Altisource Portfolio Solutions S.A. — Q2 2016 Form 10-Q
Business context and period. Altisource provides mortgage, real estate and consumer-debt services through Mortgage Services, Financial Services and Technology Services. This unaudited filing covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Amounts below are in millions of dollars unless noted.
Financial results and liquidity
- Q2 revenue: $255.8, down 5% year over year. Service revenue increased 2% to $241.3, while reimbursable expenses fell 55% to $13.8. First-half revenue: $505.9, down 1%; service revenue increased 7% to $475.6.
- Q2 profitability: Gross profit was $81.4 versus $100.2; operating income was $27.2 versus $56.2; net income attributable to Altisource was $20.0 versus $46.0. Diluted EPS was $1.02 versus $2.22. For the first half, attributable net income was $38.5 versus $49.6 and diluted EPS was $1.94 versus $2.38.
- Margins: Gross profit as a share of service revenue was 34% in Q2 versus 42% a year earlier; operating income as a share of service revenue was 11% versus 24%. First-half figures were 34% versus 38% and 12% versus 16%, respectively.
- Cash flow: First-half operating cash flow was $69.4, compared with $54.8. Investing used $60.7, including $48.2 for Residential common shares and $12.4 of capital expenditures. Financing used $67.6, including $47.8 for debt repayments/repurchases and $19.7 for share repurchases. Cash declined by $58.8 to $120.5.
- Balance sheet and debt: At June 30, cash was $120.5 and available-for-sale securities were $38.1; current assets were $286.5 and current liabilities $120.7. Long-term debt had $482.6 principal outstanding and $475.7 net carrying value, versus $536.6 principal at year-end 2015. The term loan rate was 4.50%, with maturity in December 2020. Total equity was $68.4.
Material changes versus prior comparable periods
- Mortgage Services service revenue rose 17% in Q2 and 22% in the first half, primarily from property preservation referrals and Hubzu activity. Its margins were pressured by a higher mix of lower-margin services.
- Financial Services service revenue fell 15% in Q2 and 13% in the first half, reflecting reduced or discontinued unprofitable customer relationships and lower mortgage charge-off referrals.
- Technology Services revenue fell 32% in Q2 and 27% in the first half, driven by lower Ocwen-related infrastructure and software revenue and fewer loans on REALServicing. The segment recorded a first-half operating loss of $19.6, compared with operating income of $0.8 a year earlier.
- Q2 2015 results included a $7.6 gain from extinguishing the Equator earn-out; Q2 2016 did not. Q2 2016 also included a $5.5 gain on discounted debt repurchases and $3.4 of expenses related to the Residential investment. These unusual items affect year-over-year comparability.
Outlook, risks and contingencies
- Management provided no numeric earnings or revenue guidance. It said operating cash flow and liquidity should be sufficient for working capital, capital expenditures, debt service and other needs for the next 12 months, while cautioning that growth plans may not succeed or be profitable.
- Ocwen accounted for 55% of consolidated revenue in both Q2 and the first half. A further 19% of first-half revenue (20% in Q2) came from portfolios serviced by Ocwen where another party selected Altisource. Ocwen-related regulatory, servicing-rights, pricing and customer-retention developments could materially affect results.
- Management’s growth priorities include Servicer Solutions, Origination Solutions, Consumer Real Estate Solutions and Real Estate Investor Solutions. The transition of technology-infrastructure resources supporting Ocwen was expected to be largely complete in Q4 2016.
- The $38.1 Residential share investment was carried as available for sale; first-half other comprehensive loss included $7.2 net of tax. Management reported $3.4 of related Q2 expenses and $1.0 of dividends.
- The company disclosed securities and shareholder derivative litigation and ongoing governmental inquiries. It could not predict outcomes or reasonably estimate potential losses for the specified lawsuits, and said regulatory-inquiry impacts were premature to estimate.
- Disclosure controls were not effective at June 30 because a previously identified material weakness concerning impairment reviews of long-lived and indefinite-lived assets remained unremediated. Management planned remediation by December 31, 2016.
Important facts for investors to verify
- Monitor Ocwen’s servicing portfolio, regulatory developments and any changes to service volumes, pricing or provider relationships.
- Assess whether Technology Services revenue and margins stabilize as the infrastructure transition concludes, and whether the growth initiatives improve profitability.
- Review cash conversion and liquidity after share repurchases, debt paydowns and the Residential investment; confirm covenant capacity and debt-repurchase limits.
- Track the Residential investment’s market value and related impairment or earnings treatment, as well as the company’s progress in remediating the material weakness.
- Follow developments in litigation and governmental inquiries; the filing does not provide a clear estimate of potential losses.