Ladies and gentlemen, thank you for standing by and welcome to the Altisource Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation there'll be a question-and-answer session. I would now like to turn the call over to your host, Michelle Esterman, Chief Financial Officer, 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 remarks today include forward-looking statements, which involve a number of risks and uncertainties that could cause actual results to differ. In addition to the usual uncertainty associated with forward-looking statements, the continuing COVID-19 pandemic and current economic environment makes it extremely difficult to predict the future state of the economy and its potential impact on Altisource. Please review the forward-looking statements section of the companies earnings release and quarterly slides, as well as the risk factors contained in our 2021 Form 10-K, which describe factors that may lead to different results. We undertake no obligation to update these statements, financial scenarios, and projections previously provided or provided herein as a result of a change in circumstances, new information, or future events. During this call, we will present both GAAP and non-GAAP financial measures. In our earnings release and quarterly slides, you will find additional disclosures regarding the non-GAAP measures. A reconciliation of GAAP to non-GAAP measures is included in the appendix to the quarterly slides. Joining me for today's call is Bill Shepro, our Chairman and Chief Executive Officer. I will now turn the call over to Bill.

Thanks, Michelle. Good morning and thank you for joining today's call. I'm pleased with our second quarter results and performance. Beginning with slide four, our servicer and real estate segment is benefiting from the restart of the default business with both sequential and year-over-year revenue and adjusted EBITDA growth. Our originations segments year-over-year revenue decline was largely in line with a market-wide decline in origination volume. Despite the market decline, we grew our average weighted sales pipeline in the origination business to $32 million, a 54% increase since last quarter as our Lenders One members are increasingly focused on buying our solutions, which are designed to help them reduce their costs. We also continue to maintain cost discipline in corporate with costs down by 28% over the second quarter of 2021 from cost savings initiatives and the sale of the pointless business, partially offset by the assignment of sales and marketing employees to the business segments. This performance puts us on a path to generate positive EBITDA and cash flow in 2023. We ended the quarter with $71 million in cash. As expected, we significantly reduced our cash burn, compared to the first quarter. We believe our cash burn will further decline as the year progresses, and anticipate ending the year with between $60 million and $65 million of cash with the estimate fluctuating up or down based on working capital and other factors. Our cash estimate includes the anticipated refund of approximately $5.8 million in U.S. taxes and receipt of $3.5 million in escrow funds from the point of sale. Turning to slides five and six and our servicer and real estate segment. As you can see on slide five, compared to both the second quarter of 2021 and the first quarter of this year, we grew service revenue…

Our first question from Mike Grondahl with Northland Capital. Your line is open.

Thanks. This is Mike Pochucha on for Mike Grondahl. Maybe just first on the sort of foreclosure timing ramp. Are you seeing much geographical difference versus period cycle here?

Hey, Mike. Good morning. No, I don't think we're not seeing anything from a geographical perspective at least not that I'm aware of. I think what we're seeing though is that while the markets recovering, it's still is 47% down in terms of new foreclosure initiations from where it was last year. I mean, so I think we're still in the very early innings. And as I mentioned, some of our most attractive businesses won't benefit until the market not only recovers but also stabilizes toward the middle of next year.

27% lower than in '19.

That's right. Thank you, Michelle.

Got it. And then just based on originations, is it fair to say that with a softer environment there that there's an opportunity with maybe some competitors going back to take share there?

Yes. I think what we're seeing is -- we manage this Lenders One Cooperative and the members joined the cooperative so that we can help them basically make more money, get better execution on their loan sales and reduce costs. Over the last several years, they had so much volume. They didn't need our help as much on getting better execution, because they could barely handle the volume they had. And now in today's environment though -- so over the last couple of years, those members weren't focused on cost savings, they were just focused on closing that very profitable origination business where they had tremendous volume. Now what we're seeing is our members really care about saving money. And we launched several new products in December and earlier last year, which helped the members save significant money on the cost to manufacture alone. And we've done a very good job building up that pipeline. We're still learning a lot about how long it takes to convert that pipeline into revenue, but the progress we're making in that business is very encouraging so far.

Thanks. I'll pause, thank you.

Great. Thanks, Mike.

One moment for our next question. Our next question comes from Ramin Kamali from Credit Suisse. Your line is open.

Hi, good morning. Thanks, taking my calls. I wanted to get a better sense of your cash flow trajectory. I guess Bill, you said that right now you're sitting at about $70 million of cash, expect to end the year at $60 million. But you also do have some money coming in from Pointillist and from federal tax refund. So if not for that, it would have been probably close to $20 million of cash burn. So help me understand kind of the cash flow trajectory for Q3 and Q4. And when do you now expect to be breakeven from a cash flow standpoint?

Yes. So Ramin, we think we'll end the year with $60 million to $65 million of cash. We brought that down just a little bit from what we were talking about last quarter, and that includes -- or that assumes that we get paid the tax refund and the release of the Pointillist escrow. And we do now know that the IRS is processing one of our earlier tax returns. So we've got notice that we're going to get a portion of that money, hopefully, in the next month or two. So we're feeling better about that. In terms of the business itself, we believe that we're going to generate a positive EBITDA and cash flow in 2023. A lot depends on the timing of how the default market recovers. Right now, we're being fairly conservative in terms of how this market operates. And to the extent that improves, that could accelerate the time lines. But right now, we're being conservative.

