Altisource Portfolio Solutions S.A. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Altisource provides mortgage, real estate and consumer-debt services through Mortgage Services, Financial Services and Technology Services. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless otherwise noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $272.8 | $287.7 | $781.6 | $823.0 |
| Service revenue | $245.5 | $247.7 | $689.9 | $720.8 |
| Gross profit | $98.9 | $99.0 | $266.7 | $302.5 |
| Operating income | $47.6 | $52.2 | $119.0 | $163.2 |
| Net income attributable to Altisource | $37.0 | $42.3 | $86.7 | $136.0 |
| Diluted EPS | $1.82 | $1.79 | $4.19 | $5.63 |
- Q3 revenue declined 5% year over year; service revenue declined 1%. For the nine-month period, revenue declined 5% and service revenue declined 4%.
- Gross margin as a share of service revenue was 40% in Q3 and 39% year to date, versus 40% and 42%, respectively, in 2014. Operating margin on service revenue was 19% in Q3 and 17% year to date, versus 21% and 23%.
- Q3 operating income fell 9% and attributable net income fell 12%. Nine-month operating income fell 27% and attributable net income fell 36%. Q3 diluted EPS rose 2% despite lower net income, while nine-month diluted EPS fell 26%; the weighted average diluted share count was lower year over year.
- By segment, nine-month service revenue declined 3% in Mortgage Services, 12% in Financial Services and 3% in Technology Services. Mortgage Services’ Q3 service revenue rose 7%, offset by declines of 20% in Financial Services and 16% in Technology Services.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $109.2 million, down from $125.7 million. Investing cash outflow was $40.0 million and financing cash outflow was $80.4 million. Cash decreased $11.2 million to $150.1 million.
- At September 30, cash was $150.1 million, current assets were $305.7 million and current liabilities were $117.2 million. Accounts receivable, net was $128.9 million, up from $112.2 million at year-end 2014.
- Long-term debt, net of discount, was $557.6 million, compared with $588.6 million at December 31, 2014. The term loan’s interest rate was 4.50%, with maturity on December 9, 2020; scheduled quarterly principal payments are $1.5 million. The company repurchased debt with $27.0 million par value during 2015 and recorded $2.0 million in gains on extinguishment.
- Nine-month capital expenditures were $27.7 million. The company spent $49.0 million on share repurchases and used $29.1 million for debt repurchases and repayments. Approximately 1.8 million shares remained available under the repurchase program at quarter-end.
Material changes and unusual items
- Revenue weakness reflected fewer property valuation referrals, lower mortgage charge-off collections, the 2014 discontinuation of lender-placed insurance brokerage, and lower Equator software revenue after acquisition-related deferred revenue had been fully amortized in 2014. Growth in asset management, including Hubzu REO sales, partly offset these factors.
- Cost reductions and termination of the Ocwen data-access agreement helped lower costs. Nine-month results included $4.3 million of severance expense. SG&A increased, partly due to expanded support functions, legal and regulatory costs, severance and Q3 rebranding-related marketing.
- The company settled the Equator earn-out in Q2 for $0.5 million, reducing SG&A and increasing earnings by $7.6 million. This is a non-recurring benefit. The 2014 comparison included a $37.9 million earn-out fair-value benefit and a $37.5 million goodwill impairment.
- Altisource acquired CastleLine in July for stated purchase consideration of $33.4 million, including cash, deferred cash and restricted shares. A $3.8 million portion of future cash payments is contingent on seller employment. In October, after quarter-end, it acquired RentRange, Investability and a support company for $24.8 million, comprising $17.5 million cash and $7.3 million in restricted shares.
- The company recorded a $1.9 million net loss on its HLSS investment for the nine-month period after receiving dividends and selling its shares.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management expects Ocwen-related revenue to decline over time, while pursuing growth in servicer services, mortgage origination, online real estate marketplaces, and rental and renovation services.
- Management believes liquidity and operating cash flow will be sufficient for working capital, capital expenditures, debt service and other needs for at least the next 12 months, but cautions that plans may not succeed and operations may not be profitable.
- Ocwen represented 59% of nine-month consolidated revenue and 60% in Q3. A further 21% of revenue in each period came from portfolios serviced by Ocwen where another party selected Altisource. Ocwen regulatory or servicing difficulties, loss of servicing rights or licenses, customer reductions, or pricing changes could materially reduce Altisource revenue and potentially impair assets. Management says a cost realignment plan exists, but outcomes are uncertain.
- Altisource is responding to federal and state regulatory inquiries and cannot estimate their outcome or financial impact. A securities class action was dismissed in September with leave to amend; plaintiffs filed a further amended complaint. Two shareholder derivative matters also remain pending. The company says potential losses cannot currently be estimated.
- Other disclosed risks include seasonality, customer retention, loan delinquency and origination trends, technology failures, acquisition integration, regulation, and debt-covenant limits on borrowing and share repurchases. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- How quickly Ocwen-related revenue and servicing portfolios may decline, and whether diversification initiatives can offset that exposure.
- Whether Q3 cost savings and margin stabilization are sustainable, particularly in Technology Services and Financial Services.
- Cash conversion, receivables and collections, and capacity to fund debt service, investment and repurchases while managing leverage and covenants.
- Acquisition performance and integration, including CastleLine and the post-quarter RentRange and Investability purchases; monitor contingent and deferred consideration.
- Developments in regulatory inquiries and litigation, including any changes to estimated exposure or business requirements.