Altisource Portfolio Solutions S.A. (ASPS) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Altisource Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instruction will follow at that time. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to introduce your host for today's conference, Ms. Michelle Esterman, Chief Financial Officer. Ms. Esterman, you may begin.

Thank you, operator. We first want to remind you that the earnings release, Form 10-Q and quarterly slides are available on our website at www.altisource.com. These provide additional information investors may find useful. Our presentation today contains forward-looking statements made pursuant to the Safe Harbor provisions of the Federal Securities Law. Statements in this conference call and in our press release issued earlier today, which are other than historical fact are forward-looking statements. Factors that might cause actual results to differ materially are discussed in our earnings release as well as our public filings. The Company disclaims any intent or obligation to publicly update or revise any forward-looking statements regardless of whether new information becomes available, future developments occur or otherwise. Joining me for today's call is Bill Shepro, our Chief Executive Officer. I would now like to turn the call over to Bill.

Good morning and thank you for joining today's call. This morning I plan on providing an update on the progress we’re making on our strategic initiatives and Michelle will discuss our financial performance in 2016 financial scenarios. I'm very proud of our team whose focus is on providing high-quality compliance services to our customers and positioning the company to our strategic initiatives for long-term growth. We continue to execute with existing customers onboard new customers and we see very good feedback on our offerings from the market. I'm also pleased with the financial results of the quarter, with strong service revenue, earnings per share and operating cash flow. Slide 3 provides a list of our strategic initiatives. Our initiatives in the mortgage and real estate marketplace are centered on our strategy to diversify and grow our customer and revenue base. We believe these are the right initiatives to support our growth. Each imitative addresses very large markets inline with our core competencies and provides the opportunity to leverage our competitive advantages to succeed. This morning I will discuss each initiative the contribution to 2016 service revenue assumed in our financial scenarios and the progress we're making in greater detail. Our first initiative as you can see on Slide 4 is to grow our servicer-related businesses by expanding services purchased by our existing customer base and attracting new customers. Even as delinquencies returned to historical norms, there is a very large addressable market for our services. We are one of a few service providers offering a full suite of services and technologies on a national scale. We stand to gain market shares customers consolidate to larger full-service vendors. As you can see from Slide 5 Ocwen should provide us with a long runway of earnings assuming the normal runoff of its existing portfolio and no new acquisitions. Under the midpoint of our scenarios we estimate that we will generate $535 million of 2016 service revenue related to Ocwen in its portfolio. We are also making very good progress with other customers. As I shared with you last order a top 10 U.S. banks selected Altisource to provide certain pre-foreclosure services and manage all of its REO. During the third quarter we executed our agreement with this customer and successfully onboard its portfolio to our platform. As we market these properties for sale begin to close transactions and provide additional services to this customer we expect revenue to grow materially. Our management and sales team also continued to develop a robust pipeline of opportunities. In addition to growing the services we provide to two top 10 banks we are engaged in strong sales dialogues and responding to RFPs from several of the country's largest financial institutions. With the reception of success we're experiencing in the market we believe the midpoint of our 2016 scenarios for this initiative of $93 million as set forth on Slide 21 is reasonable. Our second initiative is growing our origination services and technologies business. As you can see on Slide 6 the origination services market is also very large. Environmentally the landscape for mortgage originators today is challenging as they struggle to maintain margins while the cost of regulatory compliance and quality increases. Further there is a growing need to create uniformity in the origination process. As a result of these trends we're experiencing greater demand for our fulfillment services and certified loan insurance product. During the third quarter we signed services agreements with 10 new fulfillment and certified loan customers and are engaged in meaningful conversations with larger prospects. These trends should also drive more business to our other origination solutions including title, valuation and our mortgage builder loan origination technology. To capitalize on this trend we are expanding the focus of our enterprisewide sales teams to include our origination offerings and building a middle market sales organization to focus on medium and smaller lenders, including the Lenders One members. With a full year benefit of new customers and our investment in sales and marketing, we believe the midpoint of our 2016 scenarios for this initiative of $76 million is reasonable. Our third initiative, which is outlined on Slide 7 is growing