Can you give us a little more color on a quarterly basis in ’23? I mean any particular quarter that you think you'll be breakeven from a cash flow standpoint?

So we are not -- at this point, Ramin, we're not breaking out the numbers for next year, but we do anticipate that the earnings will continue to improve and the cash burn will continue to come down and reach positive as the year progresses next year.

Got it. And then one more question just kind of on the core business. I guess, foreclosure starts are certainly picking up. Can you kind of comment on your share of those initiations relative to what you were seeing pre-COVID?

Yes. It's hard to tell. I listened to Mr. Cooper's call yesterday, and they talked about their market share in Xome. They think they're going to be at, I think, close to 40%. Our inventory today is sitting at one-third of theirs. So if you sort of extrapolate, that could give you a sense perhaps of where our market share is. I'm not sure how they're calculating that. I think what's really interesting, Ramin, is, environmentally, the default business is recovering, and we've really found the right product market fit with our origination products and are gaining great traction, and so you wouldn't have expected that in a market where origination volumes are declining. There's actually a lot more interest in these products. And so we're learning how long it takes to onboard them, but we're making tremendous progress. And then on the default side, clearly, we're only at half, 47% of where foreclosure initiations were in the second quarter of 2019. Some of that may be related to the government. The federal government put a sort of mini moratorium, if you will, and Michelle remind me, I think it was April, for two months around GSE mortgages where if the borrower was applying for one of these government programs, the lenders had to hold off on the foreclosure. We suspect that, that resulted in servicer, sort of, scrubbing their portfolios and making sure there was none of that activity before they foreclosed. So that could have impacted foreclosure starts in the second quarter as well. We are seeing a pickup in July of our REO and foreclosure auction referrals compared to June. So we'll see. But I think the point being, it still has not even recovered to where we were. We're having tremendous benefit in that segment, even though it hasn't even recovered to where we were in the same quarter in 2019. And in a deteriorating economic environment like it appears that we're experiencing, the opportunities continue to improve for the default business.

All right. Thanks, Bill.

Thanks, Ramin.

One moment for our next question. Our next question comes from Raj Sharma with B. Riley, your line is open.

Thank you. Thank you for taking the questions I had -- I just wanted to understand on Hubzu marketplace, I think you commented that you wouldn't see a pickup in the REO business until mid of next year. Is that a change at all in what you're seeing in the flow? You had, a few quarters ago, kind of guided to a certain amount of service revenues by the mid of next year. I just want to kind of get a sense of the cadence of REO flow, FC starts.

That's a good question, Rajiv. So if you think about it, the foreclosure starts are roughly 47% of the pre-pandemic 2019 numbers in the same quarter. If it is going to get back to those pre-pandemic or close to those pre-pandemic numbers, then that would push out the stabilization a little bit beyond the middle of ’23. But we certainly expect that all these new foreclosures that have been initiated this year, those will stabilize in the middle of 2023. If the volumes increase due to the market getting back to pre-pandemic levels or because delinquency rates go up, it would push out the time it takes to stabilize. But of course, it would stabilize at an even higher number. The other thing I'd point out is in the second quarter of 2019, and Michelle, correct me if I'm wrong, how much in the revenue did we generate in Hubzu?

$28 million.

$28 million. So you compare that to the roughly $8 million we did in the second quarter of this year, and you could see or get a sense as to what the opportunity is for that business as the market recovers and as we stabilize.

Got it. That's helpful. And then on the origination side, could you comment a little bit on the lower metrics and your new product launches? You had indicated earlier that you should be doing better in the Origination business relative to the overall market, which is going to be in massive decline. Has anything changed in that? Or can you talk about the new product launches and how those are faring?

Yes, happy to. So we launched several new products in the verification space and in the credit reporting -- tri-merge credit reporting space. And those new products are gaining tremendous traction. We're focused on our pipeline every couple of weeks and the time lines to onboard those customers. And a large portion of the growth of our pipeline in the Origination business is coming from those newer products where we're able to save our customers a very significant amount of money. What we're learning is how long it takes from when a customer, we give a pricing analysis to a customer and a proposal, how long it takes to go from yes to a contract being signed, onboarded and then get all of the customer's branches up to speed and fully integrated and ordering our services. And so that's pushed up the timing a little bit. Also, the origination volumes come down more. The forecast continue to deteriorate on the market origination volume. So that had some impact. Both those points being said, we still believe, and I think you'll see a modest improvement, we believe, in the third quarter, and you'll really start to see an improvement in our Origination business in the fourth quarter relative to both the prior quarter sequentially as well as year-over-year. That's what we're currently forecasting. So I think it will start to show up in the numbers a little bit in the third quarter but really start to show up, we believe, in the fourth quarter.

Got it. Great, thank you. I'll get back.

Thank you.

Thank you.

And I'm not showing any further questions at this time. I'd like to turn the call back to Bill for any closing remarks.

Great. Thanks, operator, and thanks for joining the call. We appreciate your interest and support in the company. Have a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.