Altisource Portfolio Solutions S.A. — Q1 2019 Form 10-Q
Business context and reporting period. Altisource is a provider of services, marketplaces and technology for the real estate and mortgage industries. This unaudited filing covers the three months ended March 31, 2019, compared with the same period in 2018. The company reorganized its internal reporting structure effective January 1, 2019, as part of Project Catalyst.
Key financial results
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $169.9 million | $197.4 million; down 14% |
| Service revenue | $165.0 million | $188.8 million; down 13% |
| Gross profit and gross margin on service revenue | $45.8 million; 28% | $50.2 million; 27% |
| Operating income and margin on service revenue | $0.2 million; less than 1% | $7.1 million; 4% |
| Net loss attributable to Altisource | $3.2 million; diluted loss per share $0.20 | $4.1 million; diluted loss per share $0.24 |
| Cash used in operating activities | $6.7 million | $8.6 million used |
| Cash, cash equivalents and restricted cash at quarter-end | $55.4 million | $89.0 million at March 31, 2018 |
| Debt | $338.8 million principal; $331.8 million net carrying amount | No quarter-on-quarter comparison shown here |
At March 31, 2019, cash and cash equivalents were $51.5 million, current assets were $214.7 million and current liabilities were $110.8 million. The company had no borrowings under its $15 million revolving credit facility. Its term loans carried a 6.6% interest rate and mature in April 2024; scheduled principal payments begin in March 2020. Management said existing cash, expected operating cash flows and revolving-facility availability should meet liquidity needs for the next 12 months.
Material changes and management commentary
- Revenue declines reflected reduced Ocwen portfolio size and delinquent-loan volumes, RESI portfolio runoff, and the end of certain transitional brokerage revenue. Field Services service revenue rose 4%, while Marketplace fell 26% and Professional Services fell 17%.
- Cost of revenue fell 16%, faster than revenue, and gross margin on service revenue improved to 28%. Management attributed the improvement partly to Project Catalyst, although lower revenue and $4.4 million of restructuring charges contributed to operating income falling to $0.2 million.
- The smaller net loss versus 2018 was helped by a $2.2 million unrealized gain on RESI shares, compared with a $7.5 million unrealized loss in the prior-year quarter. Interest expense rose 15% to $6.7 million, reflecting higher loan rates and lease-related interest.
- Operating cash use improved year over year, but the company still used $6.7 million. The filing cites working-capital movements and $6.9 million of sales-tax payments as factors.
Outlook, transactions, risks and unusual items
- Financial Services sale: Altisource agreed to sell the business to Transworld Systems Inc. for $44 million: $40 million at closing, subject to a working-capital adjustment, and $4 million one year later. Closing was anticipated before the end of Q3 2019, subject to conditions including regulatory consents. Management estimated a pretax gain of more than $20 million and intended to use the upfront proceeds to repay term debt. The transaction could be delayed or fail to close.
- Project Catalyst: The company expected further restructuring costs during 2019 and estimated future costs relating to the plan at approximately $13 million to $17 million. It aims to reduce costs and improve operating margins; the filing provides no formal earnings or revenue guidance.
- Customer concentration: Ocwen generated 58% of Q1 revenue, up from 52% a year earlier. Regulatory, financial or servicing changes at Ocwen could reduce referrals, pricing or purchased services and materially affect Altisource. NRZ-related brokerage revenue was also lower year over year.
- Sales tax: The company recorded a $2.1 million Q1 loss for estimated sales-tax exposure, in addition to $6.2 million recorded in 2018. It began collecting and remitting tax where applicable but may not recover all amounts from clients; future estimates could change materially.
- Lease accounting: Adoption of the new lease standard added $42.1 million of right-of-use assets and $45.5 million of lease liabilities. It also changed expense presentation, including lower occupancy costs and higher depreciation and interest.
- Other risks and contingencies: Altisource is responding to governmental inquiries and cannot yet estimate their potential financial impact. It said existing litigation was not expected to have a material effect. The floating-rate debt exposes the company to rate changes; a one-percentage-point increase in the Eurodollar rate was estimated to raise annual interest expense by about $3.4 million.
Important facts for investors to verify
- Whether the Financial Services sale closed on schedule, the final proceeds and working-capital adjustment, and the use of proceeds for debt reduction.
- Whether Ocwen’s servicing portfolio, regulatory position, agreements or service volumes change, given its 58% share of Q1 revenue.
- Actual remaining Project Catalyst costs and whether savings improve operating income and margins as revenue evolves.
- Cash conversion, liquidity and compliance with debt covenants, including the effect of floating interest rates and upcoming principal payments.
- Final sales-tax exposure and recoveries from clients, as well as developments in the governmental inquiries.