Altisource Portfolio Solutions S.A. — Q2 2014 Form 10-Q
Business context and period. The unaudited filing covers the quarter and six months ended June 30, 2014, compared with the same 2013 periods. Altisource provides services and technology to the mortgage, real estate and consumer debt industries through Mortgage Services, Financial Services and Technology Services. Ocwen is its largest customer.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $296.1 million | $186.1 million | $535.3 million | $334.9 million |
| Service revenue | $263.2 million | $161.7 million | $473.1 million | $289.2 million |
| Gross profit | $112.1 million | $69.1 million | $203.5 million | $121.0 million |
| Income from operations | $63.1 million | $39.3 million | $111.0 million | $72.5 million |
| Net income attributable to Altisource | $54.1 million | $30.9 million | $93.7 million | $58.4 million |
| Diluted EPS | $2.24 | $1.25 | $3.84 | $2.34 |
- Q2 total revenue rose 59% year over year; six-month revenue rose 60%. Service revenue increased 63% and 64%, respectively.
- Gross profit as a percentage of service revenue was 43% in both Q2 periods and 43% for the first half of 2014, up from 42% in the first half of 2013. Operating income as a percentage of service revenue was 24% in Q2 in both years and 23% for first-half 2014 versus 25% in 2013.
- For the first half, Mortgage Services service revenue grew 55%, Financial Services 27%, and Technology Services 134%. Growth reflected Ocwen-related volumes, Hubzu activity, insurance services, Financial Services client growth and the Equator acquisition.
- Six-month operating cash flow was $111.5 million, versus $67.5 million. Investing cash outflow was $30.8 million, primarily including $30.5 million of capital expenditures. Financing cash outflow was $83.3 million, including $80.7 million of share repurchases. Cash declined $2.5 million to $127.9 million.
- At June 30, cash was $127.9 million; current assets were $271.8 million and current liabilities $137.4 million. Long-term debt, including current portion, was $393.4 million net of discount. The term loan interest rate was 4.50%, and maturity is December 2020, subject to acceleration upon default.
Changes, unusual items and management commentary
- Q2 SG&A included a $37.9 million reduction in the estimated fair value of Equator acquisition earn-out consideration, recorded as an expense reduction, and a preliminary $37.5 million Equator goodwill impairment charge. The impairment assessment was expected to be completed in Q3 2014. The filing reports the combined effect as a net $0.5 million reduction in SG&A.
- Despite higher revenue and gross profit, first-half operating margin declined, principally due to increased amortization from acquisitions and Hubzu marketing costs. Management said Technology Services margins would remain constrained while it invested in next-generation technology. It also cited higher staffing and related costs to support growth.
- Ocwen accounted for 59% of Q2 consolidated revenue and 60% for the first half, compared with 65% and 63%, respectively, in 2013. Service agreements extend through August 2025, but include pricing renegotiation rights and other provisions.
- Management said it expected operating cash flows to fund operations, capital expenditures, debt service and share repurchases. Subsequent to the filing, it intended to borrow an additional $200 million under the loan accordion, at an anticipated similar interest rate, for buybacks and general corporate purposes, including potential acquisitions; completion was not assured.
- The company repurchased $80.7 million of shares in the first half. Approximately 2.9 million shares remained authorized for repurchase, but legal and loan-agreement limits also applied; the filing cited approximately $16 million of capacity under Luxembourg law and $88 million under the term loan at June 30.
- Altisource was responding to federal and state agency inquiries concerning aspects of its business. Management said the outcome and potential financial impact could not yet be estimated. It considered ordinary-course legal proceedings not material, individually or in aggregate.
- Management corrected previously omitted related-party expense disclosures for 2013, concluding they were not materially misstated, and enhanced related-party disclosure controls. The CEO and CFO concluded disclosure controls were effective. The company was evaluating the impact of the new revenue-recognition standard, effective for periods beginning after December 15, 2016.
Key investor verification points
- Track customer concentration and Ocwen’s servicing volumes, financial condition, regulatory exposure, and continued use of Altisource’s services.
- Review the completed Equator goodwill impairment assessment and actual earn-out performance and payments against the reduced estimate.
- Verify whether the planned $200 million accordion borrowing closed, its final terms, and the use of proceeds; assess debt covenants and share-repurchase capacity.
- Monitor receivables and collections: accounts receivable increased to $125.0 million from $104.8 million, and the allowance for doubtful accounts rose to $9.7 million from $5.6 million.
- Assess whether service growth and technology investment translate into durable segment margins, particularly in Technology Services, and monitor declining default-management and origination-management revenue.
- Follow agency inquiries and any resulting regulatory, legal or financial consequences; the filing provides no clear estimate of potential exposure.