Altisource Portfolio Solutions S.A. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited consolidated financial statements; amounts below are in U.S. dollars and generally in millions unless stated otherwise.
Business context
Altisource provides services, marketplaces and technology to the mortgage and real estate industries. Effective January 1, 2019, it reorganized its reporting structure under Project Catalyst and now evaluates performance on a consolidated basis. The company is discontinuing its Buy-Renovate-Lease-Sell business and sold its Financial Services business after quarter-end.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $196.5 | $218.6 | $366.5 | $416.0 |
| Service revenue | $190.5 | $208.9 | $355.5 | $397.6 |
| Gross profit | $43.9 | $55.4 | $89.7 | $105.6 |
| Gross profit / service revenue | 23% | 27% | 25% | 27% |
| Operating income | $6.1 | $12.4 | $6.3 | $19.5 |
| Operating income / service revenue | 3% | 6% | 2% | 5% |
| Net income (loss) attributable to Altisource | $(5.8) | $1.6 | $(9.0) | $(2.6) |
| Diluted earnings (loss) per share | $(0.36) | $0.09 | $(0.56) | $(0.15) |
Q2 revenue declined 10% year over year; service revenue fell 9%. For the first half, total revenue declined 12% and service revenue declined 11%. Marketplace service revenue fell 38% in Q2 and 32% for the first half; Field Services and Mortgage and Real Estate Solutions also declined. Earlier Stage Businesses grew, while “Other” benefited from sales of BRS homes.
Operating cash flow was $33.2 million in the first half, compared with $23.3 million a year earlier. The increase included cash generated by the $38.9 million BRS inventory sale, partly offset by a $15.8 million increase in accounts receivable. Investing cash flow was $6.6 million, including $6.5 million of proceeds from RESI share sales. Financing cash outflow was $14.7 million, including $5.8 million of debt repayments and $6.7 million of share repurchases.
At June 30, cash and cash equivalents were $85.4 million; cash, cash equivalents and restricted cash totaled $89.1 million. Total assets were $743.9 million and total equity was $285.9 million. Debt had a $333.0 million principal balance and a $326.4 million net carrying amount, including the current portion; the term loan interest rate was 6.33%. No revolving-credit borrowings were outstanding. The company reported $31.6 million in operating lease liabilities.
Material changes and unusual items
- Revenue and margins: Lower revenue reflected a smaller Ocwen portfolio, fewer delinquent loans, a smaller RESI portfolio and the end of certain transitional brokerage revenue. Management also cited foreclosure holds and temporary referral effects during Ocwen’s transition to another servicing software platform. Cost reductions partly offset revenue pressure, but lower-margin BRS home sales and reduced higher-margin business revenue weighed on gross margin.
- Taxes: The first-half income tax provision was $15.3 million, including a $12.3 million reduction in Luxembourg deferred tax assets following a statutory tax-rate decrease and $0.9 million of additional foreign taxes related to an internal reorganization. Excluding those items, management reported an effective tax rate of 25.9% for the first half. The tax charge contributed to the reported net loss.
- Asset sales: Altisource sold most remaining BRS inventory for $38.9 million on June 28 and recorded a $1.8 million loss, including closing costs; two homes valued at $0.4 million remained. The Financial Services business sale to TSI closed July 1 for an aggregate stated price of $44.0 million, including $40.0 million at closing subject to adjustments and a $4.0 million payment due one year later. Management expected an approximately $18 million pretax gain in Q3. On July 17, the company used $37.0 million of the net upfront proceeds to repay term debt.
- RESI investment: The company recorded a $14.0 million unrealized gain for the first half, including $11.8 million in Q2, on RESI shares. It sold 0.6 million shares for $6.5 million net proceeds, which were to be applied to debt repayment. Fair-value movements are non-cash until shares are sold.
- Restructuring and leases: Project Catalyst restructuring charges were $6.3 million in the first half, including $1.9 million in Q2. Management anticipated further Project Catalyst costs in the range of approximately $12–$15 million. Adoption of the new lease standard added $42.1 million of right-of-use assets and $45.5 million of lease liabilities at transition, changing the presentation of occupancy, depreciation and interest costs.
- Sales tax: The company recognized a $2.1 million first-half loss for potential sales-tax exposure and began collecting and remitting tax in applicable jurisdictions. Recovery of amounts from clients is not assured.
Outlook, liquidity and risks
No specific revenue or earnings guidance is provided in the filing. Management said existing cash, anticipated operating cash flow and revolving-credit availability should cover liquidity needs for the next 12 months, including debt service and capital expenditures. It estimated $21.9 million of interest expense and $13.2 million of lease payments over the next 12 months, before considering subsequent debt repayments. The term loan matures in April 2024 and is subject to covenants and mandatory prepayment provisions.
Customer concentration is a significant risk: Ocwen accounted for 51% of first-half revenue and 44% of Q2 revenue. Ocwen’s regulatory, legal and servicing developments, changes in referrals or pricing, and its transition to another technology platform could reduce Altisource’s business. Ocwen-related receivables were $28.1 million at June 30, up from $15.2 million at year-end; management cited delayed Ocwen payments as one factor in the broader receivables increase. NRZ-related portfolio changes are another potential source of referral and revenue volatility.
The company is responding to governmental inquiries concerning aspects of its business; management said the outcomes and potential financial effects could not yet be estimated. It did not expect current litigation, individually or collectively, to have a material impact. Management cautioned that its plans may not succeed and that profitability is not assured. It also cited customer retention and diversification, regulatory and cybersecurity matters, mortgage-market activity, foreign exchange and interest rates among forward-looking risks.
Important facts for investors to verify
- Whether Ocwen referrals, payment timing and servicing-platform transition stabilize, and how concentrated revenue remains.
- Whether the Financial Services sale proceeds, estimated gain and $37.0 million debt repayment are reflected as expected in subsequent reporting.
- Whether Project Catalyst delivers sustainable cost savings relative to remaining restructuring costs and continued revenue declines.
- Whether RESI share-price changes, further share sales and debt repayments materially affect reported earnings and leverage.
- The eventual sales-tax exposure and recoveries from clients, along with the status and potential impact of governmental inquiries.
- Whether operating cash flow remains adequate after working-capital changes, contractual debt service and lease obligations.