Altisource Portfolio Solutions S.A. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited. Altisource provides technology-enabled mortgage, real estate, financial and customer-management services. Ocwen is its largest customer.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $148.8 | $139.1 | +7% |
| Service revenue | $127.6 | $108.5 | +18% |
| Gross profit | $51.9 | $47.3 | +10% |
| Income from operations | $33.2 | $30.3 | +10% |
| Net income attributable to Altisource | $27.5 | $25.2 | +9% |
| Diluted earnings per share | $1.10 | $1.02 | +8% |
| Operating cash flow | $9.6 | $27.8 | -66% |
- Gross profit was 41% of service revenue, compared with 44% a year earlier; operating income was 26% of service revenue, versus 28%.
- Cash and cash equivalents were $77.3 million at March 31, down from $105.5 million at year-end 2012. Total assets were $431.4 million; current assets were $210.1 million and current liabilities $66.9 million.
- Long-term debt had a $199.5 million principal balance, presented at $197.6 million net of discount, including $2.0 million current. The term loan interest rate was 5.75% at quarter-end.
- Investing cash outflow was $14.5 million, including the Homeward acquisition; financing cash outflow was $23.3 million, including $22.0 million of share repurchases.
Material changes versus the prior comparable period
- Service revenue growth was led by Mortgage Services (+22%) and Technology Services (+19%); Financial Services service revenue declined 9%. Mortgage and Technology revenue benefited from Ocwen portfolio growth, origination-related services and technology licensing. Financial Services asset-recovery revenue fell 35%, primarily on lower credit-card charge-off placements, partly offset by 18% growth in customer relationship management.
- Consolidated service revenue increased faster than total revenue because reimbursable expenses declined 29%, largely reflecting lower property-preservation orders and utility payments.
- Technology Services cost of revenue increased 49%, reflecting investment in next-generation software, personnel and infrastructure. Its operating margin on service revenue fell to 6% from 22%. Mortgage Services’ gross margin improved to 47% from 46%.
- Interest expense rose to $3.2 million from $15,000 following the 2012 term loan. A $0.9 million interest-income contribution, mainly from the Ocwen loan, partly offset this expense.
- Operating cash flow fell as working capital absorbed $27.0 million, principally through increased receivables and reductions in payables and other liabilities. Management reported that a $25.0 million receivable was collected on April 1; including that collection, Q1 operating cash flow would have been $34.5 million.
Outlook, management commentary, risks and unusual items
- On March 29, Altisource acquired certain Homeward fee-based businesses from Ocwen for approximately $87.0 million. The preliminary allocation included $80.4 million of customer-relationship intangible assets; the allocation remained subject to revision. Ocwen-related service agreements were extended through August 2025, with exclusivity for specified Homeward services.
- On April 12, Altisource agreed to pay $128.8 million for exclusivity over certain services for Ocwen’s ResCap servicing portfolio: $80.0 million at closing and $48.8 million in installments. The company intended to borrow up to $200 million under its loan’s accordion feature, including to fund this transaction and for general purposes; availability on acceptable terms was not assured.
- Management expected non-GSE loans on Ocwen’s REALServicing platform to nearly double by Q4 2013, as Homeward and ResCap portfolios were boarded. It anticipated default-business operating margins improving by about seven percentage points by year-end, including after Homeward and ResCap intangible amortization. These are expectations, not guaranteed outcomes.
- Management planned continued growth in origination-related services, Hubzu and single-family rental services, and aimed to improve Financial Services growth and margins. It expected Technology Services expenditures and corporate overhead to stabilize in 2014. A possible Hubzu separation was exploratory, with no certainty it would occur.
- Key risks include customer concentration and reliance on Ocwen (61% of consolidated revenue was related-party revenue), mortgage delinquency and origination levels, servicing-portfolio boarding and integration, technology investment and execution, and debt-covenant limits on borrowing and repurchases. Repurchases were restricted by the term-loan agreement, with no repurchase capacity under that agreement at quarter-end.
- Management said current litigation was not expected to have a material effect. The filing reported no material changes to previously disclosed risk factors and no material changes in internal controls.
Important facts for investors to verify
- Whether Homeward and ResCap portfolio boarding, exclusivity and integration deliver the revenue growth and margin improvement management anticipated.
- Actual funding, borrowing capacity, covenant terms and cash demands associated with the $128.8 million ResCap agreement and other planned uses of capital.
- Receivable collection timing, working-capital conversion and the sustainability of operating cash flow as the business grows.
- Dependence on Ocwen and related-party arrangements, including the continued duration and economics of those contracts.
- Technology Services investment levels, returns and the expected stabilization of technology spending and overhead.