Altisource Portfolio Solutions S.A. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing is an annual report, not a standalone fourth-quarter filing. Amounts below are in U.S. dollars.
Business context
Altisource provides mortgage, real estate, consumer debt and related technology services through Mortgage Services, Financial Services and Technology Services. It focuses on fee-based service revenue; reimbursable expenses and non-controlling interests are included in reported revenue but are generally pass-through items with no margin.
Ocwen was the largest customer, accounting for 60% of 2014 consolidated revenue as related-party revenue. A further 24% of revenue came from portfolios serviced by Ocwen where another party selected Altisource. The company acquired Mortgage Builder and Owners.com in 2014 and had acquired Equator in 2013.
Financial performance and liquidity
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $1,078.9 million | $768.4 million | +40% |
| Service revenue | $938.7 million | $662.1 million | +42% |
| Gross profit | $371.7 million | $275.9 million | +35% |
| Income from operations | $170.5 million | $162.1 million | +5% |
| Net income attributable to Altisource | $134.5 million | $130.0 million | +3% |
| Diluted EPS | $5.69 | $5.19 | +10% |
| Cash from operating activities | $197.5 million | $185.5 million | +6% |
- Gross profit margin on service revenue fell to 40% from 42%; operating margin on service revenue fell to 18% from 24%. Management attributed pressure to revenue mix, investment and growth costs, higher marketing and amortization, and increased SG&A.
- SG&A rose 77% to $201.3 million. Bad debt expense increased to $16.3 million from $2.5 million; the allowance for doubtful accounts was $22.7 million at year-end, up from $5.6 million.
- Cash and cash equivalents were $161.4 million, and current assets and current liabilities were $302.1 million and $140.8 million, respectively, at December 31, 2014.
- Long-term debt had a $591.5 million face amount ($588.6 million net carrying value); its estimated fair value was $467.3 million. The loan bore interest at 4.50% at year-end and matures in 2020, with scheduled quarterly principal installments and covenant restrictions.
- Investing cash outflow was $101.3 million, including $64.8 million of capital expenditures and $34.7 million for acquisitions, net of acquired cash. Financing cash outflow was $65.2 million, including $255.7 million of share repurchases, offset in part by $198.0 million of net debt proceeds.
Material changes and unusual items
- Technology Services revenue increased 122%, driven in part by the Equator acquisition and growth in software and IT infrastructure services. Mortgage Services revenue increased 33%, especially in asset management; Financial Services revenue increased 6%.
- Default management service revenue fell 46%, primarily reflecting lower foreclosure starts. Origination management revenue also fell 46%, reflecting a customer loss and weaker U.S. origination volumes.
- Equator’s contingent consideration was reduced by $37.9 million, recorded as an earnings benefit, while a $37.5 million Equator goodwill impairment was recorded. The net effect of these two items was a $0.5 million benefit.
- Fourth-quarter 2014 revenue was $255.9 million; Altisource reported a $1.5 million loss attributable to the company, or diluted loss per share of $0.08. The filing’s quarterly table does not clearly attribute the quarter’s loss to one specific item.
- 2014 diluted EPS growth exceeded net income growth in part as the weighted-average diluted share count declined to 23.6 million from 25.1 million.
- The company corrected prior-year related-party expense disclosures, concluding the errors were not material misstatements. It also reported that disclosure controls and internal control over financial reporting were effective; acquired Mortgage Builder and Owners.com controls were excluded from the assessment.
Outlook, risks and contingencies
- No numerical earnings or revenue guidance was provided. Management expected revenue from Ocwen’s servicing portfolio to decline in 2015, planned to increase cash reserves, and described cost reductions and diversification initiatives. These include winning new default-services clients, expanding origination technology, growing online real estate marketplaces, and developing property management and renovation services.
- Management said operating cash flow and current liquidity were expected to cover working capital, capital expenditures and debt service for at least the next 12 months, while cautioning that plans may not succeed and operations may not remain profitable.
- Ocwen’s regulatory, financing and servicing-rights challenges could reduce Altisource’s service volumes or alter pricing and contracts. The filing identifies customer concentration as a material risk and notes that Ocwen’s main service agreements extend through 2025, subject to termination provisions.
- Altisource was responding to federal and state regulatory inquiries concerning aspects of its business; management said the potential outcome and financial impact could not yet be estimated. A securities class action alleging disclosure violations and involving related-party pricing was pending; the company said it could not reasonably estimate potential loss.
- Other exposures include variable-rate debt, restrictive debt covenants, regulatory and compliance requirements, customer receivable collectability, technology and data-security risks, and $63.5 million of non-cancelable operating lease obligations. Escrow and trust balances of $62.5 million were off balance sheet at year-end.
Important facts for investors to verify
- How quickly Ocwen-related revenue and servicing volumes may decline, and the extent of Altisource’s ability to replace that business with independent customers.
- Collection of receivables and the adequacy of the $22.7 million doubtful-account allowance, particularly for default management customers.
- Debt covenant headroom, future required repayments, refinancing options, and the implications of the debt’s reported fair value below carrying value.
- Whether cost reductions and diversification can stabilize margins while funding technology investment and acquisition integration.
- Developments in the regulatory inquiries, Ocwen-related proceedings and securities class action, including any financial or operating consequences.