Altisource Portfolio Solutions S.A. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results are compared with the corresponding 2019 periods. Altisource provides services and technology to the real estate and mortgage industries.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $88.8 million | $141.5 million | $305.6 million | $508.0 million |
| Gross profit | $16.2 million | $30.8 million | $55.8 million | $120.3 million |
| Operating income (loss) | $(6.8) million | $19.7 million | $(28.7) million | $24.5 million |
| Net income (loss) attributable to Altisource | $(13.2) million | $7.2 million | $(59.9) million | $(1.9) million |
| Diluted EPS | $(0.85) | $0.44 | $(3.85) | $(0.12) |
| Gross profit as % of service revenue | 19% | 23% | 19% | 25% |
Cash flow and liquidity: Operating cash flow was negative $14.1 million for the first nine months, versus positive $22.2 million in 2019. Investing activities provided $0.8 million and financing activities used $2.5 million. Cash, cash equivalents and restricted cash were $70.8 million at period end, including $67.0 million of cash and cash equivalents and $3.8 million of restricted cash. The company also held $30.2 million of RESI equity securities; management cited $97.2 million in cash, cash equivalents and marketable equity securities during its COVID-19 discussion.
Debt and balance sheet: Senior secured term-loan principal was $293.8 million ($288.9 million carrying value after discounts and issuance costs), at a 5.00% interest rate on September 30; maturity is April 2024. There were no revolver borrowings. The company reported total assets of $310.1 million and a total deficit of $76.6 million. Current assets were $140.0 million and current liabilities $71.5 million. The leverage ratio exceeded 3.50:1.00 during Q3, restricting revolver borrowing and potentially share repurchases under the credit agreement.
Material changes and drivers
- Revenue fell 37% in Q3 and 40% year to date. Management cited COVID-19 restrictions and borrower-relief measures, Ocwen portfolio contraction, and the transfer of certain field-services referrals to another provider. The 2019 sale or wind-down of businesses also reduced comparability.
- Ocwen accounted for 48% of Q3 revenue and 57% of nine-month revenue. Altisource says the transition of NRZ-related field-services referrals was largely completed by September 30. Ocwen also communicated plans to transition certain other default-related referrals; Altisource believes referral redirection breaches its agreement and says discussions are ongoing.
- Service revenue from customers other than Ocwen, NRZ and RESI grew 11% for the first nine months. Origination-related Mortgage and Real Estate Solutions service revenue increased 38% year to date, partly offsetting weakness in default-related services.
- Gross-profit margins declined amid lower revenue and a less favorable business mix. SG&A decreased 29% year to date, but did not offset lower gross profit and the absence of the prior-year $17.6 million gain on sale of the Financial Services business.
- The nine-month result included a $12.4 million unrealized loss on RESI shares, versus an $11.7 million gain in 2019. Interest expense declined to $13.3 million from $16.7 million.
Outlook, risks and unusual items
- No formal revenue or earnings guidance is provided. Management expects COVID-related restrictions, foreclosure and eviction moratoria, forbearance, and lower foreclosure and REO activity to continue weighing on default-related services; lower interest rates and refinancing activity supported origination services.
- Management estimates cost-reduction measures implemented since April will reduce 2020 expenses by approximately $65–$75 million versus the Q4 2019 annual run rate, using specified exclusions. Project Catalyst is expected to incur a further $2–$3 million in costs.
- Management expects existing cash and anticipated operating cash flows to cover liquidity needs for the next 12 months, including estimated $14.7 million of debt interest and $8.8 million of lease payments. This outlook is subject to revenue, working-capital and cost-reduction assumptions; operating cash flow was negative for the nine-month period.
- After quarter-end, Altisource sold 1.6 million RESI shares for $21.1 million net proceeds. The credit agreement requires proceeds to repay term debt. RESI announced a proposed acquisition at $13.50 per share, expected to close in Q1 2021 subject to approvals and closing conditions.
- Risks include customer concentration and possible further Ocwen/NRZ referral changes, Ocwen regulatory or servicing developments, COVID-19 impacts, debt covenant restrictions, and potential asset impairments. The company is responding to governmental inquiries but says it is premature to estimate their outcome or financial impact. It also notes uncertainty around recovery of additional sales taxes.
Most important facts for investors to verify
- Whether Ocwen will redirect additional referrals, the contractual dispute’s progress, and the resulting revenue and cash-flow exposure.
- Cash generation, liquidity assumptions, leverage covenant status, and required use of the post-quarter RESI sale proceeds to repay debt.
- Whether the stated cost reductions are achieved and whether origination growth can offset persistent weakness in default-related services.
- Developments in governmental inquiries and sales-tax reimbursements, and any resulting financial or disclosure impact.