altisource extended certain Ocwen service agreements from August 2025 to August 2030 and expanded potential service opportunities. Ocwen shifted more than 1,900 FHA first-chance auction inventory items to Altisource in Q2 and increased its Government Loan field-service referrals. Some new services remain subject to performance requirements, agreements or technical integration.
- Customer concentration is material: Ocwen represented 31% of Q2 and 32% of first-half revenue. Ocwen’s regulatory, financial or servicing changes, and further referral or pricing shifts, could materially reduce revenue. Management also identified potential impairment or write-offs if key customer relationships deteriorate.
- Default-market activity remained depressed: foreclosure initiations from January through May 2021 were 81% below the same period in 2020. Federal moratoriums were extended through July 2021, while CFPB rules generally restricted foreclosure initiations until January 1, 2022, subject to exceptions.
- Management is reducing costs, pursuing customer and revenue diversification, and evaluating strategic alternatives for its origination business, including a possible divestiture, joint venture or outside investment. No transaction is assured.
- The company is responding to governmental inquiries regarding aspects of its business; it said potential outcomes and financial impacts could not yet be estimated. Management did not expect current litigation, individually or in aggregate, to materially affect results.
- Interest-rate exposure is significant: a one-percentage-point increase in the Eurodollar rate would add approximately $2.5 million to annual interest expense. Management also cited foreign-currency exposure, particularly to the Indian rupee.
Important facts for investors to verify
- Whether operating cash burn moderates and the company maintains sufficient liquidity given the $22.8 million first-half operating cash outflow and high leverage.
- Terms, availability and actual use of the related-party facility, including the July $6 million draw, 9% cost, collateral and repayment schedule.
- Progress on Ocwen’s expanded service opportunities, referral volumes, pricing and performance conditions, alongside the continuing loss of NRZ-related referrals.
- Actual timing and scale of any recovery in default referrals after moratoriums and temporary loss-mitigation measures expire.
- Execution of cost reductions, growth in origination revenue, and any decision or outcome regarding strategic alternatives for the origination business.