Good day, and thank you for standing by. Welcome to the Altisource Portfolio Solutions First Quarter 2024 Earnings Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Michelle Esterman, Chief Financial Officer.

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. Financial projections and scenarios are expressly qualified as forward-looking statements and as with other forward-looking statements should not be unduly relied upon. In addition to the usual uncertainty associated with forward-looking statements, the continuing impacts of government and servicer responses to the COVID-19 pandemic, government of fiscal policies, and current economic conditions make it extremely difficult to predict the future state of the economy and the industry in which we operate as well as the potential impact on Altisource. Please review the forward-looking statements sections in the company’s earnings release and quarterly slides as well as the risk factors contained in our 2023 Form 10-K describing some factors that may lead to different results. We undertake no obligation to update 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, and good morning. I’ll begin on Slide 4. I’m very pleased with our first quarter performance. We generated $4.6 million of adjusted EBITDA, marking our best quarterly performance since the third quarter of 2020 on $36.9 million of service revenue. We believe our financial results and sales wins demonstrate that we are not waiting for the default market to return to normal or for delinquency rates to rise to achieve growth. We improved adjusted EBITDA by more than $30 million over the last two calendar years in an incredibly difficult environment of low origination volume coupled with close to historically low mortgage delinquency rates. For 2024, in what continues to be a difficult environment, we forecast that we will grow revenue by 23% and adjusted EBITDA by $21 million compared to last year at the mid-point of our guidance. If achieved, this represents an adjusted EBITDA improvement of approximately $52 million over the three-year period. For the balance of this year, we anticipate quarter-over-quarter service revenue and adjusted EBITDA growth compared to the same quarters in 2023, as we continue to ramp sales wins and win new business on a lower cost base. And as the default market returns to normal and origination volumes increase, Altisource should benefit even more. In our Servicer and Real Estate segment, we are winning market share. Of the three exciting Servicer and Real Estate pipeline opportunities, I discussed with you last month, we entered into agreements with two, one in March, and one this month. We anticipate signing a third agreement this quarter. In our Origination segment, we are increasing adoption of our solutions that help originators save money. During the quarter, we signed another 13 agreements for our tri-merge credit product and related reseller services. We are already seeing the benefit…

Thank you. And at this time, we will conduct the question-and-answer session. [Operator Instructions] First question comes from Mike Grondahl with Northland. Mike, go ahead. Your line is open.

Hey, thank you. Just trying to think through, Bill, kind of your latest thoughts on when foreclosure sales might ramp up. And is there any other leading indicator we should look to? Delinquent GSE loans, macro things on job loss, but where’s your head kind of today for that ramp? And I don’t know, what are you looking to help you kind of benchmark it?

Yes. Hey, Mike, thanks for the question. So I guess the first point I want to make is, we’re not waiting for the market to recover, the default market to get back to normal or for delinquency rates to rise to improve our revenue and earnings? I think that’s a really important message. But then specifically to your question, Mike, look, I think the market is recovering less than we – at a slower pace than we expected. I thought, given those precursors rise in auto delinquencies, credit cards, student loan delinquencies, we all thought these were good solid indicators of what ultimately was going to happen or what ultimately should happen with mortgage delinquency rates. But today, they’re sitting roughly flat to where they were a year ago. And so we’re paying close attention and we do anticipate that over time, the market will get back to normal. If you look and I talked a little bit about this in my prepared remarks, if you look at loans originated, there’s several million loans originated over the last couple of years that followed the run up in home prices. And if you look at FHA loans that have 97% loan to value, there’s even with the run up of home prices over the last couple of years, there’s not a lot of equity in those homes. And so I think as the economy – as things get back to normal, you would expect those – the operating environment for those more recent cohorts of loan originations to return to a more normal operating environment. And by the way, I think, Mike, if the market – we did run the math and say what happens if the market were to get back to normal to this scenario we presented today? And I think you would see, when we look back to the run rate scenario we provided, I think in the third or fourth quarter of last year, and we account for some potential runoff of our anchor client portfolios and some other churn from customers. I mean, we could, in a normal environment, add another $30 million, roughly, of adjusted EBITDA to the scenario we presented today. So on top of the – I think, it was $35 million adjusted EBITDA in our scenario, you could add as much as another $30 million of EBITDA. Now, there may be a little bit of additional fixed costs we would add, but the number – the EBITDA becomes quite interesting as that market recovers. So it’s hard for us to tell when it’s going to recover. We think some of the early signs exist that there could be some stress in the market, but we’re not waiting for that to happen to grow our revenue and earnings.

