ASPS

Business Context and Reporting Period

Company: Altisource Portfolio Solutions S.A.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: Altisource provides high-value, knowledge-based services focused on real estate and mortgage portfolio management, asset recovery, and customer relationship management. The company operates through three segments: Mortgage Services, Financial Services, and Technology Products. Following its separation from Ocwen Financial Corporation in August 2009, Altisource became a stand-alone public company. In February 2010, the company acquired The Mortgage Partnership of America, L.L.C. (MPA), a manager for a national alliance of independent mortgage bankers.

Key Financial Metrics

Note: Debt consists of Capital Lease Obligations ($278k current, $80k non-current). The company has no long-term bank debt or lines of credit outstanding as of June 30, 2010.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 43% year-over-year for the six months ended June 30, 2010, driven primarily by the Mortgage Services segment, which doubled its revenue compared to the prior year. This growth is attributed to expanded residential default and real estate services.
• Profitability: Net income attributable to Altisource increased 98% year-over-year. Operating income rose 34%.
• Acquisition Impact: The acquisition of MPA in February 2010 contributed $5.8 million in revenue and $1.4 million in EBITDA since the acquisition date. The transaction added significant goodwill ($8.8 million) and intangible assets ($43.6 million) to the balance sheet.
• Tax Benefit: The company recognized a $3.4 million tax credit in the second quarter due to a favorable ruling regarding the treatment of certain intangibles, retroactive to the separation date. This resulted in a net tax benefit of $0.7 million for the six-month period, compared to a provision of $5.1 million in the prior year.
• Segment Performance:
  • Mortgage Services: Revenue up 101% year-over-year; Operating Income up 81%.
  • Financial Services: Revenue declined 8% year-over-year due to a difficult economic environment and the wind-down of a lower-margin customer relationship.
  • Technology Products: Revenue increased 8% year-over-year, driven by the REALSuite of services.

Guidance, Outlook, and Risks

• Outlook: Management expects continued growth in the Mortgage Services segment, particularly from Ocwen's expanding loan portfolio (which is expected to exceed $80 billion following Ocwen's acquisition of HomeEq Servicing). The company anticipates referrals from this acquisition to begin in the fourth quarter of 2010.
• Capital Allocation: The company generated significant excess cash and received shareholder approval for a share repurchase program. Management intends to deploy capital through disciplined acquisitions and potentially share repurchases.
• Liquidity: The company believes it can generate sufficient cash from operations to meet requirements for the next 12 months. Capital expenditures are estimated at $5.0 million to $7.0 million for the remainder of the year.
• Risks and Contingencies:
  • Customer Concentration: Ocwen remains the largest customer, accounting for approximately 49% of consolidated revenue for the six months ended June 30, 2010.
  • Regulatory Environment: The company noted a temporary decline in default management referrals in June 2010 due to new government regulations, though this is expected to be a timing difference.
  • Foreign Currency: The company is exposed to foreign currency exchange risk, though positions are currently limited and unhedged.

Key Facts for Investor Verification

• Related Party Dependence: Verify the stability of the relationship with Ocwen, which accounts for nearly half of total revenue and is contractually obligated to purchase services for eight years.
• Acquisition Integration: Monitor the integration and performance of the MPA acquisition, specifically the growth of new members in the Lenders One cooperative and the realization of projected synergies.
• Tax Rate Volatility: Note the significant impact of the one-time $3.4 million tax credit on the current period's effective tax rate (revised to 12.5% for 2010); future periods will not include this specific credit.
• Reimbursable Expenses: A significant portion of revenue growth in Mortgage Services is driven by reimbursable expenses (pass-through costs), which do not contribute to gross margin. Investors should analyze margins based on "Service Revenue" rather than "Total Revenue."
• Non-Controlling Interests: The consolidation of Lenders One (via MPA) introduces non-controlling interests, which reduced Net Income Attributable to Altisource by $2.1 million for the six-month period.