Altisource Portfolio Solutions S.A. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods. Amounts below are in millions of dollars unless noted. Altisource provides technology-enabled mortgage and real estate services, financial services, and technology services.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $144.2 | $93.3 | $283.3 | $181.9 |
| Service revenue | $118.1 | $72.5 | $226.6 | $144.2 |
| Gross profit | $51.5 | $30.2 | $98.8 | $63.9 |
| Income from operations | $32.4 | $16.3 | $62.7 | $33.7 |
| Net income attributable to Altisource | $28.1 | $13.4 | $53.3 | $28.2 |
| Diluted EPS | $1.13 | $0.52 | $2.15 | $1.09 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $54.0 | $38.2 |
Q2 revenue grew 55%, service revenue 63%, operating income 99%, and Altisource-attributable net income 110%. For the first half, total revenue rose 56%, service revenue 57%, operating income 86%, and attributable net income 89%.
Gross profit was 44% of service revenue in both first-half periods; operating income was 28% of service revenue versus 23% in 2011. Q2 gross profit was 44% of service revenue versus 42%, and operating income was 27% versus 22%. These margins use service revenue, excluding pass-through reimbursable expenses and non-controlling interests.
Segments and material changes
- Mortgage Services: First-half service revenue increased 91% to $169.3 million, mainly reflecting Ocwen’s larger serviced-loan portfolio and expansion of services. Segment operating income was $68.1 million versus $37.2 million, while operating margin on service revenue eased to 40% from 42%, reflecting growth-related costs and service mix.
- Financial Services: First-half service revenue declined 6% to $33.8 million. Lower asset-recovery revenue reflected lower placements and the transfer of work to a lower-cost geography at lower customer fees; customer relationship management revenue grew. Management said it was prioritizing margin improvement and technology/process changes.
- Technology Services: First-half revenue increased 33% to $34.9 million, driven by REALSuite and IT infrastructure services. Segment operating income fell to $6.6 million from $6.8 million; operating margin on service revenue declined to 19% from 26% as the company invested in personnel, technology and facilities.
Ocwen accounted for 60% of consolidated revenue in the first half and 61% in Q2, compared with 56% and 58%, respectively, in 2011. Ocwen is the company’s largest customer, and certain service agreements extend to August 2017, subject to termination provisions. The company states its Ocwen rates are comparable to market rates.
Cash, liquidity and debt
- Cash and cash equivalents were $45.2 million at June 30, 2012, up from $32.1 million at year-end 2011. Current assets were $124.0 million and current liabilities $61.5 million, yielding working capital of approximately $62.5 million.
- First-half operating cash flow was $54.0 million; investing cash outflow was $21.1 million, primarily capital expenditures; financing cash outflow was $19.9 million, including $16.8 million of share repurchases and $4.8 million of distributions to non-controlling interests.
- Accounts receivable increased to $70.3 million from $52.0 million. Management attributed lower operating cash flow relative to service revenue to working-capital growth and noted that certain fees are collected only after service milestones.
- The balance sheet reported $0.5 million of current capital lease obligations and no non-current capital lease obligations at June 30. The filing does not report conventional borrowings in the presented balance sheet.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expects approximately $40 million of capital expenditures for 2012, including approximately $15 million for a new disaster recovery center.
- Management intended to invest $50 million to $100 million in the residential asset business in the second half of 2012. The planned separation and distribution of Altisource Residential and Altisource Asset Management was expected in the second half, but management cautioned that completion was uncertain and subject to satisfactory financial, tax and legal conclusions and necessary approvals.
- Management planned to begin deploying next-generation mortgage technologies in the second half of 2012, continuing through 2013; Financial Services deployment was expected through 2014. It cited potential efficiency and margin benefits, while noting that investment and deployment timing could affect results.
- A new authorization permits repurchases of up to 3.5 million shares. No shares were repurchased in Q2 as the company preserved capital for growth initiatives; management said it might resume repurchases later in the year.
- Reported first-half results included a $0.6 million equity-method loss from Correspondent One. First-quarter compensation expense included a $0.8 million reversal related to an executive officer’s departure. The first-half effective tax rate, adjusted for non-controlling interests, was 9.5%, compared with 11.1% in 2011, reflecting income mix and a favorable Luxembourg tax ruling.
- Management identified customer retention and acquisition, technology failures, reliance on outsourcing trends, regulation and tax changes, seasonality, collection rates, margins and liquidity assumptions as risks. Routine litigation was not expected by management to have a material financial effect. Customer escrow balances were $34.8 million at June 30 and are not included in the balance sheet.
Most important facts for investors to verify
- Whether revenue growth and margin performance can be sustained as the business scales, particularly given growth-related costs and weaker Financial Services revenue.
- The degree of continuing dependence on Ocwen, including the effect of changes in its loan portfolio, referrals, service agreements or customer selection of providers.
- Cash conversion, receivables growth and funding needs alongside the planned residential asset investment, capital expenditures and any share repurchases.
- Progress, economics, approvals and timing for next-generation technology deployments and any proposed business separations.
- Whether the increase in Mortgage Services profitability and the planned Financial Services margin improvements translate into durable cash flow.