Business context and reporting period
Altisource Portfolio Solutions S.A. provides services, technology and marketplaces to the mortgage and real estate industries. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017; comparisons are with the same 2016 periods. From January 1, 2017, the company reports Mortgage Market, Real Estate Market, and Other Businesses, Corporate and Eliminations; prior-period segment results were recast.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $250.7m | $255.8m | $491.2m | $505.9m |
| Gross profit | $65.3m | $81.4m | $127.8m | $162.7m |
| Operating income | $12.8m | $27.2m | $27.7m | $54.9m |
| Net income attributable to Altisource | $9.0m | $20.0m | $15.6m | $38.5m |
| Diluted EPS | $0.48 | $1.02 | $0.82 | $1.94 |
- Gross margin measured against service revenue fell to 27% from 34% in both the quarter and first half. Operating margin on service revenue fell to 5% from 11% in Q2 and 6% from 12% for the first half.
- Six-month operating cash flow was $12.5m, down from $69.4m; investing cash outflow was $5.9m and financing cash outflow was $41.7m. Cash declined $35.1m to $114.2m.
- At June 30, cash was $114.2m and available-for-sale securities were $53.6m. Current assets were $290.2m against current liabilities of $101.5m.
- Senior secured term-loan principal was $450.6m; net carrying value was $445.4m. The loan bears 4.72% interest and matures December 9, 2020. The company repurchased $26.0m par value at a discount in Q2, recognizing a $3.9m gain.
Material changes versus prior comparable periods
- First-half revenue declined 3%, while gross profit fell 21%, operating income fell 50%, and attributable net income fell 60%. Q2 attributable net income fell 55%.
- Management attributed margin pressure largely to mix: growth in lower-margin property preservation and buy-renovate-sell activity, alongside declines in certain higher-margin businesses. Outside fees and services rose 24% in the first half, while cost of revenue rose 6%.
- Mortgage Market first-half service revenue rose 2%, but segment operating income fell to $72.0m from $84.3m. Real Estate Market revenue fell 8% and reported a $13.7m operating loss versus $5.6m income. Other Businesses service revenue fell 27%, mainly from customer relationship management and IT infrastructure transitions.
- First-half operating cash flow was pressured by the $28.0m net payment on the previously accrued securities litigation settlement, lower net income and working-capital changes.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management said it expects operating cash flows to fund capital expenditures and required debt and interest payments for the next 12 months, while cautioning that strategic plans may not succeed and operations may not be profitable.
- Customer concentration is substantial: Ocwen accounted for 58% of consolidated revenue in Q2 and the first half. Another 16% of Q2 revenue and 17% of first-half revenue came from portfolios serviced by Ocwen where another party selected Altisource.
- Ocwen faces regulatory actions and litigation, and disclosed plans to transfer servicing rights to New Residential Investment Corp. Altisource warned that changes to Ocwen’s business, servicing portfolio, licenses, service-provider choices or pricing could materially reduce its revenue and potentially impair assets. Ocwen’s planned transition from Altisource’s REALServicing platform is expected to take multiple years; related first-half service revenue was $13.4m and was approximately break-even before tax.
- The CFPB had notified Altisource that it was considering a potential enforcement action related primarily to technology services provided to Ocwen. The company said the outcome and financial impact could not yet be estimated and that an action could materially adversely affect the business.
- A securities class action settlement was approved and dismissed with prejudice on May 30, 2017. Altisource paid $32m, including $4m funded by insurance; defendants denied wrongdoing. The filing also notes other governmental inquiries whose outcomes could not be estimated.
- Other notable items: the effective tax rate rose to 22.9% for the first half from 12.2%, primarily due to the mix of taxable income by jurisdiction. The company repurchased $18.6m of shares in the first half; debt covenants limit repurchases.
Important facts for investors to verify
- Track Ocwen-related revenue exposure, servicing transfers, regulatory developments and any changes to Altisource’s contract terms or pricing.
- Assess whether lower-margin business mix and higher outside-service costs continue to weigh on gross and operating margins.
- Reconcile operating cash flow with earnings, working-capital movements and settlement-related payments; monitor cash and securities available for liquidity.
- Review term-loan leverage, interest-rate exposure, covenant restrictions and capacity for debt or share repurchases.
- Follow the CFPB inquiry and other governmental matters for developments, potential financial exposure or required disclosures.