Business Context and Reporting Period
Company: Altisource Portfolio Solutions S.A.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: Altisource provides technology-enabled services for real estate and mortgage portfolio management, asset recovery, and customer relationship management. Operations are reported through three segments: Mortgage Services, Financial Services, and Technology Services. The company is a former subsidiary of Ocwen Financial Corporation, which remains its largest customer.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total Revenue | $88.7 million | $61.0 million |
| Service Revenue (Excl. pass-throughs) | $71.7 million | $51.7 million |
| Gross Profit | $33.7 million | $21.6 million |
| Gross Margin (vs. Service Revenue) | 47% | 41% |
| Operating Income | $17.5 million | $9.6 million |
| Net Income (Consolidated) | $16.1 million | $7.1 million |
| Net Income Attributable to Altisource | $14.8 million | $6.3 million |
| Diluted EPS | $0.57 | $0.25 |
| Cash and Cash Equivalents (End of Period) | $26.3 million | $19.6 million |
| Operating Cash Flow | $16.6 million | $19.7 million |
| Total Debt (Capital Leases) | $1.4 million | $1.5 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 45% year-over-year, driven primarily by the Mortgage Services segment, which grew 84%. This growth is attributed to the national rollout of services (property preservation, default management) and the expansion of Ocwen's loan portfolio.
- Margin Expansion: Gross margin improved to 47% from 41%, and operating margin rose to 24% from 18%. The improvement is largely due to a higher mix of high-margin Mortgage Services revenue.
- Profitability: Net income attributable to Altisource more than doubled, increasing 135% to $14.8 million.
- Segment Performance:
- Mortgage Services: Revenue surged to $59.7 million (up 84%).
- Financial Services: Revenue declined slightly to $19.5 million (down 3%) due to a shift in work to a global delivery platform for a major customer, though margins improved.
- Technology Services: Revenue grew 6% to $12.7 million, despite a pricing methodology change for IT infrastructure services that reduced revenue from Ocwen.
- Acquisitions: The company acquired Springhouse, LLC (an appraisal management company) on April 11, 2011, and invested $1.1 million in Correspondent One S.A. during the quarter.
Guidance, Outlook, and Risks
- Outlook: Management expects Service Revenue to decline sequentially in Q2 compared to Q4 2010 due to seasonality and the timing of loan boardings by Ocwen. However, Asset Management Services are expected to increase in Q2 and Q3 as REO sales typically peak in summer months.
- Investment Plans: The company plans to invest in personnel for new title insurance and fulfillment services. Capital expenditures in 2011 are expected to be consistent with 2010 levels, with increased development costs for the REALSuite platform.
- Liquidity Requirements: Anticipated cash outflows in Q2 2011 include $1.3 million in distributions to non-controlling interests, $1.7 million for the Springhouse acquisition, and $14.0 million to fund the remaining commitment to Correspondent One.
- Stock Repurchases: The company has a program to repurchase up to 3.8 million shares. As of March 31, 2011, 0.9 million shares had been purchased, leaving 2.9 million shares available.
- Risks: Key risks include reliance on Ocwen (which accounted for 55% of consolidated revenue), the ability to retain and expand client relationships, and the impact of governmental regulations and policies on the mortgage and real estate sectors.
Investor Verification Checklist
- Ocwen Dependency: Verify the stability of the relationship with Ocwen, which represents the majority of revenue and is contractually obligated to purchase services for eight years.
- Seasonality Impact: Confirm the expected seasonal decline in Q2 Mortgage Services revenue and the anticipated recovery in Q3/Q4.
- Capital Commitments: Monitor the execution of the $14.0 million funding commitment to Correspondent One and the integration of the Springhouse acquisition.
- Margin Sustainability: Assess whether the improved gross and operating margins are sustainable given the planned investments in new services and personnel.
- Non-Controlling Interests: Review the impact of distributions to non-controlling interests (Lenders One members) on net income attributable to Altisource shareholders.