Owners.com our innovative online real estate brokerage. At over $60 billion the real estate brokerage and related services market is massive. With a growing segment of the population demonstrating a desire to engage in self-directed transactions, we believe Owners.com is well-positioned to become a market leader. During the third quarter we focused on improving the user experience for homebuyers and developing our launch marketing strategy. With respect to the user experience we plan to make certain new features and functionality available on this site in a few weeks and we’ll continue to launch new features to help self-directed buyers and sellers throughout 2016. From a marketing perspective, we continued the development of an integrated multi-channel campaign designed to establish the brand and acquire customers. In order to optimize our marketing spend and benefit from the seasonally strong spring and summer months we have decided to delay the initial launch of our marketing campaigns to January of 2016. We plan to launch in two large U.S. metropolitan areas. Based on the results from this initial market rollout, we will refine marketing approach as we seek to optimize consumer awareness and adoption and expand into other geographies. By the end of 2016, we plan to have launched in approximately 15 markets. Despite very little marketing since the June relaunch of Owners, we’ve represented or referred buyers for the purchase of 24 homes and of 23 homes under contract to purchase. We are strongly encouraged by the organic adoption of our innovative service. We have completed a lot of the hard work to position us to achieve the midpoint of our 2016 scenarios of $33 million. This includes creating a national brokerage license in all 50 states, integrating IDX listings from most major MLS boards, growing our workforce of licensed brokers, agents and support staff, enhancing the customer experience and developing local marketing and communication strategies. Our last initiative as shown on Slide 8 is growing our rental and renovation services and technology businesses. But approximately 15 million single-family rental homes in the United States and a small percentage of these homes owned by institutional investors this is a very large fragmented market. With a suite of services and technologies and the scale to reduce cost for real estate investors, we believe we are well positioned to grow. Further, our recent acquisitions of Investability and RentRange expand our offerings in line with our objective to connect real estate investors with home sellers, renters, service providers and homebuyers. We anticipate that our 2016 revenue growth will come from two sources. First growing revenue from existing and new customers and second deploying a portion of our cash in a program to buy, renovate and sell homes as a principal. Altisource Residential or RESI is a marquee client of our rental renovation business. As they diversify their acquisition strategy to purchasing homes both in bulk and one-by-one, we are providing additional services to RESI. In this regard, we provided diligence and title services in connection with RESI’s acquisition of 1,300 rental homes. Further since RESI September launch of its one-by-one program, we assisted it with diligence and provided brokerage and title services on its purchase of homes. We expect RESI’s new programs coupled with a competitive advantages we provide RESI to substantially accelerate the growth of its rental pool increasing our revenue. We anticipate that our new customer growth will come from Investability, RentRange and Residential Investor One. Investability’s investor real estate search and acquisition platform generates revenue through referral and lead regeneration services. RentRange generates revenue through the sale of rental home data to the financial services and residential real estate industries. Investability, RentRange and Residential Investor One’s customers purchase many of the services offered by Altisource. We believe we can offer compelling value proposition to medium and smaller rental property investors driving revenue growth. The second focus area for this initiative involves deploying a portion of our cash to purchase, renovate and sell single-family homes. We anticipate on a stabilized basis that we will allocate 20 million of cash to this initiative and we will turn the homes every six months. We believe there is a market opportunity to generate attractive unlevered annual pre-tax returns of approximately 20% to 25% by improving the value of the homes through a well-designed renovation program and have done so for one of our REO clients. These returns are enhanced because we directly provide many of the transaction related services that others typically outsource. These include brokerage, renovation and closing. With our marquee customer growing customer base and suite of services, we believe the midpoint of our 2016 scenarios for this initiative of $95 million is reasonable. You should note that proceeds from the sale of real estate in our purchase, renovate and sell program is presented as revenue in the scenarios. This accounts for approximately 23 million of the 95 million. In summary, I am pleased with our financial results and the progress we are making on our strategic initiatives all of which are centered on providing high-quality compliance services to our customers. Our successful execution of the strategic initiatives broadens our customer base, reduces our reliance on Ocwen and establishes a clear path for growth. We believe that we have laid the foundation to achieve these objectives. I’ll now turn the call over to Michelle for financial update.

