Altisource Portfolio Solutions S.A. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited fourth-quarter results; this is an annual report, not a standalone quarterly filing.
Business context
Altisource provides mortgage, real estate, consumer debt, software and technology services through Mortgage Services, Financial Services and Technology Services. Its largest customer is Ocwen Financial Corporation. Management’s strategy emphasizes expanding servicer and origination solutions, consumer real estate and real estate investor services, while diversifying customers and strengthening compliance.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $997.3 million | $1,051.5 million |
| Service revenue | $942.6 million | $940.9 million |
| Gross profit | $307.3 million | $364.1 million |
| Operating income | $65.1 million | $79.1 million |
| Net income attributable to Altisource | $28.7 million | $41.6 million |
| Diluted EPS | $1.46 | $2.02 |
| Adjusted net income attributable to Altisource (non-GAAP) | $90.1 million | $143.5 million |
| Operating cash flow | $126.8 million | $195.4 million |
Total revenue declined 5%, mainly because reimbursable expenses and non-controlling-interest revenue fell; service revenue was essentially flat. Gross profit as a share of service revenue decreased to 33% from 39%, and operating income as a share of service revenue fell to 7% from 8%. Management attributed margin pressure to growth in lower-margin property preservation work, increased related costs, and declining Technology Services revenue.
At December 31, 2016, cash and cash equivalents were $149.3 million, and available-for-sale securities were $45.8 million. Total assets were $689.2 million; total liabilities were $627.0 million. The senior secured term loan had $479.7 million principal outstanding, a 4.50% interest rate, and a December 2020 maturity. The company repurchased $51.0 million par value of debt during 2016, recognizing a $5.5 million gain on extinguishment. Management said it expected operating cash flows to fund capital expenditures and required debt and interest payments for the next 12 months.
Fourth-quarter revenue was $238.6 million, with gross profit of $65.8 million and a net loss attributable to Altisource of $20.4 million. The quarter included the securities litigation settlement charge described below.
Material changes versus prior periods
- Mortgage Services service revenue increased 11% to $749.9 million, primarily from property preservation and asset management growth; its gross margin declined to 39% from 46%.
- Financial Services service revenue decreased 16% to $74.2 million, reflecting lower customer relationship management volumes and reduced or discontinued unprofitable client work. Operating income declined to $2.7 million from $8.9 million.
- Technology Services service revenue fell 26% to $160.1 million, due to lower rates and volumes from Ocwen, fewer loans on REALServicing and the continued transfer of technology infrastructure resources to Ocwen. Segment operating loss was $27.6 million, compared with a $66.4 million loss in 2015; 2015 included $71.8 million of impairment charges.
- Operating cash flow fell 35%. Cash declined to $149.3 million from $179.3 million, while debt principal outstanding decreased to $479.7 million from $536.6 million.
Outlook, risks and unusual items
- Customer concentration: Ocwen accounted for 56% of 2016 consolidated revenue ($561.9 million). Separately, another 19% was earned on Ocwen-serviced portfolios where a third party selected Altisource. Ocwen’s regulatory, financial and servicing-rights challenges could reduce demand, affect pricing or lead to lost business. The filing provides no numerical revenue or earnings guidance.
- Regulatory matter: The CFPB issued a Notice and Opportunity to Respond and Advise in November 2016 concerning an alleged federal-law violation primarily involving technology services provided to Ocwen. Altisource responded in December and said the outcome and potential financial impact could not yet be estimated. An enforcement action, if brought, could materially adversely affect the company.
- Litigation settlement: Altisource recorded a $28.0 million net charge in 2016 ($32.0 million settlement amount less a $4.0 million insurance recovery) for a securities class action settlement. The company denied wrongdoing. At the filing date, the court had preliminarily approved the settlement, with final approval scheduled for May 30, 2017; payment was anticipated in mid-2017.
- Debt and liquidity risks: The term loan is secured by substantially all assets, has variable interest rates and restricts additional borrowing, dividends and share repurchases. A one-percentage-point increase in the Eurodollar rate was estimated to increase annual interest expense by about $3.7 million. The company reported no mandatory excess-cash-flow prepayment for 2016.
- Other items: Altisource invested $48.2 million in Residential common shares, valued at $45.8 million at year-end. It also launched and expanded Owners.com offerings and grew its managed rental-home count to 4,357. A prior-year Technology Services impairment was driven principally by lower expected Ocwen-related revenue. The company reported that a previously identified material weakness in impairment controls had been remediated; management and the auditor reported effective internal control over financial reporting at year-end, with the audit excluding certain Granite acquisition controls.
Key facts for investors to verify
- Whether Ocwen’s servicing portfolio, regulatory position, contract terms or purchasing volumes change, and the pace of customer diversification.
- Final court approval, insurance contribution and actual cash payment for the $32.0 million securities settlement.
- Any CFPB enforcement action or outcome of other government inquiries, including related costs or business restrictions.
- Technology Services revenue and profitability trends, and whether growth initiatives can offset continuing Ocwen-related declines.
- Cash generation, debt repayments, covenant headroom and the effect of variable interest rates through the 2020 loan maturity.
- Execution and profitability of new offerings and the impact of the Residential share investment and other significant capital allocation decisions.