Altisource Portfolio Solutions S.A. — FY 2017 Form 10-K
Business and period: The company provides services, technology and marketplaces for mortgage and real estate markets. This filing covers the fiscal year ended December 31, 2017; it is an annual report, not a standalone fourth-quarter filing. Beginning in 2017, Altisource reported Mortgage Market, Real Estate Market, and Other Businesses, Corporate and Eliminations segments; comparative segment results were restated.
Financial performance
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $942.2 million | $997.3 million | Down 6% |
| Service revenue | $899.6 million | $942.6 million | Down 5% |
| Gross profit | $242.3 million | $307.3 million | Down 21% |
| Gross margin on service revenue | 27% | 33% | Down 6 percentage points |
| Operating income | $49.7 million | $65.1 million | Down 24% |
| Net income attributable to Altisource | $308.9 million | $28.7 million | Inflated by 2017 tax benefit |
| Adjusted net income attributable to Altisource (non-GAAP) | $52.3 million | $90.1 million | Down 42% |
| Adjusted diluted EPS (non-GAAP) | $2.80 | $4.59 | Down 39% |
| Operating cash flow | $66.1 million | $126.8 million | Down 48% |
| Adjusted operating cash flow (non-GAAP) | $110.5 million | $139.8 million | Down 21% |
Revenue and margin pressure reflected shrinking Ocwen-serviced loan portfolios, reduced delinquent-loan volumes, lower IT infrastructure and customer relationship management revenue, and a shift toward lower-margin property preservation and real-estate investment activities. Cost of revenue rose 1% to $699.9 million, while SG&A fell 10% to $192.6 million.
Segments
- Mortgage Market: Revenue of $793.7 million, down 4%; operating income of $134.0 million, down from $159.3 million. Service revenue declined 3%, primarily due to Ocwen portfolio contraction, partly offset by preservation referrals and non-Ocwen growth.
- Real Estate Market: Revenue of $89.8 million, up 4%; operating loss widened to $25.9 million from $1.3 million. Growth in buy-renovate-lease-sell activity and consumer transactions was offset by lower margins and fewer higher-margin REO sales.
- Other Businesses, Corporate and Eliminations: Revenue of $58.7 million, down 30%; operating loss narrowed to $58.4 million from $92.9 million. Lower IT infrastructure and customer relationship management revenue were partly offset by reduced costs.
Financial position, liquidity and capital allocation
- At year-end, cash and cash equivalents were $105.0 million and available-for-sale securities were $49.2 million, totaling $154.2 million, versus $195.0 million in 2016. Current assets were $271.6 million and current liabilities $109.6 million.
- Senior secured term loan principal was $413.6 million ($409.3 million net carrying amount), down from $479.7 million principal in 2016. The loan bears variable interest; the year-end rate was 5.07%, and maturity is December 2020. The debt is secured by substantially all company assets and includes restrictive covenants and potential excess-cash-flow repayments.
- Operating cash flow was reduced by the $28.0 million net payment of a previously accrued litigation settlement and a $16.4 million increase in short-term real-estate investments. Management’s adjusted operating cash flow measure adds these items back.
- Altisource repurchased $60.1 million par value of term debt at a weighted-average 10.7% discount, recording a $5.6 million gain, and repurchased 1.6 million shares for $39.0 million. It reported $3.4 million of shares remaining under its authorized program at year-end.
- Management stated existing cash and anticipated operating cash flows should be sufficient for the next 12 months, including scheduled debt service and capital spending. Expected next-12-month debt principal repayments were $5.9 million and interest payments $19.9 million.
Material changes, outlook and risks
- Tax benefit and reported earnings: A $276.3 million income tax benefit drove reported net income attributable to Altisource to $308.9 million. The principal item was a Luxembourg subsidiary merger that generated a reported $1.3 billion net operating loss and a $300.9 million deferred tax asset, net of valuation allowance; the loss has a 17-year life. Other tax-rate changes and foreign tax reserves partially offset the benefit. The company’s adjusted effective tax rate, excluding the specified tax items, was 22.2%. The unusually high reported earnings and EPS should not be read as recurring operating performance.
- Customer concentration: Ocwen represented 58% of consolidated revenue, or $542.0 million, in 2017; a further 16% of revenue related to Ocwen-serviced portfolios where another party selected Altisource. Ocwen’s regulatory, financial and servicing-platform developments could materially affect Altisource. Ocwen plans to transition from Altisource’s REALServicing platform; 2017 REALServicing revenue was $26.4 million, and management estimated the business was approximately break-even before tax.
- NRZ transition: Altisource had an exclusive REO brokerage agreement with NRZ for certain portfolios through August 2025, but its broader fee-based services agreement remained subject to a non-binding letter of intent and negotiations. Management expected a signed agreement and transfers of servicing rights to shift revenue from Ocwen to NRZ; there was no assurance the services agreement would be completed. The LOI was extended through February 28, 2018, with a possible extension through March 31, 2018.
- Regulatory and legal matters: Altisource was responding to government inquiries and had received a CFPB Notice and Opportunity to Respond and Advise concerning alleged issues with REALServicing and other technology services provided to Ocwen. The company said the outcome and financial impact could not yet be estimated; an enforcement action could have a material adverse effect. It recorded no new litigation settlement loss in 2017, but paid the previously accrued $28.0 million net settlement.
- Other risks and outlook: The company cited extensive regulatory and licensing requirements, data-security and technology risks, competition, housing-market sensitivity, seasonality, and reliance on foreign operations. It provided no quantified earnings or revenue guidance. Management described customer diversification and growth initiatives, while cautioning that success and profitability were not assured. The Luxembourg tax ruling previously used by the company was terminated in connection with the 2017 restructuring.
The independent auditor issued an unqualified opinion on the financial statements and internal controls over financial reporting; management also concluded disclosure controls were effective at year-end.
Important facts for investors to verify
- Whether the NRZ fee-based Services Agreement was signed, and the timing and terms of transfers of the relevant servicing rights.
- How Ocwen’s servicing portfolio, regulatory situation and planned REALServicing transition affect Altisource’s revenue, margins and receivables.
- Whether the Luxembourg net operating losses and deferred tax assets can be used as expected, including the effect of valuation allowances and tax audits.
- Whether operating cash generation improves after the settlement payment and real-estate investment outlays, and whether debt covenants or variable rates constrain capital allocation.
- Whether Real Estate Market investments and customer diversification produce sustainable positive margins, rather than relying on non-GAAP adjustments or the one-time tax benefit.