Altisource Portfolio Solutions S.A. (ASPS) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Altisource Fourth Quarter and Full Year Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time [Operator Instructions]. As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Ms. Michelle Esterman, Chief Financial Officer. Please go ahead Ma'am.

Thank you, Operator. We first want to remind you that the earnings release, Form 10-K, and quarterly slides are available on our Web site 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 Laws. Statements in this conference call, our slides and our press release issued earlier today, which are other than historical facts, are forward-looking statements. These include financial projections and scenarios contained in our slides and described during this call. Altisource makes no representation that our actual financial results will be the same as that set out in the financial projections and scenarios. The financial projections and scenarios should not be unduly relied upon. 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. Today's presentation also contains financial measures that are non-GAAP financial measures. A reconciliation of these non-GAAP measures to their GAAP equivalent is included in the appendix to our slides. 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'll discuss 2016 or 2017 objectives and our longer term diversification goal. Michelle will then discuss our financial results, 2017 financial scenarios, and capital allocation. Let me briefly address the $28 million litigation settlement we recorded in the fourth quarter. Last month, we reached an agreement, the federal securities class action lawsuit filed against us in 2014. The settlement is subject to final court approval. We believe the case had no merit, but it is determined that it is in the best interest of the Company and our shareholders to settle this case to eliminate the uncertainty, burden, and expense of litigation. We are pleased to have this behind us. You can refer to our 10-K for additional information. In 2016, we continued our transformation from a mortgage services company generating the majority of revenue from Ocwen to a real-estate and mortgage marketplace, offering many of the same innovative solutions with diversified customer base. We anticipate Ocwen revenue for years to come, but we're not complacent. We're investing to grow our real-estate and mortgage marketplaces by expanding services to existing customers, winning business with new clients, growing our sales pipeline, developing complementary products, enhancing customer experience, and building brand awareness. Because the sales cycle was longer than we originally projected, our 22% non-Ocwen service revenue growth in 2016 was lower than anticipated. We are disappointed that we did not achieve our anticipated growth, but more importantly, we believe the significant progress we made in 2016 positions Altisource for a higher rate of non-Ocwen growth in 2017 and beyond. As you can see on slide two, at the midpoint of our 2017 scenarios, we project non-Ocwen revenue growth of 36%. In essence, the revenue and midpoint reflects approximately a little more than a one year delay from our originally anticipated non-Ocwen growth. Today, we believe we've greater visibility into non-Ocwen growth than we had nine or 12 months ago. To provide you with this insight, slide three provides information on our anticipated sources of 2017 non-Ocwen revenue, including projected revenue from existing clients, recent client wins, and our probability adjusted sales pipeline. As you can see, there's a gap to the midpoint. Our plan to address this includes growing the sales pipeline and further expanding relationships with existing customers. Because sales timing was slower than originally projected, we didn't benefit from our growth investments as quickly as anticipated, impacting 2016 earnings. These investments include operating losses on some of the nascent businesses, as well as development costs we don't capitalize. These ongoing strategic investments and the timing of non-Ocwen revenue growth will continue to impact earnings over 2017 as we develop and scale the businesses. We believe these investments will produce a high ROI and are critical to the franchise we're building and our growth. Few competitors in the mortgage and real-estate markets have the depth and breadth of services that we do. We believe this has positioned us well in our services and origination solutions businesses. Most of our continuing investments are centered on the real-estate investor and consumer real-estate solutions businesses, and to a lesser degree origination solutions and our marketplace technologies. In 2016, we spent an estimated $2.20 per diluted share on these investments. To continue to support non-Ocwen revenue growth, we estimate spending $1.86 in 2017 at the midpoint. These investments, all of which are expensed, represents 6% of 2016 service revenue and 6% of 2017 service revenue at the midpoint. We may increase or decrease certain of these investments if new information offers our view. For example, if Owners.com performs better than anticipated, we may increase our marketing and other spend to attract more customers. Given the long-term potential for this business, we'll be extremely comfortable accepting the short-term impact on earnings. I'll discuss some of these investments in more detail as I walk through each of the initiatives. As a reminder, our mission is to be a marketplace for real-estate and mortgage transactions, and to provide or facilitate the provision of the related services. We're executing on this mission through the four strategic initiatives shown on slide four. These initiatives are to grow our servicer, originations, consumer real-estate, and real-estate investor solutions businesses. Beginning with our servicer solutions business, we fell well short of our 2016 non-Ocwen revenue objective, but we significantly strengthened and grew existing customer relationships; and since our last call, signed three agreements with strategic customers to provide REO asset management and short sale and FHA auction services. In 2016, we also made investments to develop new offerings to provide support services for FHA mortgages. We made these investments because FHA loans represent a growing percentage of loan originations and have a higher delinquency rates than other TSE product. Our new FHA offerings include Hubzu foreclosures auction services and property preservation services for homes that are to be conveyed back to the FHA. Our strong performance, robust compliance management system, and investments in new products are translating into additional opportunities with many of the nation's top servicers. When you combine the sales pipeline with our impressive group of clients and recent client wins, we believe that servicer solutions will support non-Ocwen revenue growth around the mid-point of our 2017 scenarios. Origination solution non-Ocwen service revenue grew 30% over 2015 from the strong progress we made selling our suite of originations services and technologies to leading bank and non-bank originators. We strengthened the management team through existing customer relationships. And since our last call, signed four agreements with strategic customers for fulfillment and valuations services. Our platform solution, which couples our CastleLine Certified Loan program with Trelix fulfillment services for larger originators and correspondence, was a key driver of our success in 2016 and we anticipate will be a large contributor to our 