Altisource Portfolio Solutions S.A. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Unaudited results are compared with the three months ended March 31, 2014; balance-sheet amounts are compared with December 31, 2014. Altisource provides services and technology to the real estate, mortgage and consumer debt industries through Mortgage Services, Financial Services and Technology Services.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Total revenue | $240.5 million | $239.3 million; up 1% |
| Service revenue | $207.8 million | $210.0 million; down 1% |
| Gross profit; gross margin on service revenue | $67.7 million; 33% | $91.5 million; 44% |
| Operating income; operating margin on service revenue | $15.3 million; 7% | $47.9 million; 23% |
| Net income attributable to Altisource | $3.7 million | $39.6 million |
| Diluted EPS | $0.18 | $1.61 |
| Operating cash flow | $(15.9) million | $36.3 million |
| Cash and cash equivalents | $105.6 million | $161.4 million at Dec. 31, 2014 |
| Long-term debt, net of discount | $587.3 million | $588.6 million at Dec. 31, 2014 |
| Total assets / total equity | $760.7 million / $41.9 million | $788.2 million / $41.4 million at Dec. 31, 2014 |
Interest expense was $7.2 million, versus $4.8 million a year earlier. The term loan interest rate was 4.50% at quarter-end, with maturity on December 9, 2020, subject to acceleration upon default. Current liabilities were $113.5 million and current assets were $285.2 million at March 31.
Material changes and segment performance
- Profitability weakened sharply despite nearly flat revenue. Cost of revenue increased 17% to $172.8 million and SG&A rose 20% to $52.4 million. Management cited higher compensation, technology and telecommunications costs, severance and increased legal and compliance expenses.
- Mortgage Services service revenue declined 2% to $144.4 million; operating income fell to $41.6 million from $54.0 million. Asset management services grew 20%, offset by lower insurance and property valuation revenue.
- Financial Services service revenue declined 8% to $22.3 million; operating income was $2.5 million, down from $5.0 million, reflecting lower customer relationship management revenue and weaker margins.
- Technology Services revenue grew 11% to $52.0 million, driven by IT infrastructure services, but the segment moved to an operating loss of $8.1 million from operating income of $2.9 million as costs rose 41%.
- Cash declined $55.7 million during the quarter. Investing outflows included $30.0 million to buy HLSS shares and $3.9 million of capital expenditures. Operating cash use reflected lower earnings and unfavorable working-capital changes, including receivables growth and reduced payables.
- Altisource repurchased 168,700 shares for $4.0 million in January; about 969,638 shares remained available under the repurchase program at March 31.
Outlook, management commentary and risks
- Management expected revenue from Ocwen’s servicing portfolio to decline in 2015 and said Ocwen’s difficulties could reduce service volumes, change pricing or lead to loss of the customer. Ocwen accounted for 59% of consolidated revenue; a further 24% was earned on Ocwen-serviced portfolios where another party selected Altisource.
- Management said it was increasing focus on customer diversification and growth in default services, origination, online real estate marketplaces, property management and renovation. It was also executing cost reductions, including staff and vendor cuts. No numerical revenue or earnings guidance was provided.
- Management expected to build cash during 2015 amid uncertainty around Ocwen, while stating that current liquidity and expected operating cash flows should cover working capital, capital expenditures and debt service for at least the next 12 months. Management cautioned that plans might not succeed and operations might not be profitable.
- In Q1, Altisource recorded a $3.3 million other-than-temporary impairment on its $30.0 million HLSS share purchase; the holding was valued at $26.7 million at quarter-end. On April 6, 2015, after quarter-end, NRZ acquired substantially all HLSS assets and assumed substantially all liabilities, and HLSS announced a plan to liquidate and dissolve. Altisource’s investment outcome remains a point to monitor.
- Altisource disclosed a securities class action alleging misstatements concerning pricing and related-party transactions, plus a shareholder derivative action; potential losses were not reasonably estimable. The company was also responding to federal and state regulatory inquiries, whose outcomes and financial effects were unclear.
- Ocwen faced regulatory investigations, operational oversight and legal matters, and its debt and servicer ratings had been downgraded. Management identified potential adverse effects on Altisource, including reduced service volume and possible impairment or write-off of assets and receivables.
- The company reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How Ocwen’s regulatory, operating and servicing developments affect Altisource’s revenue concentration, contract terms and receivable collection.
- Whether cost reductions improve margins as anticipated, particularly in Technology Services, and whether growth initiatives replace declining Ocwen-related business.
- Cash conversion and liquidity, given negative Q1 operating cash flow, the cash balance decline and substantial term-loan debt.
- The eventual recovery or loss on HLSS securities following the post-quarter asset sale and liquidation plan.
- Developments in the securities and derivative lawsuits and regulatory inquiries, for which the filing gives no clear estimate of potential losses.