ASPS

Business Context and Reporting Period

Company: Altisource Portfolio Solutions S.A.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Key Event: On August 10, 2009, Altisource became a stand-alone public company following its separation from Ocwen Financial Corporation. Prior to this date, it was a wholly-owned subsidiary. The company operates in three segments: Mortgage Services, Financial Services, and Technology Products.

Key Financial Metrics (Year Ended Dec 31, 2009)

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 26% to $202.8 million, driven primarily by the Mortgage Services segment, which grew 88% to $103.1 million due to the rollout of residential default services and expanded relationships with Ocwen.
• Profitability Expansion: Net income surged 182% to $26.0 million. Operating margin improved to 18% from 11% in 2008, aided by higher gross margins and cost reduction initiatives in Financial Services.
• Segment Performance:
  • Mortgage Services: Revenue grew significantly due to new default management and asset management services.
  • Financial Services: Revenue declined 13% to $64.4 million due to lower collection rates in a difficult economic environment, though EBITDA improved due to cost cuts.
  • Technology Products: Revenue increased 5% to $47.5 million, with growth in REALSuite offsetting declines in IT infrastructure services.
• Liquidity: Cash flow from operating activities increased 15% to $33.3 million. The company terminated its revolving credit facility in June 2009 and ended the year with no outstanding borrowings on that line.

Guidance, Outlook, and Risks

• Outlook: Management expects significant revenue growth in 2010 driven by the completion of the national rollout of default services, the national expansion of title agency services, and the inclusion of The Mortgage Partnership of America (MPA) acquired in February 2010.
• Customer Concentration: The company faces high customer concentration risk. Ocwen accounted for 47% of total revenue in 2009. American Express and Assurant accounted for 16% and 12%, respectively. The loss of Ocwen or a reduction in its portfolio could materially impact results.
• Regulatory Risks: The business is subject to extensive federal, state, and local regulations regarding debt collection, foreclosure, and mortgage servicing. Non-compliance could result in fines, loss of licensure, or litigation.
• Tax Matters: The company has agreed to indemnify Ocwen for certain tax liabilities related to the separation. If the distribution is not treated as tax-free, significant tax liabilities could arise.
• Legal Contingencies: A binding arbitration ruling in March 2010 required the company to pay $1.4 million to Noble Systems Corp, which was accrued in 2009.

Investor Verification Checklist

• Ocwen Dependency: Verify the stability of the 8-year service agreements with Ocwen and the potential impact of Ocwen's portfolio changes on Altisource's revenue.
• Reimbursable Expenses: Note that $16.1 million of Mortgage Services revenue consists of pass-through costs with zero margin; verify the trend of core margin revenue.
• Goodwill and Intangibles: Review the $9.3 million goodwill and $33.7 million intangible assets, noting the "Component 2" goodwill reduction mechanism that impacts equity.
• MPA Acquisition: Assess the integration progress and financial impact of the $29 million cash acquisition of The Mortgage Partnership of America completed in February 2010.
• Legal Exposure: Monitor the status of the Noble Systems arbitration and other pending litigation mentioned in Note 14.