2017 non-Ocwen revenue growth. In 2016, we made strategic investments to develop new origination offerings that strengthen the Lenders One value preposition, attract larger customers, and enhance the platform solution. These investments included; the development and launch of Vendorly, a vendor management platform; the development and launch of Trelix Connect, a loan review system; the development and beta launch of noteXchange, a platform to facilitate whole loan purchases and sale transactions; and continued enhancements to the functionality of Mortgage Builder, a residential loan origination system. Turning to 2017, we believe that the demand for our origination platform solution, continued investments in growth, strong client relationships and sales pipeline, support our ability to achieve around the mid-point of our revenue scenarios. Our third initiative is growing our consumer real-estate business, leveraging Owners.com. Owners.com is a technology enabled national real-estate brokerage. We offer home buyers and sellers smart digital tools, personalized service from local real-estate agents and savings. In February 2016, we launched our buy-side brokerage offering in two markets, and are now operating in 26 markets. Our buy-side offering provides rebates to buyers of up to 1.5% of the purchase price. For home sellers, we re-launched our offering in the fourth quarter to provide sellers with personalized support from local real-estate agents and savings of up to 1.5% of the sales price. We are now operating our sell-side solution in 12 markets. This continues our evolution from for sale by owner model to a technology enabled whole service brokerage. Of all of our initiatives, Owners.com is in the earliest stage and therefore is the most difficult to forecast. Clearly, we didn’t meet the 2016 revenue objectives. Having said that, we believe that owners.com has the greatest growth potential of our initiatives. Based upon the strong progress we're making, we have a high level of conviction that our owners.com thesis is correct. Since the last call, we increased our capacity to response to consumers that express an interest in our services with an in-person experience. We more than doubled the number of real-estate agents growing from 97 to 200. Further, we have a target to expand to more than 500 agents by the end of this year. We also went live with a mobile app for our agents in the fourth quarter. Our agents are leveraging this tool to manage leads more efficiently and deliver a better experience to our customers. There continues to be strong consumer interest in owners.com. During the fourth quarter, we plan for and generated, about the same number of overall buyer leads as the third quarter, but saw large improvements in the lower funnel conversion metric as we grew the number of real-estate agents and deploy the agent app. This and the relaunch of our sell-side offering translated into 75 home purchases and sales transactions during the fourth quarter. We anticipate closing 140 to 180 transactions this quarter. We are currently working with approximately 950 buyers in the late stage of the buying process compared to the 400 buyers I mentioned on our last call. So, in this late stage, we're showing client homes, assisting in the offer negotiation process and working to close transactions. In 2016, we continued to make investments in owners.com to improve the online experience, develop mobile apps for home-buyers and agents, increase brand awareness through paid media and PR, build and secure licenses to establish a mortgage brokerage business to offer financing, and drive leads in 2016 that will generate revenue in 2017. Turning to 2017, we plan to make similar investments in the owners.com platform, marketing and operations. In April, we anticipate launching our mortgage brokerage business, owners.com loans in the eight states where owners operates today. We are developing owners.com loans to home-buyers a more seamless buying experience and attractive financing option, while increasing our revenues per transaction. We have a plan to close 1,500 to 3,000 transactions in 2017. The progress we are making to offer compelling product to consumers, successfully onboard and train new real-estate agents and improve our funnel metrics, should position us to achieve it. Our fourth initiative is growing our real-estate investor solutions business, leveraging the Investability platform. Through this initiative we provide a full suite of services that help real-estate investors identify, analyze, renovate, manage and sell investment homes. We fell short of our 2016 targets, but we made good progress. We're growing non-Ocwen service revenue by 87%. Slide five outlines our accomplishments. We're also pleased that Morningstar Credit Ratings recently signed our rental property management business, a residential vendor rating of 2 on a scale of 1 ne to 4 with one being the strongest. This provides us with important credibility as we seek to grow the services we provide institutional investors. In 2016, we continued to make investments in Investability platform to improve the online experience, increase brand awareness, develop the local real-estate brokerages to represent buyers and sellers of investment homes and enhance our rent range data analytics and business development solutions. Turning to our 2017 investments, we plan to enhance Investability.com to make it easier for institutional investors and the fragmented group of smaller home investors to buy and sell homes in order to related services. We also plan to invest in real-estate brokerage, sales, marketing and technology staff and acquire data to support our solution. Our 2017 midpoint reflects real-estate investment solutions’ growth of services provided to institutional investors and expansion of the buy renovate sell program, partially offset by lower revenue from RESI’s non-performing loans and REO portfolio. To give you visibility into our longer-term objectives for Altisource. In 2021, we’re targeting to generate total company service revenue of more than $1.5 billion with operating margins of 15% to 20%. These figures were developed as part of our long-term strategic planning process, and are obviously estimates based upon approximation. Our sense is that over the next six to 12 months we will be able to demonstrate solid progress as if we are growing each of our initiative. For owners.com and the Invisibility platform, empirical evidence that we’re on track to achieve our longer-term objectives, could take 18 to 24 months a longer. We hope that these estimates help you better understand our strategy, and allow you to make your assessments of future prospect. In closing, I firmly believe in the value we’re creating. The market reception for our products and services is very strong, and we are gaining more visibility into our growth prospect. We believe our investments in nascent and early stage businesses represent tremendous growth opportunities for Altisource. These investments should generate attractive long-term returns for shareholders but cover the expense of shorter-term earnings. I'm proud of the leadership team and our dedicated employees to the milestone we have achieved in 2016 that position us for success. I'm also proud that during this transformation of Altisource, the Company and our employees are also having such a positive impact on the communities in which we leave and work through both financial support and volunteer activities. I’ll now turn the call over to Michelle for financial update and the summary of our 2017 financial scenario. Michelle.