Thank you, Bill. This morning we reported third quarter 2015 service revenue of $245.5 million, adjusted net income attributable to shareholders of $46.4 million and adjusted diluted earnings per share of $2.27. Slides 9 through 12 provide highlights of our results for the current quarter compared to prior period. This morning I will discuss the financial results for the quarter and our 2016 financial scenarios. Turning to service revenue. We are very pleased that third quarter 2015 service revenue was almost the same as last year. Growth in our asset management business largely offset lost revenue from the November 2014 discontinuation of the lender-placed insurance brokerage business. The full amortization of the Equator acquisition deferred revenue in November of 2014 and fewer third quarter 2015 property valuation referrals. The asset management businesses growth was primarily driven by a higher number of non-Ocwen homes sold and growth in the property and [section] and preservation business. Turning to margins. Gross profit as a percentage of service revenue in the third quarter of 2015 was the same as the third quarter in 2014. Mortgage services consistent gross profit margins, coupled with its revenue growth offset a decline in financial services gross profit margins from revenue mix. Operating income as a percentage of service revenue in the third quarter of 2015 was slightly lower than the same quarter in 2014 primarily from an increase in sales and marketing to support our growth plans. Adjusted diluted earnings per share of $2.27 in the third quarter of 2015 was 4% higher than the third quarter of 2014 driven by share repurchases and our share price. As you can see on Slide 10, we highlighted one infrequent item during the third quarter. We repurchased $11 million of our senior secured term loan at 11% discount recognizing a gain of $900,000 on extinguishment. Normalized adjusted net income for the third quarter of 2015 of $45.6 million was largely consistent with the second quarter of 2015 of $45.7 million. From a cash perspective, we generated $54.3 million of cash from operations in the third quarter representing 22% of service revenue. The used cash from operations to purchase $11 million of our debt or $9.8 million, repurchased $5 million of our common stock, invested $6.2 million in facilities and technology and $11.2 million in CastleLine acquisition. At end of the quarter we had $150 million of cash. As a capital life services business we expect to generate significant cash from our operation. In the fourth quarter of 2015 we used $18 to acquire investability and RentRange. We also plan to use cash to repurchase a portion of our debt and potentially for a small acquisition. Following this acquisition, we plan on focusing our attention on organic growth and not on acquisition. With respect to share repurchases we may repurchase a modest amount of shares based on the environment and our share price. Finally as we discussed with you in the past we plan to continue building our cash to provide adequate runway for our strategic initiative should it be necessary. Turning to the full year 2015 compared to our scenarios. We continue to believe that adjusted pretax income at the midpoint of our 2015 scenarios of $136 is reasonable. Slide 13 set forth the financial scenarios for 2016. Similar to last year we provided you with two scenarios. Scenario A represent to some of the low end of all their assumption and scenario B represents the sum of the high-end. As you can see on Slide 21 at the midpoint of our 2016 scenarios compared to our 2015 scenarios, we believe we can replace the lower revenue from Ocwen with growth from our strategic initiative with consistent margin. At the midpoint 2016 scenarios service revenue is growing by 3% when compared to the midpoint of our 2015 scenarios and adjusted pretax income is $134 million. Company-wide pretax income margins at the midpoint of our 2016 scenarios are the same as the 2015 midpoint. Growth in the higher-margin mortgage services segment offset lower margins in the technology services segment. Technology services margins are negative as revenue is primarily declining from Ocwen’s lower loan count and to a lesser degree in the transition of the management of Ocwen’s infrastructure technology to Ocwen. Costs are not declining at the same pace as we continue to make investments in our software technology platforms as a fundamental element of our strategy. In the longer-term we anticipate that our company-wide pretax income margins will expand. Slide 21 and 22 in the appendix provide additional information on the scenarios. These were organized to provide more visibility in each of our strategic initiative. We also reorganized the 2015 scenarios to conform to the 2016 presentation. Please note that the 2015 scenarios and assumptions have not changed more than updated. Further to give you a better understanding of which businesses are included in each initiative we provided legal representation on Slide 26. As you can see from this slide certain of our businesses are dedicated to a single initiative while other businesses support multiple initiatives. We believe the midpoint of our scenarios is reasonable. However, we will not necessarily achieve the midpoint in the manner specifically laid out in the slide. Some of the businesses may perform better and some may perform worse. Finally turning to 2017, we believe that we are positioning the company to generate higher service revenue and earnings in 2017 when compared to the midpoint of the 2016 scenarios. This of course is dependent on the successful execution of our plan. In closing we’re very excited by the opportunities in front of us. Our successful execution of our strategic initiatives positions Altisource as a diversified and growing company in very large markets. We believe our recent customer wins demonstrates our value to the market. We look forward to updating you next quarter. I'd like to now open the call up for questions. Operator?

