Altisource Portfolio Solutions S.A. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 26, 2019. Altisource provides mortgage and real estate services, marketplaces and technologies. Its reporting segments are Mortgage Market, Real Estate Market, and Other Businesses, Corporate and Eliminations. Amounts below are in U.S. dollars.
Financial performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Total revenue | $838.2 million | $942.2 million | Down 11% |
| Service revenue | $805.5 million | $899.6 million | Down 10% |
| Gross profit / service revenue | $216.0 million / 27% | $242.3 million / 27% | Profit down 11%; margin flat |
| Operating income / service revenue | $42.5 million / 5% | $49.7 million / 6% | Income down 15% |
| Net income attributable to Altisource | Loss of $5.4 million | Income of $308.9 million | 2017 included a substantial tax benefit |
| Diluted earnings per share | Loss of $0.32 | Earnings of $16.53 | 2017 tax benefit makes comparison atypical |
| Adjusted EBITDA (non-GAAP) | $118.3 million | $130.7 million | Down 9% |
| Adjusted diluted EPS (non-GAAP) | $2.43 | $2.98 | Down 18% |
| Operating cash flow | $68.4 million | $66.1 million | Up 4% |
| Adjusted operating cash flow (non-GAAP) | $79.4 million | $110.5 million | Down 28% |
Mortgage Market service revenue fell 13% to $655.8 million, primarily as Ocwen’s serviced portfolio and delinquent loan count declined; lower originations also reduced Origination Solutions revenue. Real Estate Market service revenue rose 2% to $88.8 million, including 82% growth in Consumer Real Estate Solutions, but the segment recorded a $12.6 million gross loss. Other Businesses service revenue rose 4% to $61.0 million, while the segment’s operating loss widened.
Liquidity, debt and capital
- Year-end cash and cash equivalents were $58.3 million; investment in equity securities was $36.2 million. Together these totaled $94.5 million.
- Long-term debt was $338.8 million before unamortized discount and issuance costs; balance-sheet debt, net, was $331.5 million. Net debt less equity securities, a non-GAAP measure, was $244.3 million.
- The April 2018 refinancing established a $412.0 million Term B loan, maturing April 2024, and a $15.0 million revolving facility maturing April 2023. No revolving borrowings were outstanding at year-end; the term-loan rate was 6.8%.
- Operating cash flow was $68.4 million; investing activities provided $11.1 million and financing activities used $124.3 million. The company repaid $74.8 million of debt and spent $40.4 million repurchasing shares in 2018.
- Management said existing cash, expected operating cash flows and revolving-credit availability should meet liquidity needs for the next 12 months, including interest and capital expenditures. It estimated $21.6 million of interest payments over that period.
Material changes, outlook and unusual items
- Ocwen remained the largest customer, representing 52% of 2018 total revenue, down from 58% in 2017. Revenue directly recognized from Ocwen fell to $437.4 million from $542.0 million. A further 6% of 2018 revenue related to Ocwen-serviced portfolios where another party selected Altisource.
- Altisource and Ocwen entered agreements in February 2019 that facilitate Ocwen’s transition from Altisource’s REALServicing technology, permit other providers for up to 10% of certain referrals subject to restrictions, and affirm Altisource’s strategic-provider role through August 2025. Management did not anticipate the technology transition materially affecting other Ocwen services.
- Project Catalyst, launched in 2018 to reduce costs and align operations with anticipated revenue, generated $11.6 million in restructuring charges. The company expected additional costs in 2019 and estimated future restructuring costs of approximately $25–$35 million.
- The company sold its rental property management business to RESI for $18.0 million, receiving $15.0 million at closing and recording a discounted $2.2 million receivable for the remaining $3.0 million. It recognized a $13.7 million pretax gain.
- Altisource announced it would sell its BRS real estate inventory and discontinue the business. Year-end inventory was $39.9 million across 287 homes; management anticipated selling the majority in 2019. The company used $49.9 million of received and anticipated BRS proceeds to repay debt.
- A $13.0 million unrealized loss on RESI shares was recorded in earnings after a 2018 accounting change. The investment’s year-end fair value was $36.2 million.
- Following the South Dakota v. Wayfair decision, the company accrued $6.2 million for estimated sales-tax exposure. It said further exposure could require additional, currently unestimable losses.
- The effective income-tax rate was 292.9% in 2018, reflecting income in higher-tax jurisdictions while the Luxembourg subsidiary incurred a taxable loss, as well as a foreign-tax reserve. The 2017 reported earnings included a $276.3 million tax benefit associated primarily with a subsidiary merger and a large Luxembourg net operating loss.
- Fourth-quarter 2018 revenue was $217.6 million and Altisource reported an attributable net loss of $11.5 million, or $0.69 per diluted share. Fourth-quarter 2017 included a significant tax benefit and reported attributable net income of $286.4 million.
Risks, contingencies and reporting
- Customer concentration and Ocwen’s financial, regulatory and servicing developments pose significant risks to revenue, margins and asset values. The company also disclosed uncertainty around continued services to portfolios associated with NRZ; its non-binding Services LOI with NRZ expired in December 2018.
- Other risks include mortgage and housing-market conditions, regulation and licensing, competition, technology and data-security failures, vendor dependence, variable-rate debt, restrictive loan covenants, and the ability to repay or refinance debt due in 2024.
- The company was responding to government inquiries concerning aspects of its business. It said it was premature to estimate their outcome or financial impact. Management did not believe ordinary-course litigation would materially affect results, individually or collectively.
- Auditors issued an unqualified opinion on the financial statements and on internal control over financial reporting; management also concluded controls were effective at year-end.
- GAAP and non-GAAP results differ materially. Adjusted EBITDA, adjusted EPS and adjusted cash flow exclude selected items and should be considered alongside, not instead of, GAAP measures.
Investor verification priorities
- Track Ocwen’s portfolio, regulatory and financial position, the REALServicing transition, and actual referrals and revenue under the February 2019 agreements.
- Assess the sustainability of customer diversification and growth, including whether new enterprise contracts and Consumer Real Estate Solutions gains convert into recurring, profitable revenue.
- Verify BRS inventory sale proceeds and timing, debt repayments, remaining inventory exposure and completion costs for Project Catalyst.
- Review future cash generation, variable-rate interest expense, credit-agreement covenants and refinancing capacity for the April 2024 maturity.
- Monitor the resolution of sales-tax and other regulatory inquiries, potential incremental accruals, and the realizability of the large Luxembourg net operating loss and deferred tax asset.