Thank you, Bill. This morning I will discuss elements of our financial results and capital allocation in greater detail, I will also discuss our 2017 financials scenarios. For a more complete explanation of our financial results of the year, please refer to the press release and the Form 10-K that we issued earlier today. Turning to slide six, 2016 service revenue of $942.6 million was $1.7 million higher than 2015. Our 22% non-Ocwen service revenue growth and higher property preservation services from Ocwen offset the expected loss in revenue from Ocwen’s declining portfolio, lower delinquencies and lower pricing for certain technologies. As you can see on slide seven, while 2016 service revenue was flat compared to 2015, adjusted pre-tax income attributable to Altisource of $117.2 million declined by 24%. This was primarily the results of increased investments to support the Company’s growth initiatives, service revenue mix changes and technology price concessions provided to Ocwen. Adjusted net income attributable to Altisource of $90.1 million was further impacted by an increase in the 2016 effective tax rate from 16% in 2015 to 29% in 2016. The effective tax rate increased primarily due to the $28 million loss on litigation settlement and lower pre-tax income margin. These items change the expected mix of taxable income across the jurisdictions in which we operate. While we anticipate the effective tax rate in 2017 will be approximately the same as 2016, we believe that over the next several years, margins will expand and our effective cash tax rate will return to a rate that is closer to Altisource's historical rate. As you can see on slide six, we generated $126.8 million of cash from operations, representing 13% of service revenue. Cash from operations would have been $140 million or 15% of service revenue, had we not invested $13 million for the purchase of real-estates that we are renovating and will resell. We used operating cash to repurchase $37.7 million of our common stock repurchased $51 million of our debt at 13.2% discount, invest $48.2 million in RESI-stock and invest $23.3 million in facilities and technology. Slide nine shows our 2016 performance compared to the scenarios that were last updated in the second quarter of 2016. As you can see, service revenue was slightly higher than scenario A, and adjusted pre-tax income was equal to scenario A. As we discussed with you last quarter, the mix of income across the jurisdictions in which we operate resulted in a higher effective tax rate than we expected, and the $28 million litigation settlement accrual further increased our effective tax rate. As a result, adjusted net income and adjusted earnings per share are lower than scenario A. Slide 10 and 11 set for their 2017 financial scenarios. At the midpoint of our 2017 scenarios, we anticipate total service revenue to decline by 8.8% compared to 2016, as the 36% anticipated non-Ocwen service revenue growth is not enough to offset the anticipated decline in service revenue from Ocwen and RESI. The operating service revenue decline is from the anticipated normal run-off of Ocwen servicing portfolios and declining delinquency rates. The resi service revenue decline reflects their assumption that resi sells the majority of its remaining non-performing loans and REO. At the mid-point, adjusted pre-tax income is $78 million. We anticipate adjusted pre-tax income to decline from 2016 from lower revenue from Ocwen and RESI partially offset by the growth of non-Ocwen revenue and cost reduction measures. Notably, if you would add back the investments we’re making in our growth, our anticipated 2017 adjusted pre-tax income would be $129 million or $50 million higher. At the 2017 mid-point, adjusted diluted earnings per share is $2.82. If you were to add back the investments we’re making in our growth, projected adjusted earnings per share would increase by $1.86 to $4.68. Further, while anticipated 2017 adjusted pre-tax income and adjusted diluted earnings per share is down versus 2016, cash from operations plus capital expenditures in 2017 would not be down as much when we exclude the impact of the anticipated $28 million payment for litigation settlement. This is because our anticipated 2017 capital budget is approximately $7 million lower than 2016. Companywide, adjusted pre-tax income margins at the mid-point are modestly lower than 2016 based on anticipated lower revenue and changes in our service revenue mix; based upon our greater scale, our strategic plan targets operating margins of 15% to 20% in five years. While we believe the mid-point of our 2017 scenarios is reasonable, it is difficult to predict the development sales cycle with precision given the magnitude and scale of our transformation to become a bigger and more profitable company. In developing our revenue scenarios, our revenue range is tighter for a more mature initiative where we've greater visibility and wider for our earlier stage initiatives, which are more difficult to project with precision. The last topic is capital. As of December 31, 2016, our net debt plus marketable securities was $284.6 million, a 20% decrease from December 31, 2015. Our top priority is to maintain a very strong balance sheet to support our longer term growth objectives. In this regard, we're actively evaluating, refinancing our senior secured term loans to among other things, extend the maturity date. Further, based upon our assessment of market conditions, capital needs and share price, we will also repurchase shares. I would now like to open the call up for questions. Operator?

