Altisource Portfolio Solutions S.A. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Altisource provides services, marketplaces and technology to the real estate and mortgage industries through its Servicer and Real Estate and Origination segments.
Financial performance
Amounts are in millions of dollars except per-share data. Comparisons are with the prior-year periods.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $35.2 | $40.4 | $74.7 | $79.9 |
| Service revenue | $33.2 | $37.6 | $70.2 | $75.4 |
| Gross profit | $5.5 | $4.1 | $14.0 | $9.7 |
| Gross profit / service revenue | 17% | 11% | 20% | 13% |
| Operating loss | $(6.8) | $(10.5) | $(10.4) | $(18.8) |
| Net loss attributable to Altisource | $(18.9) | $(15.5) | $(31.8) | $(27.7) |
| Loss per share, basic and diluted | $(0.90) | $(0.96) | $(1.62) | $(1.73) |
| Interest expense | $9.9 | $3.5 | $16.7 | $7.1 |
Revenue declined 13% in Q2 and 7% for the six-month period. Lower mortgage origination activity, reduced demand in certain default-related services, California foreclosure delays and the exit from a low-margin customer care business contributed to the decline. Cost reductions and efficiency measures supported higher gross margins and reduced operating losses. However, increased interest costs and debt amendment and warrant-related expenses drove higher net losses.
Segments and cash flow
- Servicer and Real Estate: Q2 revenue was $26.8 million, down 16%; six-month revenue was $58.8 million, down 3%. Six-month operating income rose to $16.1 million from $12.0 million, reflecting cost savings and improved margins.
- Origination: Q2 revenue was $8.4 million, down 1%; six-month revenue was $15.9 million, down 18%, mainly reflecting the mortgage origination downturn. Six-month operating loss was $3.6 million versus $3.4 million.
- Operating cash flow: Cash used was $10.9 million in the first half, compared with $25.8 million used in the prior-year period. Management attributed the improvement principally to working-capital changes, including tax collections and return of surety bonds.
- Investing and financing: No net investing cash flow was reported for the first half of 2023. Financing used $5.1 million, including a $20.0 million debt repayment and $4.9 million of debt amendment-related payments, offset in part by $20.5 million of net proceeds from a common-stock offering.
Debt, liquidity and balance sheet
- At June 30, cash and cash equivalents were $35.0 million; restricted cash was $3.2 million. Cash, cash equivalents and restricted cash totaled $38.2 million.
- Long-term debt, net of unamortized costs and discount, was $217.9 million. Senior secured term-loan principal was $229.8 million; no revolver borrowings were outstanding. The revolver provides up to $15.0 million of borrowing capacity, subject to its terms.
- The term loan’s stated interest rate was 14.49% at June 30, including a payment-in-kind component. Its maturity is April 30, 2025; extension to April 30, 2026 is conditional, including aggregate paydowns of at least $30 million and other requirements. The company had made $20 million of qualifying paydowns by June 30.
- Total assets were $164.6 million and total deficit was $128.1 million. Current liabilities were $47.2 million, including a $9.2 million warrant liability.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management expects default-related demand to grow as the market recovers, but estimates later-stage foreclosure auction and REO activity may not fully benefit from higher early-2022 foreclosure initiations until late 2023 or early 2024. It also cites on-boarding sales wins, revenue mix and a reduced cost structure as factors that may help cash flow.
- Industry foreclosure initiations were 13% lower year over year for January–May 2023 and 31% below the comparable 2019 period; foreclosure sales were 23% higher year over year but 46% below 2019. Management says the timing and extent of any default-market recovery are uncertain.
- Customer concentration: Ocwen generated 40% of Q2 revenue and 42% of first-half revenue. Changes to Ocwen’s business, regulatory situation, servicing relationships or purchasing volumes could materially affect Altisource. The filing also highlights risks related to Rithm’s relationship with Ocwen.
- Debt and financing costs: The term loan’s rate rose materially from the prior-year period. First-half results included $3.3 million of debt amendment costs, and the company recorded a $1.1 million first-half loss from changes in warrant fair value (including a $1.8 million Q2 loss). The warrants are exercisable beginning February 2024 and could result in share dilution; the number of shares is subject to adjustment under the agreement.
- Other risks and contingencies: The company is responding to governmental inquiries and says potential outcomes and financial impacts cannot yet be estimated. It considers current litigation not likely to have a material impact. Regulatory or operating developments at Ocwen could reduce Altisource’s revenue or lead to asset impairments. Management says it expects to fund liquidity needs with cash, operating cash flow and, as needed, the revolver, but notes no assurance of profitability or successful plans.
- Shareholders approved renewal of a repurchase authorization for up to 3.1 million shares, but the credit agreement generally restricts repurchases. No shares were repurchased in the first half.
Most important facts for investors to verify
- Whether operating cash flow improves without relying on working-capital timing, and whether cash balances remain adequate for interest and debt service.
- Progress toward the additional $10 million in aggregate paydowns needed to meet the stated $30 million threshold for a possible maturity extension, and the terms and feasibility of any extension.
- How Ocwen’s regulatory and servicing developments, and its relationship with Rithm, affect Altisource’s customer volumes and revenue concentration.
- Whether foreclosure referrals and mortgage origination activity recover as management anticipates, including the impact of California delays.
- The effects of the high borrowing rate, payment-in-kind interest, warrant remeasurement and potential warrant dilution on future earnings, debt balances and share count.