Altisource Portfolio Solutions S.A. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; filed July 26, 2018. Altisource provides services, technology and marketplaces for the mortgage and real estate industries. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and position
- Q2 revenue: $218.6 million, down 13% from $250.7 million a year earlier. Service revenue was $208.9 million, down 12%.
- Q2 earnings: Gross profit was $55.4 million; operating income was $12.4 million; net income attributable to Altisource was $1.6 million, or $0.09 per diluted share, versus $9.0 million, or $0.48, in Q2 2017. Gross profit was 27% of service revenue and operating income was 6%.
- First-half results: Revenue was $416.0 million, down 15%; gross profit was $105.6 million; operating income was $19.5 million. Altisource reported a net loss of $1.4 million and an attributable net loss of $2.6 million, or $0.15 per share, compared with attributable net income of $15.6 million, or $0.84 per share, in first-half 2017. Gross profit was 27% of service revenue and operating income was 5%.
- Cash flow and liquidity: Operating cash flow was $23.3 million for the first half, versus $12.5 million a year earlier. Investing cash outflow was $2.8 million and financing cash outflow was $39.0 million. At June 30, cash and cash equivalents were $84.6 million; cash, cash equivalents and restricted cash totaled $90.4 million. Current assets were $243.2 million and current liabilities were $133.9 million.
- Debt: The company reported $403.8 million of term loans outstanding ($395.5 million net carrying amount after debt costs and discount) and no revolver borrowings. The new Term B Loans bear interest at 6.33% at June 30 and mature in April 2024; the $15 million revolving facility matures in April 2023. Management expected $41.2 million of mandatory principal repayments and $24.7 million of interest payments over the next 12 months.
- Other balance-sheet items: Total assets were $809.9 million and equity was $312.3 million at June 30. The $43.2 million investment in RESI common stock was marked to market.
Material changes versus prior comparable periods
- Revenue declines were concentrated in the Mortgage Market, where first-half service revenue fell 16%, chiefly as Ocwen’s serviced portfolio and delinquent-loan count contracted. The average number of loans Ocwen serviced on REALServicing fell 13% year over year.
- Ocwen remained the largest customer, representing 51% of first-half revenue and 50% of Q2 revenue. Direct revenue from Ocwen was $210.8 million in the first half, versus $285.6 million in 2017.
- Despite lower revenue, cost reductions helped maintain consolidated gross margin at 27% of service revenue. First-half operating margin declined to 5% from 6%; Mortgage Market operating income rose to $75.6 million, while Real Estate Market and Other Businesses, Corporate and Eliminations reported operating losses of $16.6 million and $39.5 million, respectively.
- Interest expense rose to $12.9 million for the first half from $11.3 million. The April refinancing generated a $4.4 million loss from writing off prior debt costs and discount. First-half other expense also included a $6.0 million unrealized loss on RESI shares; the comparable 2017 period included a $3.9 million gain on early debt extinguishment.
- Altisource adopted ASC 606 on January 1, 2018 using the cumulative-effect method. The adoption reduced opening retained earnings by $10.4 million; 2017 comparative results were not restated. For first-half 2018, the company reported $2.25 million less gross profit under the new standard than it would have reported without adoption.
- The company repurchased $21.1 million of shares in the first half. The renewed program authorized repurchases of up to 4.3 million shares, subject to legal and credit-agreement limits.
Outlook, commentary and risks
- No specific revenue or earnings guidance is provided. Management said existing cash, expected operating cash flow and revolver availability should be sufficient for liquidity needs over the next 12 months, but cautioned that plans may not succeed and operations may not be profitable.
- Management expects revenue from NRZ to increase as Ocwen-serviced mortgage servicing rights transfer to NRZ, with Ocwen revenue declining. Altisource expected NRZ to become its largest customer following further transfers and an anticipated services agreement; the Services Letter of Intent ran through August 31, 2018, and there was no assurance a definitive agreement would be signed.
- Ocwen’s regulatory, legal and operational challenges could reduce service volumes, change pricing or lead to loss of business. Ocwen was transitioning from Altisource’s REALServicing platform; Altisource supported the transition and did not anticipate a material effect on its other Ocwen services.
- The CFPB informed Altisource on April 3, 2018 that its investigation was complete and its enforcement staff did not then intend to recommend enforcement. Other governmental inquiries remained unresolved, and the company said their outcomes and potential financial impact could not be estimated.
- The credit agreement includes restrictive covenants, mandatory repayment provisions and default triggers. The company also disclosed that shareholder “group” formation could trigger termination or default provisions in certain material agreements.
- Other considerations include seasonal revenue patterns, dependence on a concentrated customer base, variable-rate debt exposure, and foreign-exchange exposure, particularly to the Indian rupee.
Important facts for investors to verify
- Progress on the NRZ Services Agreement, MSR transfers, and the related impact on customer concentration and revenue.
- Ocwen’s loan-servicing volumes, regulatory developments, servicing-platform transition, and continued demand for Altisource services.
- Cash generation, debt repayment requirements, interest rates, and compliance with credit-agreement covenants.
- Whether restructuring and cost reductions can offset ongoing revenue declines without impairing service levels or growth initiatives.
- Effects of ASC 606 and RESI share-price movements when assessing reported earnings and comparisons with prior periods.