Altisource Portfolio Solutions S.A. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. Unless otherwise indicated, amounts below are in U.S. dollars; financial statement amounts are in millions.
Business context and reporting period
Altisource provides technology-enabled services for real estate and mortgage portfolio management, asset recovery, and customer relationship management. Its segments are Mortgage Services, Financial Services, and Technology Services. Mortgage Services was the principal growth engine, supported largely by expansion of Ocwen’s serviced loan portfolio.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenue | $423.7 | $301.4 |
| Service Revenue | $334.8 | $247.0 |
| Gross profit | $147.8 | $112.3 |
| Income from operations | $85.7 | $55.0 |
| Net income attributable to Altisource | $71.1 | $49.3 |
| Diluted EPS | $2.77 | $1.88 |
| Operating cash flow | $111.6 | $52.8 |
- Total revenue increased 41% and Service Revenue increased 36%. Service Revenue excludes pass-through reimbursable expenses and cooperative non-controlling interests.
- Gross profit was 44% of Service Revenue, versus 45% in 2010; operating income was 26% of Service Revenue, versus 22%.
- FY 2011 cash flows were $(33.1) million from investing activities and $(68.6) million from financing activities. Investing included $16.4 million of capital expenditures and a $15.0 million investment in Correspondent One; financing included $62.2 million of share repurchases.
- At December 31, cash was $32.1 million, current assets $90.3 million, and current liabilities $55.4 million. The company reported no line-of-credit or other secured borrowings; capital lease obligations were $0.8 million. Total liabilities were $58.2 million.
- Operating lease commitments totaled $18.4 million, including $9.6 million due within one year. Customer escrow balances of $17.7 million were generally held in segregated accounts and excluded from the balance sheet.
Fourth-quarter results and material changes
Unaudited Q4 2011 revenue was $132.0 million, gross profit $47.5 million, pretax income $30.8 million, net income attributable to Altisource $25.7 million, and diluted EPS $1.02. Q4 2010 revenue was $91.5 million and diluted EPS was $0.64.
- Mortgage Services revenue grew to $311.9 million from $187.1 million, with Service Revenue up 66% to $224.9 million. Growth reflected Ocwen-related servicing expansion and additional mortgage and real estate services.
- Financial Services revenue declined 8% to $71.2 million; Service Revenue fell 7% to $69.2 million. Management attributed the decline principally to economic conditions, lower collection placements and fees, and customer work shifting to lower-cost delivery locations. Segment operating income improved to $4.5 million from $0.3 million.
- Technology Services revenue rose 8% to $56.1 million, while operating income declined to $14.4 million from $18.1 million; its gross margin fell to 34% from 44%, reflecting higher personnel, technology, and infrastructure costs.
- Revenue concentration increased: Ocwen represented 58% of consolidated revenue, compared with 51% in 2010; the three largest customers together represented 71%. Ocwen’s serviced portfolio was $102.2 billion in unpaid principal balance at year-end.
- The company acquired Springhouse, an appraisal management company, and Tracmail’s assembled workforce. It invested $15.0 million in Correspondent One, which recorded no loan-sale revenue in 2011 and was expected to incur losses into 2012.
Outlook, risks, contingencies, and unusual items
- Management expected Ocwen’s portfolio growth, including approximately 0.2 million loans expected to board in early 2012, to be the principal driver of 2012 growth. It also planned to expand mortgage origination services, implement next-generation REALSuite technology, and improve operating effectiveness. No quantified earnings or revenue guidance was provided.
- Management intended to work toward Financial Services profitability and expected Correspondent One to continue incurring losses until the second half of 2012. Next-generation vendor and process technologies were planned to begin deployment in the second half of 2012 and continue through 2013.
- Key risks include substantial dependence on Ocwen and customer concentration; Ocwen’s ability to grow, retain or redirect servicing work; competition; regulatory and consumer-protection requirements; technology disruption and information security; litigation; labor and foreign-operation risks; and potential disruption or loss relating to customer escrow funds held at financial institutions.
- Management said current legal proceedings were not expected to have a material impact. The 2011 goodwill impairment charge was zero; 2010 included a $2.8 million Financial Services goodwill impairment. FY 2011 included a $0.5 million equity-method loss from Correspondent One. A favorable 2010 tax ruling had produced a $3.4 million credit attributable to 2009.
- Auditors issued an unqualified opinion on the financial statements and internal controls; management and the auditor reported effective internal control over financial reporting as of year-end. The audit report highlighted significant related-party transactions with Ocwen.
Important facts for investors to verify
- Whether Ocwen’s planned servicing acquisitions and loan boarding occurred as expected, and how they affected Altisource’s revenue, staffing costs, and margins.
- Whether Altisource reduced Ocwen concentration and expanded unaffiliated customer relationships; review the terms, duration, and termination provisions of Ocwen service agreements.
- Whether cash conversion remains strong after working-capital movements, growth investment, share repurchases, and ongoing capital needs.
- Whether Technology Services margins recover and Financial Services achieves sustainable profitability, and whether Correspondent One reaches scale without further funding needs.
- Potential effects of regulatory changes, litigation or compliance matters, tax positions and indemnities, and the company’s contingent exposure to customer escrow funds.