Altisource Portfolio Solutions S.A. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Altisource is an integrated service provider and marketplace for the mortgage and real estate industries. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $197.4 million | $240.5 million | Down 18% |
| Service revenue | $188.8 million | $229.8 million | Down 18% |
| Gross profit | $50.2 million | $62.5 million | Down 20% |
| Gross margin on service revenue | 27% | 27% | Flat |
| Operating income | $7.1 million | $14.8 million | Down 52% |
| Operating margin on service revenue | 4% | 6% | Down 2 percentage points |
| Net income (loss) attributable to Altisource | $(4.1) million | $6.5 million | Turned to a loss |
| Diluted earnings (loss) per share | $(0.24) | $0.34 | Turned to a loss |
| Cash flow from operations | $(8.6) million | $(18.4) million | Use narrowed |
Revenue and operating results contracted primarily as Ocwen’s serviced portfolio and delinquent loan count declined. Mortgage Market revenue fell 18%; Real Estate Market revenue fell 24%. Management cited lower RESI-related activity, partially offset by growth in several non-Ocwen services. Segment operating results: Mortgage Market income was $32.9 million; Real Estate Market loss was $7.4 million; Other Businesses, Corporate and Eliminations loss was $18.4 million.
The $7.5 million unrealized loss on RESI equity securities was recorded in earnings under a newly adopted accounting standard and contributed to the quarterly net loss. Interest expense was $5.9 million, versus $5.8 million a year earlier. The company reported an income tax benefit of $1.4 million, compared with a $2.6 million provision in Q1 2017.
Cash, debt and liquidity
- At March 31, cash and cash equivalents were $84.9 million; restricted cash was $4.1 million. Cash, cash equivalents and restricted cash totaled $89.0 million, down $19.9 million during the quarter.
- Operating cash use was $8.6 million; investing cash use was $1.3 million, mainly capital expenditures; financing cash use was $10.0 million, including $10.0 million of share repurchases.
- Long-term debt had $412.1 million principal outstanding at March 31 (carrying value $407.7 million after debt costs and discount); the stated interest rate was 5.38%. Current debt portion was $5.9 million.
- On April 3, 2018, after quarter-end, the company refinanced the prior term loan with $412.0 million of Term B loans and a $15.0 million revolving facility. The new term loans mature in April 2024, have no financial maintenance covenants, and bear interest at a higher stated margin than the prior facility. Management expected $41.2 million of mandatory principal repayments and $23.5 million of interest over the next 12 months, assuming the then-current rate.
- Management stated that existing cash and expected operating cash flows should cover liquidity needs for the next 12 months, including debt service and capital expenditures, but cautioned that plans may not succeed and operations may not be profitable.
Material changes, outlook and risks
- Customer concentration: Ocwen accounted for 52% of Q1 revenue ($102.0 million), down from 59% in Q1 2017. A further 8% of Q1 revenue came from portfolios serviced by Ocwen where another party selected Altisource. Ocwen’s regulatory, business and servicing-platform developments could reduce referrals, pricing or services purchased.
- NRZ relationship: Altisource earned $10.3 million directly from NRZ and an additional $16.1 million related to transferred MSRs when another party selected Altisource. Management expected NRZ revenue to rise and Ocwen revenue to decline as MSRs transfer. A Services Agreement with NRZ was still under negotiation; execution was not assured. The brokerage agreement could be terminable if the services agreement was not signed within the extended negotiation period.
- Accounting changes: Topic 606 was adopted January 1, 2018 using the cumulative-effect method. Adoption reduced opening retained earnings by $10.4 million and increased deferred revenue; Q1 adoption effects included $0.4 million more revenue and $0.8 million more cost of revenue, reducing reported operating income by $0.4 million. Prior-year figures were not restated. A separate standard moved changes in RESI’s fair value into net income; the Q1 unrealized loss was $7.5 million.
- Other outlook and exposures: The company cited seasonality in property sales, originations and certain services. It was pursuing diversification and growth across its strategic businesses, but provided no quantified revenue or earnings guidance. A planned transition by Ocwen from Altisource’s REALServicing platform was not expected by management to affect other Ocwen services; REALServicing revenue was $6.5 million in Q1 versus $7.0 million a year earlier.
- Regulatory and legal matters: The CFPB informed Altisource on April 3 that its investigation concerning REALServicing and related technology was complete and its enforcement staff did not intend to recommend enforcement action. Other governmental inquiries remained ongoing, with outcomes and potential financial effects not estimable. The company said ordinary-course litigation was not expected to have a material impact.
- Share repurchases: Altisource repurchased 360,732 shares for $10.0 million at an average $27.67 per share during Q1. Approximately 3.1 million shares remained authorized for repurchase at March 31, subject to legal and credit-agreement restrictions.
Most important facts for investors to verify
- Whether Altisource retains or replaces Ocwen-related revenue as servicing portfolios, referrals and platform use change.
- Whether the NRZ Services Agreement is executed, and how MSR transfers affect customer concentration and realized revenue.
- The new credit agreement’s actual borrowing cost, amortization schedule, covenant implications and liquidity headroom.
- Whether operating cash flow improves and diversified businesses can offset declining mortgage-market activity.
- The effects of Topic 606 and RESI share-price volatility on future reported earnings and comparability.