Thank you [Operator Instructions]. Our first question comes from the line of Mike Grondahl of Northland Securities. Your line is open.

The first one, non-Ocwen revenues in the fourth quarter, I think came in at $53 million. And that was a chunk below the implied guidance of $80 million to $85 million. What happened there in the fourth quarter that it was actually below the third quarter?

Mike, I think, the bottom line is we were behind schedule from a timing perspective. I think there's some non-Ocwen REO sales that we thought were going to take place in the fourth quarter that will probably fall into the first quarter, as well. But the bottom line is, we're behind. And I think, Mike, as we just -- it's probably worth taking a step back just for a minute, when you think about our results. Our service revenue in 2016 is the highest it's been in the Company's history. And at the same time, we're planning for Ocwen's revenue to decline in line with the normal run-off of its portfolio and lower delinquency rates. And we're also planning for resi to sell its remaining REO and non-performing loans in 2017. So, to address this, we've created these four initiatives that I've been talking to to you about for the last couple of years. And we've had very good success. If you look back at '14 over '13 and '15 over '14 with 40% plus non-Ocwen revenue growth, this past year which was disappointing, we had 22% non-Ocwen revenue growth. We think we've learned a lot about the sales cycle and how long it takes to onboard sell and onboard and then stabilize these new clients. And that's how we got to the 36% growth this year, and we're giving a lot more visibility. But to continue the growth, it takes investments in the business. And we think the investments that we're making make a lot of sense. And we spend a lot of time with the management team and with the board discussing these investments, and we believe these will support our long-term growth. At the same time, even though we had our higher service revenue in our history this past year, our margins weren't where they need to be because we're investing. But I think if you look at the slides we presented today and you go back a couple of years when we're growing service revenue, as we were very good at growing our margins over those couple of years where revenue was growing. So we firmly believe that as we continue to execute on this transformation, and it is the transformation of the Company, we will get those margins up as you look into 2018 and 2019. And with that will come more earnings, and that will also help reduce our cash taxes. So, we think we’re on the right track. 2016, look it was far on near both a shareholders and the employees that’s incentivized based on earnings. We had a tough year this past year. And it was hard on the management team. But we really believe in the investments we’re making and what we’re doing to transform the Company. And it's taking longer than we had planned for this past year, but we’re on the right path. And we have a strong belief in what we’re doing. And we think, Mike, we’re well positioned, given the feedback we’re getting from the clients we’re winning and through the sales pipeline, we believe we’re really well positioned. So, I know it didn’t exactly answer your question Mike. But I think it's really important to take a step back and look at the progress we’ve made, even though it's disappointing this year where we ended up from a adjusted pre-tax perspective.

