Altisource Portfolio Solutions S.A. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited results; comparisons are with the three months ended March 31, 2016 unless stated otherwise. Altisource provides services and technology to the mortgage and real estate industries.
Financial results and position
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Revenue | $240.5 million | $250.1 million; down 4% |
| Service revenue | $229.8 million | $234.3 million; down 2% |
| Gross profit | $62.5 million | $81.3 million |
| Gross profit / service revenue | 27% | 35% |
| Operating income | $14.8 million | $27.7 million |
| Operating income / service revenue | 6% | 12% |
| Net income attributable to Altisource | $6.5 million | $18.5 million |
| Diluted earnings per share | $0.34 | $0.92 |
| Cash from operating activities | $(18.4) million | $29.0 million |
| Cash and cash equivalents | $117.1 million | $149.3 million at Dec. 31, 2016 |
| Available-for-sale securities | $63.2 million | $45.8 million at Dec. 31, 2016 |
| Debt | $478.2 million principal; $472.5 million net carrying value | $479.7 million principal at Dec. 31, 2016 |
| Total assets / total equity | $653.5 million / $72.4 million | $689.2 million / $62.2 million at Dec. 31, 2016 |
The term loan carried a 4.50% interest rate at quarter-end and matures December 9, 2020, subject to earlier acceleration under specified default conditions. Scheduled quarterly principal payments are approximately $1.5 million. The filing does not provide a single headline liquidity ratio.
Material changes and segment performance
- Revenue fell 4%, while cost of revenue rose 5% to $178.0 million. Management attributed margin compression mainly to a shift toward lower-margin property preservation and buy-renovate-sell activity, alongside declines in some higher-margin businesses.
- Mortgage Market service revenue increased 4% to $195.0 million, but operating income declined to $35.9 million from $39.9 million; operating margin was 18% versus 21%.
- Real Estate Market service revenue declined 18% to $19.2 million. The segment recorded a $6.4 million operating loss, compared with $3.3 million of operating income a year earlier, reflecting lower property preservation and REO sales and costs of the growing buy-renovate-sell program.
- Other Businesses, Corporate and Eliminations service revenue declined 31% to $15.7 million, mainly from lower customer relationship management and IT infrastructure services revenue. Segment operating loss narrowed to $14.7 million from $15.5 million.
- SG&A decreased 11% to $47.7 million, including lower intangible amortization, legal/professional services and marketing costs. Interest expense declined to $5.8 million, partly following 2016 term-loan repurchases.
- Cash declined by $32.2 million during the quarter. Operating cash use included the net payment of $28 million for the previously accrued securities litigation settlement, as well as working-capital movements and lower earnings. Investing cash use was $1.9 million; financing cash use was $11.9 million, including $10.6 million of share repurchases and $1.5 million of debt repayment.
Outlook, risks and unusual items
- Customer concentration: Ocwen generated 59% of consolidated revenue in Q1 2017, up from 56% a year earlier. A further 17% of revenue was earned on portfolios serviced by Ocwen where another party selected Altisource as provider. Management warns that reduced Ocwen business, portfolio transfers, pricing changes, or loss of Ocwen could materially hurt results and potentially lead to asset impairments.
- Ocwen developments: Ocwen was conducting a strategic review of its continued use of Altisource’s REALServicing platform. REALServicing revenue was $7.0 million, down from $9.9 million; management estimated its pretax income was approximately break-even and expected any transition to take multiple years. On April 20, 2017, after quarter-end, the CFPB and Florida filed separate complaints against Ocwen; the filing describes potential adverse consequences for Altisource if Ocwen’s operations or service-provider relationships are affected.
- Regulatory exposure: Altisource had received a CFPB NORA letter concerning technology services provided to Ocwen and had submitted a response. The company said the outcome and financial impact could not yet be estimated; an enforcement action could materially adversely affect its business, reputation and results.
- Litigation settlement: Altisource paid $32 million into a proposed securities class-action settlement fund, of which $4 million was funded by insurance. The court had preliminarily approved the settlement; final approval was scheduled for May 30, 2017. The company and individual defendants denied wrongdoing. A separate Ocwen shareholder derivative action was dismissed with prejudice without any monetary contribution by Altisource.
- Management’s liquidity view: Management believed available liquidity and operating cash flows would be sufficient for working capital, capital expenditures and debt service over the next 12 months, while cautioning that strategic initiatives may not succeed and operations may not be profitable. Expected Q2 payments included $1.5 million of principal and $5.4 million of interest.
- Accounting and unusual items: The company adopted a share-based compensation accounting change, recording a $0.9 million cumulative adjustment between additional paid-in capital and retained earnings. It preliminarily estimated that adoption of the new revenue standard could defer less than 5% of consolidated revenue, primarily software-development professional services. Available-for-sale Residential shares were valued at $63.2 million; the quarter included $12.7 million of after-tax unrealized gains in other comprehensive income.
- The company reported no material changes to risk factors from its 2016 Form 10-K. It identified interest-rate and foreign-currency exposure; a 1 percentage point increase in the Eurodollar rate was estimated to add about $4.7 million to annual interest expense.
Important facts for investors to verify
- Whether Ocwen’s regulatory proceedings, servicing transfers or REALServicing review change Altisource’s revenue, customer relationships or pricing.
- Final court approval and completion of the $32 million securities class-action settlement, including insurance recovery.
- Whether operating cash flow recovers from the Q1 outflow and how much cash remains available after working-capital needs, debt service and repurchases.
- Whether the lower-margin segment mix and Real Estate Market operating loss improve as growth initiatives develop.
- The eventual effects of the revenue-recognition standard and other accounting changes on reported results.