Altisource Portfolio Solutions S.A. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; interim financial statements are unaudited. The company provides real estate, mortgage and consumer debt services through Mortgage Services, Financial Services and Technology Services.
Financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $287.7 million | $210.8 million | $823.0 million | $545.8 million |
| Service revenue | $247.7 million | $180.4 million | $720.8 million | $469.6 million |
| Gross profit | $99.0 million | $76.6 million | $302.5 million | $197.6 million |
| Operating income | $52.2 million | $45.1 million | $163.2 million | $117.6 million |
| Net income attributable to Altisource | $42.3 million | $36.0 million | $136.0 million | $94.5 million |
| Diluted EPS | $1.79 | $1.42 | $5.63 | $3.77 |
- Q3 revenue increased 36% year over year; service revenue rose 37%. Nine-month total revenue rose 51%, and service revenue rose 53%.
- Gross profit as a share of service revenue was 40% in Q3 versus 42% a year earlier, and 42% for both nine-month periods. Operating income as a share of service revenue was 21% versus 25% in Q3 and 23% versus 25% for the nine months.
- Cash from operations was $125.7 million for the first nine months, down from $134.6 million. Investing used $63.3 million and financing used $16.2 million. Cash increased $46.2 million to $176.6 million.
- At September 30, cash was $176.6 million, current assets $356.8 million and current liabilities $128.7 million. Long-term debt was $590.0 million net of discount, including $5.9 million current; approximate net debt after cash was $413.4 million. The term loan rate was 4.50%.
Changes, drivers and unusual items
- Mortgage Services growth reflected Ocwen servicing portfolio expansion and higher Hubzu auction mix. Technology Services growth largely reflected the Equator acquisition and increased software and IT infrastructure revenue. Financial Services revenue increased for the nine months but was roughly flat in Q3.
- Management cited lower foreclosure starts and the loss of an origination-services customer as offsets to growth. Technology investment and growth in lower-margin Technology Services contributed to lower consolidated operating margins.
- Equator’s estimated earn-out fair value was reduced by $37.9 million in Q2, increasing earnings, while a $37.5 million goodwill impairment was recorded. The net effect of these items was a $0.5 million benefit for the nine-month period; the filing reports no Q3 charge or benefit for either item.
- Mortgage Builder was acquired in September for $15.7 million cash at closing, with up to $7.0 million additional contingent consideration. Its acquisition was described as not material to results or financial position.
- The company borrowed an additional $200 million under its senior secured term loan in August and repurchased $208.8 million of shares during the first nine months. Approximately 1.6 million shares remained authorized for repurchase at quarter-end.
- Operating cash flow was affected by working-capital outflows, including increased receivables and unbilled revenue; management said some unbilled amounts were invoiced in October.
Outlook, risks and contingencies
- No quantified company-wide financial guidance is provided. Management expected Technology Services costs to rise as it continued next-generation software investment and anticipated pressure on that segment’s margins. It described further Mortgage Services margin improvement initiatives, assuming no change in service mix.
- Management believed cash generation would be sufficient for operations, capital expenditures, required debt service and share repurchases, while noting that access to additional capital on favorable terms was not assured.
- Ocwen generated approximately 60% of Q3 and nine-month revenue. The service agreements extend through August 2025 but include termination provisions; the filing warns that reduced Ocwen activity, nonpayment or adverse regulatory impacts on Ocwen could materially affect Altisource.
- The company was responding to federal and state agency inquiries concerning aspects of its business. Management said the potential outcome and financial impact could not yet be estimated. Ordinary-course legal proceedings were not expected by management to have a material effect.
- Debt covenants restrict additional borrowing and share repurchases, among other actions. The variable-rate loan creates interest-rate exposure; a one-percentage-point increase in the Eurodollar rate was estimated to add about $1.4 million to annual interest expense.
- Seasonality affects Mortgage Services and Financial Services. The filing also identifies regulatory and licensing requirements, technology failures, customer retention and loan delinquency/origination trends as risks. The 2014 effective tax rate was 6.3%; management noted it may vary with income mix, tax rules and use of tax attributes.
Most important facts for investors to verify
- Whether revenue and cash generation remain resilient given Ocwen’s approximately 60% revenue contribution and the timing of servicing portfolio activity.
- Whether receivables and unbilled revenue convert to cash, and whether operating cash flow recovers from the year-to-date working-capital drag.
- Whether Technology Services investment produces growth sufficient to offset lower segment margins, and whether Equator performance supports its remaining contingent consideration.
- Debt covenant headroom, floating-rate exposure and the balance between share repurchases, acquisitions and liquidity needs.
- Developments in federal and state regulatory inquiries, related-party oversight and the effects of regulatory actions involving Ocwen or the broader mortgage-servicing industry.