Is there a revenue target or range that you can call out associated with the investment spend of close to $60 million in 2016, and the $50 million in 2017 that you hope to achieve longer-term or medium-term?

Mike, when you look at what I discussed, where we would like to be north of $1.5 billion in 2021 at 15% to 20% margins and operating margins, and you do math. A lot of that’s coming from the investments we’re making in the origination business, the FHA product, what we’re doing with Owners.com and Investability. And so if we’re successful with these investments, the return on those investments is well, well north of what you would think our weighted average cost of capital is well north of that.

And then you mentioned, the press release, some Ocwen re-pricing. How much revenue was lost because of that, and what was that in particular?

Sure. And I think we’ve talked about this in the past. So, late in 2015 and early 2016, when Ocwen was going through its financial difficulties and was very focused with all of its vendors on cost reductions, we agreed to reduce some of our fees on our technologies. And that probably cost us north of $20 million of pre-tax this year. And I am excluding the normal run-off, that’s just from the price change on the expected run-off.

And then do you have a ballpark number for 2016 revenue related to RESI, and what amount is expected in 2017?

Mike, we don’t break that out directly. But I can tell you, with respect to RESI, we would expect we’re going to sell the balance of their REO with us this coming year. And we provide services on their non-performing loans, which we believe RESI will sell this year that revenue will be partially offset by new revenue as we buy, renovate and sell homes to RESI, and as we grow the property management business there.

Thank you [Operator Instructions]. Our next question is from the line of Lee Cooperman of Omega Advisors. Your line is open.

Michelle mentioned that the net debt was $284.6 million at year-end. Could you just give us the components, what was your cash balance at year-end? Is that number before or after the $28 million settlement? And what if the growth step and year-end shares outstanding?

Sure. Cash balance at the end of the year was $149.3 million, marketable securities was $45.8 million.

That's your RESI investment, basically.

That's correct, and $479.7 million.

And then the shares outstanding -- actual shares outstanding…

Yes, 18.7, 74 and that's not dilutive.

And then what is the dilution effect on the shares and dilution?

Dilutive effect was about 1 million shares, 916,000.

In terms of your 2017 expectations, which are like outlined on the page 23, what would the cash generation be as a business if you take your net income plus depreciation and amortization minus CapEx, and after your investment in business. Where do you think you’re generating free cash flow?

Lee, after CapEx, which we estimate to be about $16 million, it's about $17 million.

So $16 million of CapEx, and you said how much free cash flow of $60 million?

No, I said that $70 million after the $28 million and after $16 million of CapEx. So the settlements the legal litigation settlement which has not been paid yet is $28 million and then we have $16 million of CapEx. So, after you subtract those two items, we estimate as the mid-point roughly $70 million.

Do you have a game plan if you were to array the uses, acquisitions, debt retirements, stocks repurchase, dividends. Is there any sense of prioritization at the board level for the use of free cash flow at the present time?

Yes, so we discussed that quite a bit with the board, Lee. I think as we discussed in our press release and in my remarks, we’re working now actively to refinance and extend the loan. And so that may require -- we anticipate that that they may require principle reduction as part of that extension. But we think extension makes a lot of sense for the Company. And so, we anticipate doing that. We will also look to, based on market conditions and the other needs and how we’re doing, at share purchases as well.

So the dividends would be at the bottom end of the list of priorities?

