Altisource Portfolio Solutions S.A. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Altisource provides services, marketplaces and technology to the mortgage and real estate industries through its Servicer and Real Estate and Origination segments.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $36.2 million | $38.4 million | $110.9 million | $118.3 million |
| Gross profit | $7.2 million | $4.0 million | $21.2 million | $13.7 million |
| Gross margin on service revenue | 21% | 11% | 20% | 12% |
| Operating loss | $(3.5) million | $(10.6) million | $(13.9) million | $(29.3) million |
| Net loss attributable to Altisource | $(11.3) million | $(14.4) million | $(43.1) million | $(42.1) million |
| Diluted loss per share | $(0.51) | $(0.89) | $(2.10) | $(2.62) |
| Net cash used in operating activities | — | $(17.6) million | $(32.3) million |
Balance sheet and liquidity
- At September 30, 2023, cash and cash equivalents were $36.6 million; cash, cash equivalents and restricted cash totaled $39.8 million. Current assets were $60.8 million and current liabilities were $36.6 million.
- Long-term debt had a $222.0 million principal balance and a $212.0 million net carrying value. The term-loan interest rate was 14.09% at quarter-end; interest expense was $9.9 million for Q3 and $26.6 million year to date.
- The term loan matures April 30, 2025. Altisource met the $30 million paydown threshold for an option to extend maturity to April 2026, subject to conditions and a 2% payment-in-kind extension fee. No revolver borrowings were outstanding; the amended revolver has a $15 million capacity.
- Operating cash flow remained negative, although cash used improved year over year. Financing cash flow included $20.5 million net proceeds from a February common-stock offering, $18.4 million from a September treasury-stock sale, $30.0 million in debt repayments and $4.9 million in debt amendment and issuance costs.
- Total assets were $162.6 million versus $195.3 million at year-end 2022; shareholders’ deficit was $112.9 million. Customer funds held in escrow, excluded from the balance sheet, were $39.0 million.
Changes and operating trends
- Q3 revenue declined 6% year over year; nine-month revenue declined 6%. Service revenue fell 7% year to date. Management cited lower default-related service orders, the exit of a low-margin customer-care business, and weaker mortgage origination activity.
- Cost reductions improved gross margins and reduced operating losses. Management attributed savings to efficiency initiatives, lower headcount, vendor-contract changes and reduced SG&A costs.
- Servicer and Real Estate revenue decreased 4% for the first nine months, while segment operating income increased to $24.5 million from $17.9 million. Origination revenue fell 13%, with growth in Lenders One partly offset by declines in Solutions.
- Ocwen accounted for 43% of consolidated revenue in the quarter and nine-month period. Revenue recognized directly from Ocwen was $47.3 million year to date, compared with $47.2 million in 2022.
Outlook, risks and unusual items
- No specific numerical revenue or earnings guidance was provided. Management expects demand for default-related services to grow as the market recovers, but noted that foreclosure activity remains below pre-pandemic levels and that the timing of referral growth is uncertain. The company estimated that foreclosure initiations typically take about two years to convert to sales, with another six months to market and sell REO.
- Management says liquidity needs are expected to be funded through cash on hand, operating cash flow and, if needed, the revolver. However, it warns that refinancing or repaying debt at maturity may be difficult if operating cash flow does not improve or refinancing is unavailable on acceptable terms.
- Customer concentration is a material risk: changes to Ocwen’s business, servicing rights, regulatory position, pricing or relationship with Rithm could reduce Altisource’s revenue. The filing also describes ongoing governmental inquiries into aspects of Altisource’s business; potential outcomes and financial effects were not estimable.
- Q3 included a $2.2 million gain from remeasurement of the warrant liability. After the company reached the $30 million paydown threshold, the remaining 1.6 million penny warrants became fixed in number and the $7.0 million liability was reclassified to equity.
- The company recorded $3.4 million of debt amendment-related advisor costs during the first nine months. Higher interest rates and amortization of debt discounts and fees materially increased financing expense.
- Management reported disclosure controls were effective as of September 30, 2023, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether operating cash flow and revenue improve enough to address the April 2025 debt maturity, and whether the April 2026 extension conditions can be met.
- Debt terms, cash and restricted-cash availability, interest-rate exposure, and the availability and conditions of the $15 million revolver.
- Ocwen’s share of revenue and any developments affecting Ocwen, Rithm-related servicing portfolios, customer pricing or service referrals.
- Whether default-market recovery and Origination-segment trends support management’s expectations, and whether cost savings can continue without impairing service capacity.
- The effect of equity issuance and warrant exercise on share count and dilution; the filing reports 26,492,632 common shares outstanding as of October 20, 2023, excluding treasury shares.