Business Context and Reporting Period
Altisource Portfolio Solutions S.A. provides services, marketplaces and technology to the real estate and mortgage industries. This unaudited Form 10-Q reports the quarter and six months ended June 30, 2020; financial amounts below are in millions unless otherwise stated.
Results were affected by the COVID-19 pandemic, the reduction of Ocwen’s servicing portfolio, and businesses sold or discontinued since 2019. Ocwen remained the largest customer, contributing 60% of Q2 revenue and 61% of revenue for the first half.
Key Financial Metrics
| Metric | Q2 2020 | Six months 2020 | Comparable 2019 |
|---|---|---|---|
| Total revenue | $95.3; down 51% | $216.8; down 41% | Q2 $196.5; six months $366.5 |
| Service revenue | $91.0; down 52% | $204.2; down 43% | Q2 $190.5; six months $355.5 |
| Gross profit | $12.7 | $39.6 | Q2 $43.8; six months $89.5 |
| Gross profit / service revenue | 14% | 19% | Q2 23%; six months 25% |
| Operating income (loss) | $(17.8) | $(21.9) | Q2 $5.4; six months $4.8 |
| Net loss attributable to Altisource | $(35.1) | $(46.7) | Q2 $(5.8); six months $(9.0) |
| Loss per share, basic and diluted | $(2.25) | $(3.00) | Q2 $(0.36); six months $(0.56) |
| Cash from operating activities | Not separately stated in the filing text | $(11.2) | Six months 2019: $33.2 |
Q2 other expense included an $11.2 million unrealized loss on the RESI equity investment; the six-month unrealized loss was $12.6 million. The investment’s fair value was $30.0 million at June 30, 2020, down from $42.6 million at year-end 2019.
At June 30, cash and cash equivalents were $68.2 million, restricted cash was $3.8 million, and the RESI investment was $30.0 million. Long-term debt was $288.6 million net of discount and issuance costs ($293.8 million principal); the term-loan rate was 5.00%, and the $15 million revolving facility was undrawn. Total deficit was $64.9 million. Management reported $98.2 million of cash, cash equivalents and marketable equity securities.
Material Changes Versus the Prior Comparable Period
- Revenue declines reflected COVID-related restrictions and changed vendor and consumer behavior, lower Ocwen portfolio volumes, and the 2019 sale or wind-down of the Financial Services, BRS and Owners.com businesses and Ocwen’s transition from REALServicing.
- Default-related services were pressured by foreclosure and eviction moratoria and service limitations. Management cited first-half foreclosure starts and completions down approximately 44% year over year; Q2 foreclosure starts were down approximately 80% year over year.
- Lower interest rates supported origination-related businesses: Mortgage and Real Estate Solutions origination services grew 44% for the first half and 35% in Q2. Service revenue from customers other than Ocwen, NRZ and RESI rose 19% for the first half and 5% in Q2.
- First-half operating cash flow moved from $33.2 million provided in 2019 to $11.2 million used in 2020. The filing attributes the change principally to lower gross profit and increased cash use from operating assets and liabilities.
- Project Catalyst restructuring charges were $5.8 million in Q2 and $8.7 million for the first half, compared with $1.9 million and $6.3 million, respectively, in 2019.
Outlook, Risks, Contingencies and Unusual Items
- Ocwen referral risk: Ocwen said an investor directed it to transition certain field-services referrals to another provider, with transition beginning in July 2020. Altisource believes the investor may be NRZ, but Ocwen had not confirmed this. The timing and full impact are uncertain and could be material. Altisource estimates the affected NRZ-portfolio field-services revenue was $58.2 million for the first half of 2020; Ocwen also indicated possible transitions of other default-related services, which Altisource estimates generated $20.6 million in first-half revenue. These are historical revenue amounts associated with the referrals, not a stated forecast of losses. Altisource believes redirection may breach its agreement and said it is in discussions with Ocwen and has reserved its rights.
- Customer concentration: Ocwen’s importance, its regulatory and business risks, and potential changes in its relationship with NRZ could reduce Altisource’s referrals or customer revenue. The company’s Ocwen service agreements extend through August 2025, subject to terms and conditions.
- COVID-19 outlook: Management expected continued pressure on default-related services while restrictions and borrower-relief measures persisted. Origination services could remain stronger if refinance activity continued, but management noted economic, government and GSE factors could constrain that growth. A late-June rebound in default-related revenue was considered too early to establish a trend.
- Cost actions and liquidity: Management estimated 2020 cash expense reductions of $45–$50 million compared with the fourth-quarter 2019 annual run rate, in addition to variable outside-service costs. It expected another $4–$7 million of Project Catalyst costs. Management said existing cash and anticipated operating cash flows should cover liquidity needs for the next 12 months; expected next-12-month interest and lease payments were $14.7 million and $9.9 million, respectively. No formal revenue or earnings guidance is stated in the filing text.
- Debt and contingencies: Term loans mature in April 2024; scheduled principal installments begin in March 2023. The credit agreement includes restrictive covenants and default provisions. The company is responding to governmental inquiries but said it is premature to estimate their outcomes or financial impact. It did not expect its disclosed litigation to materially affect financial condition, results or cash flows.
- Other items: The company received the final $4.0 million payment for its 2019 Financial Services business sale on July 1, 2020. The RESI merger agreement announced in February 2020 was terminated in May 2020.
Important Facts for Investors to Verify
- Whether and when Ocwen redirects the identified field-services and other default-related referrals, the resulting revenue and earnings impact, and the status of discussions over the alleged contractual breach.
- Whether cost reductions can offset lower referrals and support positive operating cash flow, while accounting for restructuring costs and debt service.
- How COVID-19, foreclosure and eviction moratoria, and borrower-relief programs affect default-related volumes, and whether origination growth persists.
- Ocwen’s financial, regulatory and servicing developments, NRZ’s relationship with Ocwen, and Altisource’s ability to diversify its customer base.
- The performance and valuation of the RESI investment, and compliance with credit-agreement covenants as operating results evolve.