It's something, Lee, we continue to discuss with the Board. We haven't made a decision one way or the other. We're still having conversations…

Well, based on your response it would be debt reduction, reinvestment in the business, stock repurchase. I'm not arguing for any particular thing. I just want to understand the psychology of the management?

So, I think that's a fair assessment.

There's very little talk about -- Ocwen seems to be the rebirth. We kind of write that up for debt, and you keep emphasizing your non-Ocwen business. What's the chance that Ocwen could turn out to be a better client than we're thinking and that they return to some type of growth platform?

Clearly, we're going to do everything we can on our side to help Ocwen in as part of that rebirth. I think from a planning perspective, we just make the assumption, and not necessarily educated, but we're planning for -- we're just assuming, which I think is the right thing to do in terms of how we run our business, that as toward the normal run-off. But of course we're hoping and optimistic that with all the progress Ocwen has been making that at some point they actually will turn around and start growing, which will be obviously fantastic for Altisource.

On page 23, dealer education, you add investors net of tax per diluted share. I mean almost you can have saying what we didn't up people money, or we didn't pay interest on our debt and we add that back. These items that are under current accounting principles you could have capitalized and not expensed, and you're just trying to be conservative? Or they have to expense given the nature of their -- the nature of the expenditure?

So, Lee, I think in some cases, they definitely would need to be expensed, because some of that's just operating losses and some of our newer businesses. In other cases, we're following our accounting policy, and others may look at that those same expenses differently. But we're following our policy, which doesn't capitalize them, and that’s historically how we've done it. Other companies may or probably could do it differently.

A couple more questions, you mentioned on the $28 million litigation settlement, just to keep in mind. You said we did nothing wrong. We sell to get it out of the way with a distraction. $28 million is real money. I don't give somebody $28 million unless I did something wrong, or unless the uncertainty of the outcome was great enough to warrant that kind of settlement. Is this the class action? Is this one individual party? Who got the $28 million?

So, it's going to be shareholders that own the stock between April 25th who purchased it or the stock between April 25, 2013 and December 21, 2014. But Lee, I think in the security litigation, I mean I've learned a lot about these types of cases over the last few months, something like one tenth of 1% ever make it to trial. And most of these ultimately settle. Look, it's very painful for us and the Board and our audit committee to agree ultimately to settle this case. But we think -- we absolutely think we did nothing wrong, but at the same time I've been around for a long time. And when you litigate you ultimately never know. And we start this with the best outcome for shareholders and for the Company.

One last question, not to open up old wounds, I am trying to figure out you guys spent $200 million at over $100 a share to buy back stock. Obviously, it was in stake stocks 24, 25 now. Has the business outlook, as it stands today, worse or better than it was when you thought your stock was undervalued at $100?

Lee, I mean I look at the business and look I personally have been buying the stock almost every quarter for the last few quarters. So, I'm a big believer in the Company. And we’re developing a diversified business with a diversified customer base through these initiatives. And we truly are transforming the Company. So, it's painful to go through a transformation like we’re going through. But I think we’re going to come out of it much better. We’re going to be much more -- look, if Ocwen kept growing, it would have been fantastic. If they didn’t went into any of those issues that they did in late, it was in late ’14, we probably look like heroes for buying the stock back at those prices. But it happened.

But that’s not really my question. My question really is as you see the outlook to-date from where you are now, are you confident that we’re going to be bigger larger and more profitable company? Or is that still -- is that now a question mark?

No, no absolutely. Lee, I won’t be -- my personal view is that yes. And it won’t be and up to ’17 I think you will start to see, ’18 will be somewhat similar to 2017 and you really start to see it going into ’19 and ’20. And now I'm just assuming Ocwen continues the run-off. If that changes that would change my answer. But I do believe we’re positioning ourselves to be diversified and growing.

If I was you and own what you owned and you have missed our view, the support of shareholder owning what he owns. If you believe it when you’re working as refinancing, you would have basically worked at a refinancing and take the Company private, make the money for yourself at a fair price. The market cap of the Company at $30 -- $600 million and you look at the cash flow you generating and more importantly what you expect to generate a couple of years out, you’ll stop taking questions, so maybe it's like myself. You’ve answered the question. Thank you very much.

Thank you. Our next question is from Mike Grondahl of Northland Securities. Your line is open.

Just a couple of more, the operating losses that you’re calling out, what are those relate to. Are those new businesses that you’re starting like Owners.com? Is it acquisitions that were previously acquired? Could you just provide a little bit of color on those?

