Altisource Portfolio Solutions S.A. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Altisource provides mortgage, real estate, consumer-debt and technology services through Mortgage Services, Financial Services and Technology Services. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $250.1 | $240.5; up 4% |
| Service revenue | $234.3 | $207.8; up 13% |
| Gross profit | $81.3 | $67.7; up 20% |
| Gross profit / service revenue | 35% | 33% |
| Operating income | $27.7 | $15.3; up 81% |
| Operating income / service revenue | 12% | 7% |
| Net income attributable to Altisource | $18.5 | $3.7 |
| Diluted EPS | $0.92 | $0.18 |
| Operating cash flow | $29.0 | $(15.9) |
| Capital expenditures | $6.0 | $3.9 |
| Cash and cash equivalents at quarter-end | $159.7 | $179.3 at December 31, 2015 |
| Available-for-sale securities | $30.4 | None reported at December 31, 2015 |
| Senior secured term loan principal outstanding | $535.1 | $536.6 at December 31, 2015 |
Q1 net cash decreased by $19.6 million, reflecting $35.4 million used in investing activities and $13.3 million used in financing activities. Investing included a $29.4 million purchase of 2.5 million shares of Altisource Residential common stock. Financing included $11.7 million of share repurchases and a $1.5 million scheduled debt repayment. Current assets were $314.5 million and current liabilities $117.6 million at March 31, 2016.
Material changes and segment performance
- Mortgage Services: Service revenue increased 27% to $183.2 million, driven mainly by higher property inspection and preservation referrals and more non-Ocwen properties sold through Hubzu. Operating income rose to $50.5 million, while operating margin on service revenue eased to 28% from 29%.
- Financial Services: Service revenue decreased 10% to $20.1 million, primarily due to lower mortgage charge-off collection referrals. Operating income fell to $1.5 million from $2.5 million.
- Technology Services: Revenue decreased 22% to $40.6 million, reflecting lower IT infrastructure services during cost reductions and the transition of technology-infrastructure resources to Ocwen, as well as lower rates and volumes for some software services. The segment reported an operating loss of $7.8 million.
- Service revenue growth and improved consolidated operating results were partly offset by lower Financial and Technology Services revenue. Q1 2015 included a $3.3 million impairment loss on HLSS securities; there was no comparable charge in Q1 2016. This, lower interest expense and lower corporate costs also contributed to the year-over-year improvement in pretax income.
- Reported total revenue includes reimbursable expenses and non-controlling interests, which Altisource says carry no margin. Reimbursable expenses fell 52% to $15.5 million, in part because Ocwen REO preservation pricing shifted from fixed-fee-plus-reimbursement to per-service fees; this also moved some amounts from reimbursable revenue to service revenue.
Outlook, risks and unusual items
- Customer concentration: Ocwen accounted for 56% of consolidated revenue in Q1 2016 ($140.1 million); a further 19% of revenue came from portfolios serviced by Ocwen where another party selected Altisource. Management warns that regulatory, legal or servicing developments affecting Ocwen could reduce service volumes, change pricing or result in lost business, and could lead to impairment of assets. Altisource says it has a cost realignment plan and initiatives to diversify customers and revenue, but gives no assurance they will succeed.
- Management outlook: Management believes current liquidity and operating cash flows will fund working capital, capital expenditures, debt service and other needs, and expects sufficient operating cash flow for those needs over the next 12 months. It also describes growth initiatives in servicer solutions, origination, consumer real estate and real estate investor services. No specific revenue or earnings guidance is provided.
- Debt and subsequent event: The term loan carried a 4.50% interest rate at quarter-end and matures December 9, 2020, subject to acceleration upon specified defaults. In April 2016, the company repurchased $28.0 million par value of the loan at a 13.1% discount; the resulting extinguishment accounting was to be recorded in Q2. Debt covenants constrain, among other things, additional borrowing and share repurchases.
- Legal and regulatory matters: The filing describes a securities class action and two shareholder derivative matters related to alleged conduct involving Ocwen; the company says outcomes and potential losses cannot be reasonably estimated. It is also responding to government inquiries concerning aspects of its business; potential outcomes and financial impacts are not yet estimable.
- Controls: Management concluded internal control over financial reporting was not effective at March 31, 2016 due to a previously disclosed material weakness in controls over impairment indicators for long-lived assets and impairment analysis of indefinite-lived assets, primarily goodwill. Remediation was being planned, with no timetable yet established.
- Other exposure: A one-percentage-point rise in the Eurodollar Rate would increase annual interest expense by approximately $2.3 million; a one-percentage-point change in the Indian rupee relative to the U.S. dollar would change annual expenses by approximately $1.1 million. The Luxembourg tax ruling contributing to a below-statutory effective tax rate expires in 2019 unless extended or renewed.
Key facts for investors to verify
- Whether Ocwen-related regulatory or servicing developments affect contracted work, pricing, customer retention or revenue concentration.
- Whether service-revenue growth translates into sustained margins and operating cash flow, particularly given segment trends and seasonal effects.
- The Q2 accounting impact and updated debt balance following the April 2016 discounted loan repurchase, and the company’s covenant and liquidity headroom.
- Progress and timing of remediation for the material weakness in impairment controls, and any subsequent impairment assessments.
- Developments in the disclosed lawsuits and government inquiries, including any change in the company’s ability to estimate potential exposure.