Altisource Portfolio Solutions S.A. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Altisource provides services, marketplaces and technology to the mortgage and real estate industries. The quarter reflects the early effects of COVID-19, alongside businesses sold or discontinued since Q1 2019.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Total revenue | $121.4 million | $169.9 million | Down 29% |
| Service revenue | $113.2 million | $165.0 million | Down 31% |
| Gross profit | $26.9 million | $45.7 million | Down 41% |
| Gross profit / service revenue | 24% | 28% | Lower-margin revenue mix weighed on margin |
| Operating loss | $(4.2) million | $(0.6) million | Operating margin on service revenue: (4)% vs. less than (1)% |
| Net loss attributable to Altisource | $(11.7) million | $(3.2) million | Loss per share: $(0.75) vs. $(0.20) |
| Cash used in operating activities | $(1.6) million | $(6.7) million | Improved primarily due to less cash used by working-capital changes |
- Cash and cash equivalents were $79.1 million at March 31, 2020; cash, cash equivalents and restricted cash totaled $82.9 million. Cash and equivalents were $82.7 million at December 31, 2019.
- Senior secured term-loan principal was $293.8 million; its balance-sheet carrying value, net of debt costs and discount, was $288.2 million. The loan rate was 5.45% at quarter-end; no revolving-credit borrowings were outstanding under the $15 million facility.
- Total current assets were $181.6 million and current liabilities were $84.7 million. Total shareholders’ deficit was $31.5 million.
- Interest expense was $4.7 million. The company reported a $1.3 million unrealized loss on its RESI investment, versus a $2.2 million unrealized gain in Q1 2019.
Material changes versus Q1 2019
- Revenue fell primarily because of the sale of the Financial Services business in July 2019, the exit from BRS and Owners.com, Ocwen’s transition away from REALServicing, and lower activity tied to Ocwen’s shrinking portfolio and COVID-19 restrictions.
- Service revenue from Field Services fell 22% and Marketplace fell 29%; Mortgage and Real Estate Solutions grew 15%, benefiting from stronger origination activity. Revenue from customers other than Ocwen, NRZ and RESI across the core businesses grew 36%, according to management.
- Ocwen generated $74.2 million, or 61% of total revenue, compared with $98.3 million, or 58%, a year earlier. The filing also reports that 6% of Q1 2020 revenue was earned on Ocwen-serviced portfolios when another party selected Altisource.
- Cost of revenue declined 24% and SG&A declined 33%, but gross margin contracted. Project Catalyst restructuring charges were $2.9 million versus $4.4 million.
- The Q1 2019 comparison included $16.1 million of Financial Services revenue, $8.2 million of REALServicing revenue, $2.5 million from BRS and $1.6 million from Owners.com; these were absent or substantially reduced in Q1 2020.
Outlook, risks and unusual items
- COVID-19: Management said pandemic-related restrictions and changing vendor and consumer behavior hurt default-related services in Q1. It anticipated continued pressure on foreclosure, eviction, REO, field services, auction and settlement activity; lower home-buying activity could also weigh on Hubzu and settlement services. Lower interest rates supported origination-related businesses, though management noted that benefit could be constrained by economic conditions and loan-forbearance effects.
- Cost actions: Management estimated 2020 cash-expense reductions of $45 million to $50 million compared with the Q4 2019 annualized run rate, excluding outside fees and services that generally move with referrals. Measures included compensation reductions, discretionary-spending cuts, and planned furloughs or eliminations affecting 16% of the workforce. The CEO agreed to forgo 40% of base salary from April through December 2020; Board cash compensation was reduced 50%. These are plans and estimates, not guaranteed results.
- Liquidity and RESI: Management expected existing cash, operating cash flows and the revolver to meet liquidity needs for the next 12 months, subject to forecasts and successful cost reductions. The announced RESI merger at $12.50 per share was expected to yield approximately $43.2 million for Altisource’s 3.5 million shares; management expected to use proceeds to reduce debt. The transaction’s completion and timing were not assured in the filing.
- Debt and obligations: Term loans mature in April 2024; scheduled principal payments begin in March 2023, subject to mandatory prepayments and credit-agreement terms. Management estimated the next 12 months’ interest expense at $16.0 million and lease payments at $11.2 million. Credit-agreement covenants and defaults could restrict access to liquidity or accelerate repayment.
- Customer concentration: Dependence on Ocwen is significant. Ocwen’s regulatory, legal, servicing-portfolio and relationship developments, and changes involving NRZ, could reduce referrals or revenue and potentially result in asset impairments. The NRZ brokerage agreement also lists specified termination events, including certain financial or going-concern disclosures.
- Other contingencies: Altisource was responding to governmental inquiries; management said it was too early to predict outcomes or estimate financial impact. It did not expect current litigation to materially affect results. Potential changes in sales-tax exposure could still require material adjustments.
- Restructuring: Management anticipated an additional $8 million to $11 million of Project Catalyst costs. The filing gives no formal revenue or earnings guidance.
Important facts for investors to verify
- Whether COVID-19 effects, referral volumes and vendor availability materially change revenue, margins or cash generation after quarter-end.
- Whether the estimated $45 million to $50 million of cash-expense reductions are achieved, and the operational impact of workforce actions.
- Completion, timing and net proceeds of the RESI merger, and the amount of debt actually repaid with proceeds.
- Ocwen’s share of revenue, its servicing portfolio and regulatory position, and any changes to Ocwen or NRZ contractual relationships and referrals.
- Compliance with debt covenants, available revolver capacity, and the assumptions supporting management’s 12-month liquidity assessment.
- Outcomes of governmental inquiries and any changes in litigation, sales-tax exposure or other contingencies.