So, in some cases, its technology we’re developing. So for example, we developed a product called Trelix Connect to support our platform solution and originations, and that’s going to allow us to really scale our underwriting fulfillment and capital line business. And so we’re developing the technology there along with Vendorly and noteXchange. So, in some cases, it's technology development. In other cases, its losses on some of these nascent businesses, like Owners.com and Investibility. And lastly, we’re continuing to enhance and build-out the marketplace technology, which makes it very easy to order and pay for services through our various platforms.

So, prior on acquisition are an headache when it comes to those operating losses?

No, we’re pleased with -- look, with Owners and Investibility almost can’t even look at those like acquisitions, we’re really -- we’re leveraging what we bought in transforming those into something, it's to some degree very different than what they were. So, we are making investments in those businesses, and losing money. But I wouldn’t say that’s -- I wouldn’t attribute that to the acquisition, actually that’s our growth strategy.

And then just to clarify, the $70 million or approximately $70 million of free cash flow, that includes all of the investment spending, correct. So, that’s a truly net number?

That’s correct. That’s net of the $28 million litigation settlement and net of our estimated CapEx. At the mid-point roughly, although that’s -- so I think that number is slightly, if we do it slightly better than at this point to my recollection.

Could you talk or spend a minute on Hubzu and your outlook there for 2017?

So I think with Hubzu, there is couple of things going on. We’re winning clients, and we're providing REO auctions sales for clients. We're winning big-big focus of the Company, is providing services for FHA loans where the government essentially incentivizes loan servicers on the FHA loans. To auction the homes before they can waive them back to the government, and it stays -- if the auction is successful, it stays the servicer companion spot. So that's a big initiative of ours. We just signed one, I'd call a medium size clients and a smaller client in the fourth quarter and in January of this year. But that's -- when you think about where the lower FICO score borrowers are going today, if FHA loans. So we view that as very important and that's going to be through Hubzu. And then lastly, we've just signed two deals with top 10 banks to provide short-sell services to them, household names. And we haven’t started doing the work they won't ramp until the second quarter, probably late in the second quarter. But we're also be leveraging Hubzu to sell short-sell homes for them. So, I think that's where, at short sales if the FHA government auctions and the traditional REO auctions with new clients.

And when you add that up, does Hubzu grow next year in total absorbing?

I don’t have that in front of me. So I can't answer that question. I apologize.

Thank you. Our next question is from Fred Small of Compass Point. Your line is open.

On the investments, did those -- what sort of the path forward for those. Do they ramp down materially, or what's recurring? Do you need to do investing, how much of that do you need to keep investing in 2018?

Michelle, correct me if I am wrong. My recollection those begin to come down in 2018. I think at the end of the day, when we look at lease based on how we see things today, 2018 is a similar year because you’re dealing with the same environmental trends around the normal run-off of Ocwen's portfolio, and the growth of our non- Ocwen. But we do see the investments coming down for two reasons; one, some of those businesses, either won't be losing as much money or they are making money; and two, some of those investments will go to more normal course as approached to build.

And I think when Bill talked about the 15% to 20% longer-term margins. There is some assumption of continued maintenance and building new functionality and better growth in with that.

And the majority of those investments are coming or running through the mortgage services segment. Is that the right way to think about it?

Yes. So I think today they’re running in mortgage services, some are running through technology. I would point out that we’re working very hard to change our segment structure, beginning with the first quarter, to make it much easier for you and our shareholders, for the analyst and the shareholders to follow what we’re doing. So we anticipate with the first quarter, we hope by the first quarter, to roll-out a new segment structure that more closely aligns to our four strategic initiatives.

So that's going -- I think we talked about that much. But that's line-up on the way you’re reporting on the scenario, like revenues are going to line-up on the scenario assumptions, or…

So, Fred, this is all subject to change. But the way we're thinking about it right now, it's going to line up between mortgage as one segment and real-estate as the second. And then some of the other costs that are smaller, we believe under the rules or guidelines, will move into corporate. So the real-estate segment broken down by those businesses and mortgage segment broken down by its businesses.

I guess on -- maybe it doesn't matter since you're going to restate everything. But on the current basis, what margin do you think the mortgage services segment can stabilize at?

Maybe Fred the better way to think about it is based on the four businesses I think that might be easier because that's the direction we're going. But when you think about the servicer solutions business, and again a lot depends on the mix because property preservation and inspection is lower margin and REO sales is very high margin. But that certainly could be in high 30s, Michelle, right?

