Altisource Portfolio Solutions S.A. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Altisource is an integrated service provider and marketplace for the mortgage and real estate industries. All amounts below are U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $204.6 | $235.0 | $620.6 | $726.1 |
| Service revenue | $196.9 | $224.3 | $594.5 | $692.3 |
| Gross profit | $57.0 | $60.1 | $162.6 | $187.9 |
| Income from operations | $20.9 | $13.5 | $40.5 | $41.1 |
| Net income attributable to Altisource | $8.7 | $7.0 | $6.1 | $22.5 |
| Diluted EPS | $0.49 | $0.38 | $0.35 | $1.20 |
- Revenue fell 13% in Q3 and 15% for the nine-month period; service revenue declined 12% and 14%, respectively. Management attributed the declines mainly to a smaller Ocwen-serviced portfolio and fewer delinquent loans, and to RESI’s smaller non-performing loan and REO portfolio.
- Gross profit as a share of service revenue was 29% in Q3 versus 27% a year earlier, and 27% for both nine-month periods. Operating income as a share of service revenue was 11% versus 6% in Q3 and 7% versus 6% for the nine months.
- Q3 operating income included a $13.7 million gain on the rental property management business sale. The nine-month comparison also reflects a $4.4 million debt-refinancing loss and $4.2 million unrealized loss on RESI shares in 2018, versus a $5.4 million gain from early debt extinguishment in 2017. Higher interest expense and a higher effective tax rate also weighed on nine-month attributable earnings.
Cash, debt and liquidity
- Cash and cash equivalents were $102.9 million at September 30, 2018; restricted cash was $5.7 million. Nine-month operating cash flow was $43.7 million, down from $47.1 million. Cash, cash equivalents and restricted cash declined by $0.3 million during the period.
- Investing activities provided $10.8 million, including $15.0 million of cash proceeds from the business sale, partly offset by $4.2 million of capital expenditures. Financing activities used $54.7 million, including debt repayments and $21.8 million of share repurchases.
- Term loan principal outstanding was $388.8 million, with $34.4 million classified as current; net carrying debt was $381.0 million. The new Term B loan matures in April 2024, carried a 6.39% interest rate at quarter-end, and had $15.0 million of revolving capacity with no borrowings outstanding.
- Management expected to pay $34.4 million of mandatory principal and $24.1 million of interest over the next 12 months, and believed cash, operating cash flows and revolver availability would meet liquidity needs. The filing notes debt covenants may constrain borrowing, repurchases and other actions.
Material changes, outlook and risks
- Customer concentration: Ocwen accounted for 56% of Q3 revenue and 53% of nine-month revenue. Ocwen’s servicing portfolio contraction and regulatory, legal and operational developments could reduce service volumes or affect the relationship. Altisource was negotiating an agreement with NRZ; management expected NRZ revenue to grow and Ocwen revenue to decline, but stated there was no assurance a Services Agreement would be signed. The related letter of intent was extended through November 15, 2018.
- Restructuring: Project Catalyst began in August. The company recorded $3.4 million of Q3 charges and estimated additional future costs of $25–$35 million through 2019. Management projected annual run-rate operating expense reductions of $65–$90 million after completion, subject to change.
- Business sale: Altisource sold its rental property management business to RESI for $18.0 million total consideration: $15.0 million received at closing and a discounted long-term receivable of about $2.2 million for the remaining $3.0 million payment. The sale generated the $13.7 million pretax gain. The sale agreement also restricts transfers of Altisource’s RESI shares for a period.
- Contingencies: The company accrued $5.9 million for potential U.S. sales tax exposure following the Wayfair decision; additional losses were possible but not estimable. It also recorded a further $0.5 million expense related to a 2016 litigation settlement. Management said other legal proceedings were not expected to have a material impact, but certain government inquiries remained under review.
- Regulatory update: The CFPB informed Altisource in April 2018 that its REALServicing-related investigation was complete and staff did not intend to recommend enforcement action against the company. Separately, Ocwen’s regulatory and legal matters could adversely affect Altisource’s business relationship and revenue.
- Accounting and seasonality: Altisource adopted ASC 606 on January 1, 2018 using the cumulative-effect method; 2017 comparatives were not restated. The company disclosed that ASC 606 increased reported Q3 revenue by $4.0 million and attributable net income by $2.2 million versus amounts without adoption. Certain property sales, originations and preservation services are seasonal.
- No formal company-wide revenue or earnings guidance is provided in the supplied filing text. Management’s quantified outlook principally concerns Project Catalyst savings and costs and its assessment of 12-month liquidity.
Investor verification priorities
- Track Ocwen’s servicing portfolio, referrals, platform transition and any resulting changes in Altisource revenue or pricing.
- Confirm whether Altisource and NRZ executed the Services Agreement and how MSR transfers affect customer concentration and revenue.
- Assess whether Project Catalyst achieves the projected $65–$90 million annual savings, and compare realized savings with the $25–$35 million expected costs.
- Monitor sales tax exposure, including potential additional accruals, collection from customers and related cash payments.
- Review debt amortization, variable interest costs, covenant headroom and liquidity, particularly given the $34.4 million current debt portion.
- Separate recurring operating performance from the business-sale gain, restructuring charges, tax adjustments and RESI fair-value changes.