Altisource Portfolio Solutions S.A. — Q2 2013 Form 10-Q
Business context and period. Altisource provides technology-enabled outsourcing and software services focused on mortgage and real estate portfolio management, asset recovery, and customer relationship management. This unaudited filing covers the three and six months ended June 30, 2013; financial statement amounts below are in millions of dollars unless noted. The company reports Mortgage Services, Financial Services, Technology Services, and corporate items and eliminations.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $186.1 | $144.2 | $334.9 | $283.3 |
| Service revenue | $161.7 | $118.1 | $289.2 | $226.6 |
| Gross profit | $69.1 | $51.5 | $121.0 | $98.8 |
| Income from operations | $39.3 | $32.4 | $72.5 | $62.7 |
| Net income attributable to Altisource | $30.9 | $28.1 | $58.4 | $53.3 |
| Diluted EPS | $1.25 | $1.13 | $2.34 | $2.15 |
- Total revenue grew 29% in Q2 and 18% for the six-month period; service revenue grew 37% and 28%, respectively. Growth reflected Ocwen-related portfolio activity, Financial Services expansion, and origination-related services.
- Gross profit as a share of service revenue was 43% in Q2 and 42% for the half, compared with 44% in both prior-year periods. Operating income as a share of service revenue was 24% and 25%, versus 27% and 28%.
- Q2 SG&A increased 57% to $29.8 million; six-month SG&A increased 35% to $48.5 million, substantially reflecting acquired-intangible amortization and corporate expansion. Interest expense was $4.9 million in Q2 and $8.1 million for the half, primarily due to term-loan borrowings.
- At June 30, cash and cash equivalents were $177.8 million; current assets were $299.1 million and current liabilities $76.7 million. Operating cash flow was $67.5 million for the half, versus $54.0 million a year earlier. Investing used $141.5 million and financing provided $146.3 million.
- Long-term debt had $398.5 million principal outstanding ($397.7 million net carrying amount), including $4.0 million current; the loan’s reported interest rate was 5.75%. Total assets were $643.1 million, up from $429.2 million at year-end 2012.
Material changes and unusual items
- Altisource acquired Homeward fee-based businesses for approximately $87.0 million on March 29 and ResCap fee-based businesses for $128.8 million on April 12. The acquisitions added customer-relationship intangible assets; preliminary allocations and useful lives remained subject to revision. From acquisition through June 30, the businesses contributed reported revenue of $33.9 million and $7.8 million, respectively.
- On May 7, the company increased its senior secured term loan from $200 million to $400 million, receiving $201 million gross proceeds for the incremental borrowing. The loan matures in 2019, includes an additional $200 million accordion facility, and imposes debt and share-repurchase restrictions.
- The company repurchased $51.6 million of shares in the first half, compared with $16.8 million in the prior-year period. Repurchases are constrained by Luxembourg law and loan covenants.
- Altisource sold its 49% interest in Correspondent One to Ocwen for $12.6 million on March 31. Ocwen also repaid a $75 million loan, plus accrued interest, in February.
Outlook, management commentary, and risks
- Management expected Ocwen’s servicing growth to drive additional business: approximately 619,000 non-GSE loans were expected to be boarded on REALServicing in the second half of 2013, including about 470,000 ResCap loans in Q3 and 149,000 OneWest loans in Q4. It anticipated boarding 1.2 million GSE loans through the first half of 2014.
- Management expected short-sale services to expand across additional states and to include HAFA and non-HAFA transactions. It also described Hubzu expansion and scaling property-management services for Altisource Residential as growth initiatives. These are expectations, not guarantees.
- Management said technology and overhead expenditures were expected to reach stable levels in 2014. It believed operating cash flow would fund operations, capital expenditures, required debt and interest payments, and share repurchases.
- Key risks include customer retention and concentration, loan delinquency and origination volumes, timing of loan boarding, technology failures, seasonality, ability to raise capital, regulatory changes, and the ability to realize anticipated growth or improve margins. Ocwen was the largest customer; related-party revenue was 65% of Q2 revenue and 63% for the first half.
- Management stated current legal proceedings were not expected to have a material financial impact. Customer escrow balances of $48.7 million were held off balance sheet at June 30. The filing reported no material changes to risk factors from the 2012 Form 10-K and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether Ocwen’s expected loan boarding schedule and portfolio growth occurred, and the resulting revenue and capacity utilization.
- How much revenue and earnings depend on Ocwen and whether customer concentration or related-party arrangements change.
- Whether acquired businesses meet expectations, including purchase-price allocation, integration, amortization expense, and margin effects.
- Debt covenant headroom, repayment requirements, interest costs, and the amount of share repurchases permitted under both loan terms and Luxembourg law.
- Whether operating cash flow keeps pace with earnings and growth, particularly given receivables, working-capital requirements, and planned investment.