Yes.

…from an operating margin perspective. Origination solutions, which is not making margin today, we believe could go into the 20% plus margin. The consumer real-estate solutions and real-estate investor solutions, we think of as 20% margins. And you might ask me why isn't that much higher given they are all technology enabled. But think about inside of revenue is the commission you pay to real-estate agent, or 1099 real-estate agent. So they're taking, let's say, 1% commission or close to 1% commission. And so that brings down your margins from net cost of goods.

And in the past I think you've put out slides on the natural deceleration or the expected run-off of Ocwen related revenue. Has anything materially changed in your expectations for that pace of run-off over the next four or five years?

I think we just continue to -- I know in our model, just continue to assume a normal run-off of Ocwen's portfolio and the continuing decline in its delinquency rate. And I think we've been pretty accurate on that. I was surprised that this past year was that the number of preservation and inspection orders increased pretty dramatically, I think as all these municipalities are focused a lot more on the maintenance on both abandoned pre-foreclosure homes and REO.

Thank you. Our next question is from Lee Cooperman of Omega Advisors. Your line is open.

I want to come back to, when I'm hearing the $28 million is a one-time deal. So really what you're doing is you're saying you're generating cash at closer to $100 million. I think the 70 plus the 28, divide that by roughly 20 million shares, you're generating $5 a share free cash flow. You say over the next two years, your investments are becoming down. You say that you're optimistic about the outlook for your business over the next three or four years. Your stock is trading at under five times recurring cash flow. I didn't spend the $200 million at a $104 like you did. But if you believe everything you're saying, why we're sitting on $46 million of resi-stock when you could buy-back 10% of your own Company by swapping stock with resi, let them buy their own stock, take that money and buyback 10% of your Company that what seems to be bargain prices, or keep the resi stocking, fix your balance sheet and fix it -- there is nothing wrong with your balance sheet. Extend the maturities and then become more aggressive at 25 as you were more aggressive at a 100.

Lee, I talked about this in past. Our investment in RESI, we’re being supportive of RESI, long-term we don’t -- our goal is at Altisources is not to be a holder of RESI stock. In the short-term, we’re being supportive. It also is an investment that we could get access to the cash fairly easily. We think it's very remote Lee that we would need to have the money, very linear. And we also believe that things are getting a lot better. But that said, even if it's just a really, really infinitesimal chance that there is existential risk, Lee. I want to make sure we can achieve what we’re super excited about.

Just taking additional risk for who for RESI or for Altisource?

No, exit potential risk of something, Lee something -- I think the risk is very, very, very small to remote and it's getting more remote. But if something were to happen at Ocwen, I want to make sure, look I don’t -- I want to go through it, but if something were to happen, I want to make sure that no matter what we have the cash to support what we’re doing with these initiatives. And, Lee, and I hope that three or four years from now you’d tell me, you know what Shepro, you should have bought, but you should use all that cash to buy stock back, but it's…

No, not all the cash, we’re talking about 10% or 15% of the Company. We’re not talking about buying whole the company. Your argument is a good argument against taking the whole company private, and you and Bill or be leveraging up et cetera, et cetera. We’re talking about being more aggressive than you are now at 25% to the price that you were aggressive at before. And so, the question I ask myself and I don’t the answer, you know the answer better than me, is the business gotten 75% worse, which is what the stock has done, or is the market overreacted? You have 5 million shares short, when I look at the flow somebody really has a view that you’re melting ice cube. And today, they are on the right track. Hopefully, they won’t be in the right track two or three years now. I’ve made my point. I don’t want to monopolies the call. But I would say that some amount that we purchased at this depressed price given everything you’re saying, $5 of recurring free cash flow or grow over the next few years. And then I look at the improved situation in Ocwen, you got the possibility of monetizing RESI stock. There is lot of things that can go right, and this spokes to Ocwen things were uncertain, not when things are very clear at a 114 liquidus, now they don’t look so clear. Maybe now is the time to act, because the 75% decline in the price of stock to create that opportunity, that’s it.

And by the way, Lee, and we did say we will look at buying shares back at the end of the [multiple speakers]…

No, I would do it, get that your debt package extended and then go for it.

Thank you. And that concludes our Q&A session for today. I’d like to turn the call back over to Michelle Esterman for any further remarks.

Thank you for joining our call today. We’ll talk to you next quarter.

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