Altisource Portfolio Solutions S.A. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. Unless stated otherwise, amounts are U.S. dollars in millions. The company provides technology-enabled mortgage and real estate services, asset recovery, and customer relationship services through Mortgage Services, Financial Services, and Technology Services.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Total revenue | $139.1 | $88.7 |
| Service revenue | $108.5 | $71.7 |
| Gross profit | $47.3 | $33.7 |
| Operating income | $30.3 | $17.5 |
| Net income attributable to Altisource | $25.2 | $14.8 |
| Diluted EPS | $1.02 | $0.57 |
| Operating cash flow | $27.8 | $16.6 |
| Capital expenditures | $16.2 | $1.4 |
- Total revenue increased 57%; service revenue increased 51%; attributable net income rose 70%. Basic EPS was $1.08 versus $0.60.
- Gross profit was 44% of service revenue, compared with 47%; operating income was 28% of service revenue, compared with 24%. The filing attributes gross-margin pressure primarily to service mix, technology and staffing investments, and hiring ahead of expected Ocwen loan boarding.
- Cash and cash equivalents were $26.7 at March 31, down from $32.1 at year-end 2011. Current assets were $96.3 and current liabilities $61.9. Accounts receivable rose to $62.3 from $52.0; the cash-flow statement shows a $11.0 operating cash use from receivables.
- Operating cash flow less capital expenditures was approximately $11.6, calculated from reported figures. Investing outflows were $16.2, primarily capital spending; financing outflows were $17.1, including $16.8 of treasury-stock purchases.
- The filing reports no material conventional borrowings; capital lease obligations totaled $0.6, including $0.1 non-current. Total assets were $240.5 and equity was $176.0.
Material changes versus the prior period
- Mortgage Services revenue increased sharply, supported by Ocwen portfolio growth, service expansion, acquisitions, and stronger REO sales. Service revenue in this segment rose 83% to $79.3.
- Technology Services revenue increased 34% to $17.0, reflecting Ocwen and company growth, REALSuite activity, and IT infrastructure services.
- Financial Services revenue declined 8% to $18.0, mainly from lower asset-recovery placements and lower fees as work shifted to lower-cost locations; customer relationship management grew.
- Ocwen accounted for $82.8, or about 60%, of consolidated revenue, versus $48.8, or about 55%, a year earlier. Ocwen remains the largest customer; agreements extend to August 2017 but are subject to termination provisions, and Ocwen may redevelop services.
- Capital spending increased substantially, including disaster-recovery investment; premises and equipment, net, rose to $39.1 from $25.6. Share repurchases were $16.8 versus $7.2 in Q1 2011.
Outlook, commentary, and risks
- Management estimated 2012 capital expenditures of approximately $40, including about $15 for a new disaster recovery center. The filing is not formal earnings guidance.
- Ocwen loan boarding was expected through Q2 2012; Altisource increased staffing in advance. Management planned next-generation technology deployment beginning in the second half of 2012 and continuing through 2013, seeking improved efficiency and margins.
- Management described Q1 REO sales as unusually high for the season, citing process improvements and increased end-user interest. Financial Services revenue is typically strongest in Q1 and tends to decline during the year.
- The company was developing residential rental-related businesses and a consumer real estate portal, and was considering potential separations or spin-offs. Management cautioned that no separation was certain and any transaction would require satisfactory legal, tax, and financial review and any necessary approvals.
- Management planned to limit share repurchases in Q2 to preserve cash for growth plans, with an intention to resume in Q3. A proposed new repurchase plan was subject to shareholder approval at the May 16, 2012 annual meeting. A $2.7 distribution to Lenders One members was expected in Q2.
- Key risks include customer concentration and retention, reliance on outsourcing, technology failures, regulatory and tax changes, seasonality, collections and placement levels, and execution of growth plans. Management said routine legal proceedings were not expected to have a material effect; no material risk-factor changes from the 2011 Form 10-K were reported.
- Unusual item: Q1 2012 stock-based compensation included a $0.8 reversal related to an executive officer’s departure, resulting in reported stock compensation expense of negative $0.2. The effective tax rate, adjusted for non-controlling interests, was 10.1%, broadly consistent with 10.2% a year earlier.
Important facts for investors to verify
- Whether Ocwen’s servicing growth and anticipated Q2 loan boarding translated into sustained revenue, collections, and margins.
- How much of reported revenue growth came from fee-based service revenue versus reimbursable pass-through expenses and non-controlling interests.
- Whether receivables and unbilled fees convert to cash as growth continues, and whether planned capital spending remains near the stated estimate.
- Progress, costs, and approvals for next-generation technology, residential rental initiatives, portal development, and any proposed spin-offs.
- Shareholder approval and subsequent use of the proposed repurchase authorization, alongside cash needs for investment and the expected Lenders One distribution.