Altisource Portfolio Solutions S.A. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited U.S. GAAP results. Unless noted, amounts are in U.S. dollars. The company provides mortgage, real estate, consumer-debt and technology services through Mortgage Services, Financial Services and Technology Services.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $239.3 million | $148.8 million | +61% |
| Service revenue | $210.0 million | $127.6 million | +65% |
| Gross profit | $91.5 million | $51.9 million | +76% |
| Operating income | $47.9 million | $33.2 million | +44% |
| Net income attributable to Altisource | $39.6 million | $27.5 million | +44% |
| Diluted EPS | $1.61 | $1.10 | +46% |
| Operating cash flow | $36.3 million | $9.6 million | +280% |
- Gross profit was 44% of service revenue, up from 41%; operating income was 23% of service revenue, down from 26%, as SG&A grew faster than service revenue.
- Cash and cash equivalents were $116.4 million at March 31, versus $130.3 million at year-end 2013. Operating cash flow was offset by $13.2 million of investing outflows and $37.0 million of financing outflows.
- Net long-term debt was $394.3 million, including a $4.0 million current portion; the loan’s stated rate was 4.50% at quarter-end and maturity is December 2020. The company reported no mandatory prepayments due for the quarter.
- Current assets were $254.6 million and current liabilities $134.5 million. Accounts receivable rose to $122.1 million from $101.3 million at year-end.
Material changes and business drivers
- Service revenue rose across all three segments: Mortgage Services $146.5 million (+52%), Financial Services $24.3 million (+50%) and Technology Services $47.5 million (+135%). Growth reflected Ocwen portfolio expansion and expanded services, Financial Services growth, and the Equator acquisition completed in November 2013.
- Management said Ocwen’s average loans serviced on REALServicing increased to 1.9 million from 0.9 million a year earlier. Mortgage Services growth was strongest in asset management; default-management revenue fell 47%, and origination-management revenue fell 57%.
- SG&A increased 133% to $43.5 million. Management attributed much of the increase to acquisition-related intangible amortization, which rose to $9.5 million from $1.2 million, along with Hubzu marketing, occupancy and staffing costs.
- Q1 2014 included $35.8 million of share repurchases and $12.9 million of capital expenditures. The company repurchased 325,146 shares at a weighted-average $109.97 per share during the quarter.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management expects continued investment in next-generation technology; it anticipates Technology Services margins will remain constrained while that investment continues. Management stated it expects cash generation to fund operations, capital spending, required debt service and repurchases.
- Ocwen and its subsidiaries generated 61% of consolidated revenue in Q1 2014, compared with 60% in Q1 2013. Service agreements extend through August 2025, subject to termination provisions. The filing highlights the risk that a loss or reduction of this relationship, or adverse regulatory impact on Ocwen, could materially affect results.
- Other risks include extensive and changing regulation of mortgage, foreclosure, insurance and debt-collection activities; foreclosure volumes; customer retention; origination levels; technology failures; and access to debt financing. Management said current legal proceedings were not expected to have a material financial impact.
- Equator’s purchase agreement includes up to $80 million of earn-out consideration; $46.0 million was its estimated fair value at March 31, 2014. The filing also notes seasonality: Financial Services collections tend to be stronger in Q1, while Mortgage Services activity is affected by seasonal REO sales.
- Approximately $97.2 million of customer escrow and trust balances were held off balance sheet at March 31, 2014. Share repurchases are subject to Luxembourg-law and debt-agreement limits; the filing cited approximately $15 million of Luxembourg-law capacity and $95 million of loan-agreement capacity.
Important facts for investors to verify
- Whether growth and cash conversion can persist as receivables expand; operating cash flow benefited from higher earnings and favorable working-capital changes.
- How much revenue and earnings remain dependent on Ocwen, and any developments affecting its servicing portfolio, regulatory position or purchasing commitments.
- Equator earn-out performance, final purchase-price adjustments and integration costs, as well as the impact of substantial acquisition-related amortization.
- Debt covenants and restrictions on additional borrowing and repurchases, and the company’s capacity to fund investment, debt service and buybacks concurrently.
- Trends in default-management and origination activity, where Q1 revenue declined, and the timing and cost of next-generation technology investment.