Altisource Portfolio Solutions S.A. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; interim financial statements are unaudited. The company provides technology-enabled mortgage and real estate services, asset recovery, and customer relationship management through Mortgage Services, Financial Services, and Technology Services.
Financial performance
Amounts below are in millions of U.S. dollars except per-share data. Comparisons are with the corresponding 2010 period.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $109.8 | $77.6 | $291.7 | $209.9 |
| Gross profit | $36.5 | $28.7 | $100.3 | $77.3 |
| Operating income | $21.1 | $13.9 | $54.9 | $38.0 |
| Net income attributable to Altisource | $17.2 | $9.8 | $45.4 | $32.5 |
| Diluted EPS | $0.67 | $0.37 | $1.76 | $1.24 |
- Revenue increased 42% in Q3 and 39% year to date; service revenue, excluding pass-through items, rose 39% year to date.
- Gross profit as a share of reported revenue was about 33% in Q3 and for the nine-month period. Management’s gross margin measure, gross profit divided by service revenue, was 42% and 44%, respectively, versus 46% and 45% in 2010.
- Operating income rose 52% in Q3 and 44% year to date. Operating income as a share of service revenue was 25% in Q3 and 24% year to date, compared with 22% in both 2010 periods.
- Cash from operations was $68.8 million for the nine months, versus $33.3 million. Investing cash flow was negative $29.0 million and financing cash flow negative $40.7 million; cash decreased $0.9 million to $21.3 million.
- At September 30, current assets were $80.6 million and current liabilities $42.5 million (current ratio about 1.9). Restricted cash was $1.2 million. Capital lease obligations totaled approximately $1.0 million; the filing reports no significant conventional debt balance.
- Total assets were $209.7 million; equity was $163.7 million. The company repurchased $35.5 million of shares during the first nine months.
Material changes and business drivers
- Mortgage Services drove growth: nine-month segment service revenue increased 65% to $147.8 million. Growth reflected expansion of services and growth in Ocwen’s serviced-loan portfolio, including the Litton portfolio boarding that began September 1.
- Financial Services service revenue declined 6% to $53.1 million year to date, chiefly due to lower asset-recovery revenue from a large customer, work shifting to the company’s global delivery platform, and depressed collections. Customer relationship management revenue grew.
- Technology Services revenue rose 10% to $41.1 million year to date, while its gross margin declined to 36% from 45%. The company cited business mix, Consumer Analytics being reported in this segment in 2011, and higher licensing costs.
- Ocwen generated 58% of consolidated Q3 revenue and 57% of nine-month revenue, compared with 51% and 50% in 2010. The company says Ocwen-related services are priced at rates it believes are comparable to market rates.
- April acquisition of Springhouse and July acquisition of a subcontractor’s India asset-recovery workforce were described as not material to consolidated results. The company invested $15.0 million in 49%-owned Correspondent One; it had no revenue as of September 30 and Altisource recorded a $0.4 million equity-method loss.
Outlook, risks and unusual items
- Management expected Q4 service revenue to improve from Q3, principally due to anticipated foreclosure and asset-management referrals. It expected remaining Litton loans to board in November 2011, with related referrals and revenue expected later; some were anticipated to translate into revenue in 2012.
- Management estimated full-year 2011 capital expenditures at the lower end of its previously stated $16–$18 million range. No formal earnings or revenue guidance range is provided.
- Management said pre-foreclosure services generally carry lower margins, although they can lead to higher-margin foreclosure and asset-management referrals. Hiring, technology and facility investments ahead of expected growth may constrain near-term Mortgage Services margins.
- Correspondent One was expected to incur losses into 2012; the filing states Altisource had no additional funding commitments. Management expected a $1.8 million distribution to Lenders One members in Q4.
- Income tax provision was $5.4 million year to date, with a 9.7% effective tax rate; management attributed the difference from Luxembourg’s 28.8% statutory rate mainly to a favorable tax ruling and the mix of income and losses across jurisdictions.
- Routine litigation was disclosed; management, after consulting counsel and considering insurance, did not expect current proceedings to materially affect financial condition, results or cash flows. No material changes to previously disclosed risk factors were reported. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
- Seasonality affects results: Financial Services revenue tends to decline through the year, while REO sales are typically lower in fall and winter. Forward-looking statements are subject to risks including customer retention and growth, regulation, taxes, collection rates, loan placements and estimates.
Most important facts for investors to verify
- Whether Ocwen’s portfolio growth and Litton boarding translate into expected referrals, revenue and margins, given the concentration of revenue tied to Ocwen.
- Whether Financial Services can stabilize asset-recovery revenue and improve collections and customer placements.
- Whether the company can manage lower-margin pre-foreclosure work and investment costs while sustaining margin growth.
- Correspondent One’s operating progress, expected losses and capital requirements; also verify the stated absence of further funding commitments.
- Share-repurchase pace and cash needs alongside planned capital expenditures, lease commitments and member distributions.