Altisource Portfolio Solutions S.A. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited, U.S. GAAP consolidated results. Altisource provides mortgage, real estate, consumer-debt and technology services through Mortgage Services, Financial Services and Technology Services.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $268.3m | $296.1m | $508.8m | $535.3m |
| Service revenue | $236.6m | $263.2m | $444.4m | $473.1m |
| Gross profit | $100.2m | $112.1m | $167.8m | $203.5m |
| Income from operations | $56.2m | $63.1m | $71.4m | $111.0m |
| Net income attributable to Altisource | $46.0m | $54.1m | $49.6m | $93.7m |
| Diluted EPS | $2.22 | $2.24 | $2.38 | $3.84 |
- Margins: Gross profit was 42% of service revenue in Q2 versus 43% a year earlier; operating income was 24% in both periods. For the first half, gross margin was 38% versus 43%, and operating margin was 16% versus 23%.
- Cash flow: First-half operating cash flow was $54.8m, down from $111.5m. Investing used $23.3m and financing used $62.8m; cash declined $31.3m to $130.1m.
- Liquidity and debt: June 30 cash was $130.1m and current assets were $270.9m versus current liabilities of $107.2m. Term debt carrying value was approximately $569.9m, with a 4.50% interest rate and maturity no earlier than December 2020, subject to default provisions. The company reported no mandatory excess-cash-flow prepayment for the first half.
- Capital spending and repurchases: First-half capital expenditures were $21.4m. The company spent $44.0m repurchasing shares and $17.7m on debt repayments/repurchases. It had about 2.0m shares remaining under its new repurchase authorization at quarter-end.
Material changes versus prior periods
- Q2 total revenue fell 9%; first-half revenue fell 5%. First-half service revenue declined 6%, including declines in Mortgage Services (8%) and Financial Services (8%); Technology Services service revenue increased 4%.
- Management attributed revenue pressure mainly to discontinued lender-placed insurance brokerage, fewer property-valuation referrals, lower mortgage charge-off collections and reduced Equator revenue. Asset-management growth, including Hubzu activity, partly offset these declines.
- First-half gross profit fell 18% and operating income fell 36%. Management cited lower-margin revenue mix, higher compensation costs and Technology Services investment costs. Q2 margins improved from the first quarter following cost actions and termination of Ocwen’s data-access agreement.
- Interest expense rose 50% year over year in both Q2 and the first half, reflecting the additional $200m term borrowing made in August 2014. First-half operating cash flow also weakened, partly due to lower earnings and payment timing, including incentive compensation.
Outlook, commentary, risks and unusual items
- Outlook: No numerical earnings or revenue guidance was provided. Management expects Ocwen-related servicing revenue to decline over time and is pursuing new default-services clients, origination technology, online real-estate marketplaces, and property-management and renovation growth. Management believes liquidity and operating cash flows will cover working capital, capital expenditures and debt service for at least the next 12 months, but cautions that plans may not succeed.
- Customer concentration: Ocwen accounted for 59% of consolidated revenue in both Q2 and the first half of 2015. A further 20% of Q2 revenue and 21% of first-half revenue was earned on Ocwen-serviced portfolios when another party selected Altisource. Ocwen’s regulatory, servicing-rights and litigation issues could reduce volumes, change pricing or lead to loss of business; management says the potential impact cannot be predicted.
- Unusual items: A $7.6m gain from settling the Equator earn-out reduced Q2 SG&A. A $1.1m gain arose from repurchasing $16m par value of debt at a discount. HLSS investment activity produced a $3.3m first-quarter impairment and a $1.4m Q2 gain, for a $1.9m net loss for the first half. These items affect period-to-period comparisons.
- Other risks and contingencies: Altisource disclosed a securities class action and two derivative suits involving Ocwen-related allegations; potential losses were not estimable. It was also responding to federal and state agency inquiries, whose outcomes and financial effects were unclear. Ocwen faces separate regulatory matters that could affect Altisource’s business.
- Subsequent event: On July 17, 2015, Altisource acquired CastleLine for $37.1m: $12.3m cash at closing, $10.5m payable over four years and $14.3m in shares, with some consideration tied to future employment.
Important facts for investors to verify
- Track Ocwen’s servicing portfolio, regulatory developments, customer volumes and pricing, given the company’s substantial revenue concentration.
- Assess whether cost reductions and diversification initiatives can offset lower revenue and restore first-half margins and cash generation.
- Review debt covenants, permitted share repurchases, scheduled repayments and the impact of interest-rate changes on debt service.
- Separate recurring operating performance from the Equator earn-out, HLSS investment and debt-extinguishment items when comparing earnings.
- Monitor the litigation and regulatory inquiries, as the filing states that outcomes and potential losses cannot currently be estimated.