Business context and reporting period
Altisource Portfolio Solutions S.A. is a Luxembourg-based provider of mortgage, real estate and consumer-debt services and technology. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2013; comparisons are with the same 2012 periods. Its reporting segments are Mortgage Services, Financial Services and Technology Services.
Financial performance and position
Amounts are in millions of dollars except per-share data. Revenue includes pass-through reimbursable expenses and non-controlling interests; service revenue is the company’s fee-based revenue measure.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $210.8 | $144.0 | $545.8 | $427.3 |
| Service revenue | $180.4 | $118.6 | $469.6 | $345.2 |
| Gross profit | $76.6 | $49.7 | $197.6 | $148.5 |
| Operating income | $45.1 | $31.2 | $117.6 | $94.0 |
| Net income attributable to Altisource | $36.0 | $27.0 | $94.5 | $80.3 |
| Diluted EPS | $1.42 | $1.08 | $3.77 | $3.23 |
- Q3 total revenue grew 46% year over year and nine-month revenue grew 28%; service revenue rose 52% and 36%, respectively. Growth reflected Ocwen’s Homeward and ResCap portfolio activity, Financial Services expansion and higher Technology Services licensing revenue.
- Gross profit as a share of service revenue was 42% in both Q3 periods and 42% for the 2013 nine-month period versus 43% in 2012. Operating income as a share of service revenue was 25% in Q3 2013 versus 26%; nine-month margin was 25% versus 27%.
- Interest expense was $6.2 million in Q3 and $14.3 million for nine months, primarily reflecting the term loan. The nine-month effective tax rate was 6.0%, versus 9.1% in 2012.
- Operating cash flow was $134.6 million for nine months, compared with $97.1 million. Investing cash outflow was $137.5 million, including $204.6 million for acquisitions, partly offset by the $75.0 million Ocwen loan repayment and $12.6 million sale proceeds from Correspondent One. Financing cash inflow was $109.9 million. Cash increased by $107.1 million to $212.6 million.
- At September 30, cash was $212.6 million; total assets were $647.8 million and equity was $173.5 million. Net long-term debt was $396.7 million, including $4.0 million current; cash less net debt was approximately negative $184.1 million.
Material changes versus prior period
- Homeward and ResCap fee-based businesses were acquired from Ocwen in March and April 2013 for $75.8 million and $128.8 million, respectively. Their results contributed $102.9 million of service revenue from acquisition through September 30. Acquired customer-relationship intangibles increased amortization and SG&A.
- Debt increased substantially: the senior secured term loan principal rose from $200 million to $400 million in May 2013. The loan carried a 5.75% rate at September 30 and matures in November 2019, subject to scheduled amortization and covenants.
- Share repurchases totaled $87.4 million for the first nine months of 2013, versus $16.8 million in 2012. Treasury stock increased to $151.9 million from $78.0 million at year-end 2012.
- Ocwen remained the largest customer and a related party: it represented 68% of consolidated Q3 revenue and 65% for the first nine months, versus 60% in each 2012 period.
- Segment service revenue grew year over year in Q3: Mortgage Services 48%, Financial Services 78% and Technology Services 32%. Mortgage Services’ nine-month operating margin declined to 36% from 40%; Financial Services improved to 22% from 7%; Technology Services declined to 11% from 15%.
Outlook, commentary and risks
- Management said it expected sufficient cash flow for operations, capital expenditures and required debt service, and to support share repurchases. It anticipated overhead spending reaching a stable level in 2014 and expected to pursue margin improvement through workforce efficiency, vendor substitution and technology. The filing gives no specific earnings or revenue guidance.
- Management viewed growth opportunities in Hubzu, single-family rental services, Ocwen portfolio servicing, mortgage origination, collections and customer relationship management. It reported that Hubzu had sold over 23,000 homes in the prior 12 months and was expanding listings and auction activity.
- The planned Equator acquisition had consideration of up to $150 million: $70 million initial and up to $80 million contingent on profitability targets. FTC review was delayed; the application was refiled early in Q4, and management expected a Q4 close but cautioned there was no assurance.
- Key risks include reliance on Ocwen and related-party activity, customer retention, mortgage delinquency and origination levels, portfolio boarding timing, seasonal revenue, margin variability, technology investment and execution, debt covenant restrictions, and regulatory or tax changes. Management reported no material change to previously disclosed risk factors.
- Management stated that current legal proceedings were not expected to have a material impact. Customers’ escrow balances of $56.8 million were held off balance sheet. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Investor facts to verify
- How much of growth and future revenue depends on Ocwen, given its 65% share of nine-month consolidated revenue and the related-party relationship?
- Whether Homeward and ResCap portfolio boarding, acquired revenue and expected operating benefits develop as anticipated, and how intangible amortization affects reported earnings.
- Equator’s regulatory clearance, closing, final purchase-price adjustments and achievement of contingent profitability targets.
- Debt covenant headroom, variable-rate exposure, scheduled repayments and the company’s capacity to fund acquisitions and repurchases while maintaining liquidity.
- Whether management’s margin-improvement initiatives offset lower-margin service mix, hiring ahead of portfolio boarding and technology-development costs.