Altisource Portfolio Solutions S.A. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The company provides technology-enabled mortgage and real estate portfolio services, asset recovery, and customer relationship management. Unless stated otherwise, dollar amounts below are in millions; the filing presents financial statements in thousands.
Financial performance
| Metric | Q2 2011 | Q2 2010 | H1 2011 | H1 2010 |
|---|---|---|---|---|
| Total revenue | $93.3 | $71.3 | $181.9 | $132.3 |
| Service revenue | $72.5 | $58.9 | $144.2 | $110.6 |
| Gross profit | $30.2 | $27.0 | $63.9 | $48.6 |
| Operating income | $16.3 | $14.5 | $33.7 | $24.0 |
| Net income | $14.7 | $17.6 | $30.8 | $24.7 |
| Net income attributable to Altisource | $13.4 | $16.3 | $28.2 | $22.7 |
| Diluted EPS | $0.52 | $0.62 | $1.09 | $0.87 |
- Service revenue grew 23% in Q2 and 30% in H1 year over year; total revenue grew 31% and 37%, respectively. Total revenue includes reimbursable expenses and Lenders One non-controlling interest, which the company identifies as pass-through items that earn no margin.
- Gross profit as a percentage of service revenue was 42% in Q2 2011 versus 46% in Q2 2010, and 44% in both H1 periods. Operating income as a percentage of service revenue was 22% in Q2 2011 versus 25% in Q2 2010, and 23% in H1 2011 versus 22% in H1 2010.
- H1 operating cash flow was $38.2, compared with $24.3 in 2010. Investing cash flow was $(8.7), financing cash flow $(16.6), and cash increased by $12.9 to $35.0.
- At June 30, cash was $35.0 and current assets/current liabilities were $92.6/$31.9. Total assets were $203.0 and equity was $167.9. Capital lease obligations totaled $1.2; the filing reports no other borrowings in the presented balance sheet.
Comparability and business drivers
- Mortgage Services was the main growth driver: H1 segment revenue rose to $125.2 from $75.0, with income before tax attributable to Altisource increasing to $35.2 from $18.8. Growth reflected expanded services and growth in Ocwen’s serviced loan portfolio.
- Financial Services H1 revenue declined 6% to $37.5; segment pretax income fell to $2.4 from $3.0. Management cited reduced business from a major customer, partly due to work moving to the company’s global delivery platform, and seasonal collections. Management said the transfer lowered revenue but generally improved margins.
- Technology Services H1 revenue increased 8% to $26.3, while operating income declined to $6.8 from $8.7. Management cited investment and costs, including licensing, and a 2011 change to infrastructure-service pricing. The segment’s H1 gross margin was 36% versus 46%.
- Q2 attributable net income and diluted EPS decreased year over year even as operating income increased. The comparison was affected by a $1.8 tax provision in Q2 2011 versus a $3.1 tax benefit in Q2 2010; H1 2011 effective tax rate was 10.3%, with the filing citing a favorable tax ruling and jurisdictional income mix.
- Ocwen or services derived from its loan portfolio represented 56% of consolidated H1 revenue, versus 49% in H1 2010. Ocwen remains the largest customer; related-party revenue was $102.5 in H1 2011. Service agreements extend up to eight years from the 2009 separation, subject to termination provisions, and Ocwen is not restricted from redeveloping services.
Outlook, risks, and notable items
- Management expected modest service-revenue growth in Q3, supported by seasonally stronger REO sales and title-insurance growth. It expected substantially greater Q4 growth assuming Ocwen completed its Litton-platform acquisition and Altisource continued its title-insurance rollout. These expectations were conditional, not a formal quantified forecast.
- Management expected Q3 investments in personnel, technology, and Litton-related infrastructure to constrain margin expansion; it anticipated personnel costs to rise as it prepared for potential portfolio boarding. Longer-term margin improvement depended on process improvements, software deployment, and higher referral volumes.
- Management estimated 2011 capital expenditures of $16–$18 million, above 2010, principally reflecting REALSuite development. In July, after quarter-end, it paid $12.0 million to complete its Correspondent One funding commitment, bringing total funding to $15.0 million; it also paid a net $0.7 million to end a subcontractor arrangement and acquire an approximately 600-person workforce. A further $1.3 million distribution to Lenders One members was expected in Q3.
- Springhouse was acquired in April for $1.8 million; management said the acquisition did not materially affect financial position, results, or cash flows. In July, the company’s ownership in Correspondent One was reduced below 50% following investment by Lenders One members.
- The company repurchased 152,175 shares in Q2 for an average $32.37 per share. By June 30, it had repurchased 1.0 million shares under its 3.8 million-share authorization, leaving approximately 2.8 million available. H1 financing cash flow included $12.5 million of share repurchases.
- Other income included a $0.6 million H1 gain from the change in fair value of an MPA-related put option. Management said routine litigation was not expected to have a material impact; it also reported no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Ocwen completes the Litton acquisition and boards the anticipated loans, and the resulting effect on Altisource’s revenue, costs, and customer concentration.
- Whether service-revenue growth and margin performance meet management’s seasonal and longer-term expectations, particularly amid foreclosure-referral declines and Financial Services softness.
- Cash and capital needs after the July Correspondent One funding and workforce transaction, including actual 2011 capital expenditures and remaining commitments.
- Ocwen-related revenue concentration, contract termination terms, and the extent to which business depends on Ocwen’s servicing portfolio and purchasing decisions.
- The effects of the tax ruling and tax amortization on future effective tax rates, and the valuation and potential exercise or forfeiture of the MPA put option.