Altisource Portfolio Solutions S.A. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate. The company provides technology-enabled mortgage and real estate services, asset recovery, and customer relationship management through Mortgage Services, Financial Services, and Technology Services.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Change | Nine months 2012 | Nine months 2011 | Change |
|---|---|---|---|---|---|---|
| Revenue | $144.0m | $109.8m | +31% | $427.3m | $291.7m | +46% |
| Service revenue | $118.6m | $86.2m | +38% | $345.2m | $230.4m | +50% |
| Gross profit | $49.7m | $36.5m | +36% | $148.5m | $100.3m | +48% |
| Operating income | $31.2m | $21.1m | +48% | $94.0m | $54.9m | +71% |
| Net income attributable to Altisource | $27.0m | $17.2m | +57% | $80.3m | $45.4m | +77% |
| Diluted EPS | $1.08 | $0.67 | +61% | $3.23 | $1.76 | +84% |
- Margins: Gross profit as a percentage of service revenue was 42% in Q3 and 43% year to date, versus 42% and 44% in 2011. Operating income as a percentage of service revenue improved to 26% in Q3 and 27% year to date, from 25% and 24%.
- Cash flow: Nine-month operating cash flow was $97.1m, compared with $68.8m a year earlier. Investing cash flow was negative $24.2m, primarily reflecting capital expenditures; financing cash flow was negative $20.6m, including $16.8m of share repurchases and $6.0m of non-controlling interest distributions. Cash increased by $52.3m to $84.4m.
- Balance sheet and liquidity: At September 30, cash was $84.4m, current assets $159.6m, and current liabilities $71.4m. Total assets were $306.3m and equity $232.4m. The filing reports $0.3m of current capital lease obligations and no non-current capital lease obligations; it reports no other outstanding debt balance in the supplied text.
Material changes versus prior comparable periods
- Mortgage Services drove growth: nine-month service revenue increased 76% to $259.9m. Technology Services service revenue rose 31% to $54.0m, while Financial Services declined 7% to $49.1m.
- Management attributed growth mainly to expansion in Ocwen’s serviced loan portfolio and broader mortgage and real estate services. Ocwen’s average serviced loans rose to 0.7m for the first nine months of 2012 from 0.5m a year earlier.
- Financial Services asset recovery revenue fell amid lower credit card delinquencies and placements, and migration of work to a lower-cost geography with lower customer fees. Customer relationship management revenue grew.
- Technology Services operating margin weakened: nine-month operating income as a percentage of service revenue fell to 15% from 27%, reflecting investment in next-generation software, infrastructure costs, and faster growth in lower-margin IT services.
- Accounts receivable rose to $62.5m from $52.0m at year-end 2011. Management noted that working capital growth reduced operating cash flow per service-revenue dollar; nine-month operating cash flow was approximately $0.28 per service-revenue dollar versus $0.30 in 2011.
Outlook, management commentary, risks and unusual items
- Capital plans: Management intended to borrow approximately $200m in Q4 2012 for growth and general corporate purposes, including investing in service businesses and capitalizing the planned residential asset businesses with $105m. These were plans, not completed transactions as of the report; management cautioned completion was not assured. It intended to use some excess cash flow to repay debt.
- Growth initiatives: The company expected to separate and distribute Altisource Residential and Altisource Asset Management to shareholders around year-end 2012, subject to completion. Altisource planned to provide services to the residential rental business. Management also reported that Ocwen agreed to acquire Homeward Residential, which it believed could increase Ocwen’s serviced loans by more than 50%; a separate Residential Capital portfolio transaction remained subject to definitive documents and bankruptcy court approval.
- Other outlook: Management estimated 2012 capital expenditures of $30m–$35m, including approximately $13m for a disaster recovery center. It expected Financial Services margin-improvement initiatives to be completed by the end of the first half of 2013. No specific consolidated earnings or revenue guidance was provided in the supplied filing text.
- Customer concentration: Ocwen was the largest customer. Related-party revenue was 60% of consolidated revenue in both the quarter and first nine months, versus 58% and 57% in 2011. Ocwen-related agreements were extended or entered into on October 1, 2012 through 2020; the filing states Ocwen and OMS are not restricted from redeveloping the services.
- Risks and contingencies: Management identified customer retention and acquisition, technology failures, reliance on outsourcing trends, regulatory and tax changes, seasonality, liquidity, growth execution, margins, collections, and estimates/reserves as risks. Management believed pending litigation would not materially affect financial condition, results, or cash flows. Customer escrow balances of $24.7m were held off balance sheet at September 30, 2012.
- Unusual items: Nine-month share-based compensation included a $0.8m reversal related to an executive officer’s departure. Share repurchases were suspended after Q1 in anticipation of growth investment; no shares were repurchased in Q2 or Q3. The company reported a favorable Luxembourg tax ruling and a 9.6% effective tax rate for the first nine months, adjusted for non-controlling interests.
Important facts for investors to verify
- Whether the planned approximately $200m borrowing and $105m investment in the residential asset businesses were completed, and on what terms.
- Progress and final terms of the planned separation and distribution of Altisource Residential and Altisource Asset Management.
- How much revenue and operating cash flow remain dependent on Ocwen, including implications of the long-term agreements and Ocwen’s ability to redevelop services.
- Whether receivables and working capital convert to cash as the business grows, and whether capital spending stays within management’s estimate.
- Whether Financial Services margins improve as planned and Technology Services margins recover as development investment continues.
- Actual outcomes and timing of the announced Ocwen-related acquisitions, including required approvals and resulting servicing volumes.