Altisource Portfolio Solutions S.A. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This annual filing also presents unaudited fourth-quarter results; it is not a standalone quarterly filing.
Business context
Altisource provides mortgage, real estate, consumer-debt and technology services through Mortgage Services, Financial Services and Technology Services. Growth remained closely linked to Ocwen: Ocwen accounted for 65% of 2013 revenue, and the three largest customers represented 76%. Altisource reported that Ocwen service agreements extend through August 2025, subject to termination provisions.
Financial results
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Total revenue | $768.4 million | $568.4 million | +35% |
| Service revenue | $662.1 million | $466.9 million | +42% |
| Gross profit | $275.9 million | $202.2 million | +36% |
| Income from operations | $162.1 million | $127.4 million | +27% |
| Net income attributable to Altisource | $130.0 million | $110.6 million | +17% |
| Diluted EPS | $5.19 | $4.43 | +17% |
| Cash flow from operations | $185.5 million | $116.5 million | +59% |
Revenue includes $102.5 million of reimbursable expenses and $3.8 million of non-controlling interests; management emphasizes service revenue because these are pass-through amounts without margin. Gross profit as a percentage of service revenue was 42%, down from 43%; operating income as a percentage of service revenue was 24%, down from 27%. The effective tax rate was 6.0%, versus 7.0%.
At December 31, cash and cash equivalents were $130.3 million, current assets $245.8 million and current liabilities $130.3 million. Long-term debt, net of discount, was $395.3 million, with $4.0 million current principal due. The term loan interest rate was 4.50% at year-end and variable. Total contractual obligations, including estimated interest, were $550.6 million. Management said it expected operating cash flows to fund operations, capital expenditures, debt service and Equator earn-out payments.
Investing cash outflow was $215.9 million, including $267.9 million of business acquisitions net of acquired cash and $34.1 million of capital expenditures; financing cash inflow was $55.3 million. The company repurchased approximately 1.2 million shares for $141.0 million during 2013.
Fourth-quarter results and changes versus prior period
Fourth-quarter 2013 revenue was $222.6 million, compared with $141.1 million in fourth-quarter 2012. Net income attributable to Altisource was $35.5 million versus $30.3 million, and diluted EPS was $1.42 versus $1.20.
Annual growth reflected Ocwen’s expanding servicing portfolio, additional services on boarded loans, new Financial Services clients and acquisitions. Mortgage Services revenue rose 39%, Financial Services 45% and Technology Services 40%. Mortgage Services default-management revenue declined 17%, amid foreclosure delays, modification-related holds and a customer moratorium. Technology Services’ gross margin fell to 19% from 26%, largely reflecting investment in next-generation software and the Equator acquisition. Higher acquisition-related amortization and interest expense also weighed on operating results.
Transactions, outlook and risks
- Altisource acquired Homeward fee-based businesses for $75.8 million and completed the ResCap fee-based business transaction for $128.8 million. Equator was acquired in November for $63.4 million upfront, with up to $80 million of additional consideration tied to performance; the year-end estimated fair value of the earn-out was $46.0 million.
- Debt was increased to $400 million in May and refinanced in December 2013 at lower rates, with maturity extended to December 2020. The agreement contains restrictions on additional debt, dividends, repurchases and other actions; leverage levels may trigger required excess-cash-flow payments.
- Management identified growth opportunities in real-estate marketplaces, rental-property services, mortgage origination and servicing, and next-generation technology. It expected Technology Services costs to rise as development continued and anticipated potential margin improvement as new portfolios generated broader service referrals and efficiency initiatives took effect. No numerical earnings or revenue guidance was provided.
- Key risks include Ocwen concentration and related-party conflicts, regulatory scrutiny of mortgage servicing and foreclosure practices, uncertain default volumes, competition, technology development and cybersecurity risks, vendor oversight, acquisition integration, variable-rate debt and dependence on skilled employees. Management stated current litigation was not expected to materially affect financial condition, results or cash flows.
- Auditors issued unqualified opinions on the financial statements and internal controls. Equator, representing 17% of consolidated assets but less than 1% of revenue and net income attributable to Altisource, was excluded from management’s internal-control assessment and the auditor’s internal-control audit.
Important facts for investors to verify
- Whether Ocwen’s servicing growth, contractual relationship and referrals can sustain revenue, and how concentration affects customer diversification.
- Actual margins and cash conversion as lower-margin portfolio boarding work transitions to a broader service mix; track receivables and collections alongside growth.
- Debt terms, leverage-covenant headroom, variable-rate exposure and the cash requirements of scheduled principal, interest and the Equator earn-out.
- Equator integration, earn-out performance and acquisition-related amortization, as well as returns on ongoing technology investment.
- Regulatory developments affecting foreclosure activity, servicers and vendors, and any changes in litigation, compliance or customer oversight outcomes.