Thank you. [Operator Instructions] And our first question comes from the line of Mike Grondahl from Piper Jaffray. Your line is open.

Yes, thanks guys. A couple questions. The revenue per non-GSE loan was up at $565 per quarter. Can you talk about what's driving that up, that increase year-over-year?

Sure, Mike. Compared to the third quarter of 2014, service revenue per delinquent loan increased from higher revenue from our property preservation services. And of course this was partially offset from lower revenue from the lender-placed insurance brokerage business that was discontinued and slightly lower valuation.

Okay. And then on the four initiatives that you list on page 6, 5 through 8, I think it is, which ones do you have the most confidence in? Which two of those do you think you feel the best about?

Mike, it sort of like asking which child we like the best, but look we are very excited about each of the initiatives. I think in terms of the progress we are making right now, we feel very good on the services. On related services, we are getting great feedback and we are seeing really good RFP, strong RFPs and really good response and we’ve got an active pipeline. On owners.com, I think if we are successful, longer term, if we were to forecast that a couple of years, right now that would be our largest initiative, but of course there is a lot of wood to chop to get there. On originations, we are very encouraged by the agreements we’ve signed in the third quarter and the pipeline we are building for next year. And then on rental and renovation, as we give a competitive advantage continue to give a strong competitive advantage to RESI and they perform well. We think that represents a huge opportunity and we also think Investability and RentRange. So it's a tough question to answer. We feel really good about them, Mike and we think we can achieve what we set forth to do next year.

Got it. Yes, the detail helps. Just following up on Owners, how many markets did you say? You said something about 15 markets. Was that the end of 2015 or the end of 2016?

So Mike, we are going to launch in January in two markets, two large metropolitan areas and we think will be in 2015 by the end of the next year.

Got it. And then what were you saying, Bill, about 24 homes or 23 homes? I didn't quite follow that.

Sure. So far this year, since we launched the new site, the new experience in June, we have sold so buyers have come to us to purchase a home and we would help them buy a home and close 24 times, and when I think I said we have 22 homes under contract to close. So without really launching, we’ve just had some organic users come to us and we’ve actually helped them buy 24 homes and we have another 22 under contract. So we think that bodes well for when we actually launch the marketing.

Got it. Is your buyer's rebate - I think that's what you've been marketing there - that buyer's rebate of like 50%, is that the hook right now, do you think?

Yes and it's a little bit different in each market but, today, we are providing value. Longer-term there’s a lot more we’re going to offer buyers. And I don’t want to talkabout it too much for competitive reasons. Today, it’s value longer-term, there’s a lot more that benefit a buyer will receive by using Owners.

Got you. And lastly, could you just go into your strategy of spending $20 million buying homes and creating rentals and then I think flipping them on a six-month basis? Talk a little bit more about that strategy and why you are doing it and what you hope to learn from it?

Look, we have actually renovated 1,200 homes I think is the number a little bit more than 1,200 homes so far for our customers. And so we have a lot of experience renovating homes. We also can eliminate a lot of the friction cost associated with the business because we could be the real estate broker on the acquisition and sale of the home, we can be the title agent and the escrow agent, for example. But, Mike, the reason why we’re looking at is we have a $150 million of cash. And we think, we want to be conservative in terms of how we use that cash in the event we need it and the unlikely event we need it. But we don't like the returns we are earning on the money sitting in the bank. So if we can earn a 20% to 25% return doing something we’re very good at. In the meantime we think it's a very good use of our cash, we get to recycle the cash so it’s there should we need it and in the meantime, we get to earn a very attractive return on it and something that we know how to do.

Got it, okay. Hey, thank you.

Thanks, Mike. End of Q&A

Thank you. [Operator Instructions] And I'm not showing any further questions at this time. I would now like to turn the call back over to Ms. Esterman for any further remarks.

Yes, thanks for joining the call today and we look forward to updating you next quarter. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone have a great day.