Altisource Portfolio Solutions S.A. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited U.S. GAAP financial statements. Altisource provides services, marketplaces and technologies to the mortgage and real estate industries.
Financial results and liquidity
Amounts below are in millions of dollars except per-share data. Comparisons are with the same 2018 period.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $141.5 | $204.6 | $508.0 | $620.6 |
| Gross profit | $30.6 | $57.0 | $120.3 | $162.6 |
| Income from operations | $18.2 | $20.9 | $24.5 | $40.5 |
| Net income (loss) attributable to Altisource | $7.2 | $8.7 | $(1.9) | $6.1 |
| Diluted EPS | $0.44 | $0.49 | $(0.12) | $0.35 |
- Gross profit as a share of service revenue was 23% in Q3 versus 29% a year earlier, and 25% for nine months versus 27%. Operating income as a share of service revenue was 14% versus 11% in Q3, but 5% versus 7% for nine months.
- Nine-month operating cash flow was $22.2 million, down from $43.7 million. Investing activities provided $45.7 million, including sale proceeds; financing used $61.3 million. Cash, cash equivalents and restricted cash ended at $70.6 million, including $66.9 million of cash and cash equivalents.
- At September 30, cash and cash equivalents were $66.9 million; current assets were $187.3 million and current liabilities $89.0 million. Long-term debt was $287.7 million carrying value ($294.0 million principal before debt costs and discount). The term loan rate was 6.1%; no revolver borrowings were outstanding on the $15 million facility.
Material changes and unusual items
- Revenue fell 31% in Q3 and 18% for the nine-month period. Service revenue declined 32% and 18%, respectively. Management cited lower Ocwen portfolio and delinquency volumes, Ocwen’s servicing-platform transition, lower referral volume and REO conversion, and the sale or discontinuation of businesses.
- Ocwen accounted for 63% of Q3 revenue and 54% of nine-month revenue. Revenue from Ocwen was $89.8 million in Q3 and $275.1 million for nine months. Management estimated Ocwen’s transition reduced Q3 revenue by about $7.8 million through lower REO conversion rates.
- The Financial Services business was sold July 1, 2019, generating a $17.6 million pretax gain; $37 million of the sale proceeds was used to repay debt. The BRS business was discontinued, with remaining inventory sold in 2019. The company also sold 0.7 million RESI shares for $7.8 million and used the proceeds to repay debt.
- Nine-month net income attributable to Altisource was a loss despite $20.9 million of pretax income, largely reflecting a $20.7 million tax provision. The effective tax rate was 98.9%, including a $12.3 million reduction in Luxembourg deferred tax assets and tax effects of the Financial Services sale. Excluding those items, management reported an estimated 6.5% rate.
- RESI share-price movements produced an $11.7 million unrealized gain for nine months, but a $2.3 million unrealized loss in Q3.
- Project Catalyst restructuring charges were $9.1 million for nine months. The company reported anticipated future Project Catalyst costs of approximately $12 million to $15 million; the filing does not clearly specify in that estimate whether this is total or incremental to amounts already incurred.
Outlook, risks and contingencies
- Management expected Ocwen-related REO conversion rates to return to normal in Q4 2019 and the first half of 2020, describing the lower conversion as largely a timing matter. This is an expectation, not a guarantee.
- Management said cash, expected operating cash flows and revolver availability should be sufficient for liquidity needs over the next 12 months. It expected $19.4 million of interest expense and $12.7 million of lease payments during that period.
- On October 8, 2019, the company announced plans to wind down Owners.com. It reported $5.9 million of revenue and $12.8 million pretax loss from the business for the first nine months of 2019, and estimated a $5.9 million non-cash impairment charge plus wind-down and severance costs in Q4.
- Customer concentration is a key risk: an Ocwen loss, reduced referrals, regulatory or financial problems at Ocwen, changes in pricing or servicing arrangements, or failure to retain service-provider status could materially affect Altisource. NRZ-related servicing and referral changes may also affect volumes.
- The company was responding to governmental inquiries; management said it was too early to predict outcomes or estimate financial impact. It stated that current litigation was not expected to have a material impact. Sales-tax exposure remains subject to estimation and reimbursement uncertainty.
- Other disclosed risks include seasonal revenue patterns, loan delinquency and origination levels, cybersecurity and technology incidents, interest-rate and currency exposure, and debt-agreement covenants. A 1 percentage point change in the Eurodollar rate was estimated to change annual interest expense by about $2.9 million.
Most important facts for investors to verify
- Whether Ocwen transition effects and customer concentration continue to depress referrals, REO conversions, collections and cash receipts.
- Whether the projected recovery in REO conversion rates occurs, and whether revenue and margins stabilize as divestitures and restructuring take effect.
- Actual Project Catalyst, Owners.com wind-down and impairment costs, and the tax treatment of asset sales and deferred tax assets.
- Operating cash flow and receivable collection trends, particularly the increase in receivables and reported payment delays from Ocwen.
- Debt repayment progress, interest costs, covenant compliance and available revolver capacity.