Got it. And then two questions kind of related to Slide 17. The first one, the consolidated sales pipeline and win, you guys had a bunch of wins in 2023, right? Like $68 million worth, and you’ve cumulatively got about $8 million of that into revenue. If we look at the same time period, those five quarters presented, how should we think about the next – I don’t know, I’ll call it the remaining $60 million flowing into revenue?

Yes. That’s a very good question, Mike. So I think, look, what you’re going to see is we’re now ramping, and you see that on the bottom row of that Slide 17, where we did, I think, $3.5 million. So we are starting to ramp it. You’re going to see that we’re going to continue to ramp the sales wins as the year progresses. And look, when we get to the fourth quarter, we’re not going to be quite at that run rate. But I think from an EBITDA perspective, we’re expecting to be north of $30 million EBITDA run rate if you annualize our fourth quarter performance. You’re going to start to see the benefit. And, again, we’re being very conservative on the default market recovering. This is primarily from ramping sales wins on a more efficient cost base or a lower cost base.

Got it. That’s helpful, that exit run rate. And then my last question on the top line, attractive sales pipeline. I sort of get 3Q 2023, 4Q 2023, those numbers were kind of flattish. And I think a chunk of the pipeline went down into wins. But then if I go 4Q 2023 to 1Q 2024, yes, you had $10 million fallout to wins, but the number dropped by about $8 million. Are you happy where your pipeline is? Do you kind of need to rebuild some of that now or I don’t know, just help us think about that pipeline, the size of it, what does it need to be to kind of continue to support these wins?

Yes. I think you’re right, Mike. The reason for the drop primarily reflects the sales wins and we have some pretty meaningful sales win. You’re going to see – I think there’s a footnote about it. But in April, we had a pretty good sales win that I talked about in my prepared remarks related to our trustee business. We think we’re going to sign a second agreement hopefully this quarter, which will go into the win column as well. Look, we’re never happy with the sales pipeline. We always want it to be bigger, Mike. And we’ve got a really strong sales team that’s done a very nice job of building the pipeline, winning market share in a really tough market today, particularly on the default side. And so I’m pleased with the progress we’re making, but I’m never – I always want that pipeline to be bigger. And we talk about it internally, not just this quarter, but each quarter, we set pretty aggressive goals around how we want to grow the pipeline. But we feel good. This is a weighted average pipeline, keep in mind. The actual pipeline is much higher than that.

Got it. Got it. Hey, that color is helpful. Thanks and good luck.

Thanks, Mike.

[Operator Instructions] Next question comes from Raj Sharma with B. Riley. Raj, go ahead. Your line is open.

Yes. Hi. So congratulations on the increase in profitability. I wanted to ask you some questions on this slide. Earlier stage, the business wins that are contributing to $88 million in annualized revenue increase, how is that split – that’s Slide 6, how is that split between the default services and the market? I mean, I’m assuming that has nothing to do with the Hubzu side, the marketplace. And also, how does that split with originations?

Sure. So, hey, Raj, let me turn to that slide.

The service revenue scenario.

Yes. So you’re on Slide 6.

Yes.

So of that $88 million, I would say a meaningful portion of that is tied to the growth of our renovation business. Then some of it is tied to the growth of these trustee wins. And I think this is a sales wins through April 20 or so. It may be April 24. So this includes the trustee business. The renovation business would probably be the two – the renovation being the largest, then the two trustee wins, and then the next largest would be probably, I don’t have that right in front of me, but I think some of that REO auction work that we’re doing for a loan servicer, that’s a market share gain. And then there’s some in the Origination side, but it’s pretty small, relatively speaking, compared to what’s the growth in the Servicer and Real Estate segment. So I think just to repeat, largely, it’s the renovation business, the two trustee wins, and then the REO auction business. There’s a little bit of title wins in there as well.

Right. So all this is, if I’m correct in understanding all that – all this – all these wins are in the earlier stage of the foreclosure process basically. If the foreclosures market is not moving up considerably and there’s more loss mitigation and there’s more loan modifications and other early. So this is the earlier stage. Could you talk about the trustee referral expansion business? You are taking share there, and that’s largely all of the gains. But are you – do you make much money if there’s loss mitigation, loan modifications?

Yes. So we’re a foreclosure trustee and I think it’s 11 or 12 states. And there’s milestone billing, Raj. So – and we’re not assuming that each foreclosure file we receive makes it all the way through the end of the process. But in the milestone billing process, I think you’re probably billing 60% or 70% of the total fees in the first couple months of receiving the referral. So it’s not dependent on making it all the way through the end. And our analysis or forecast of what the revenue could look like on a stabilized basis is in today’s market, not in a rising delinquency rate environment or a more normal delinquency environment. And yes, that is a very profitable business for us.

Got it. And then on the cost base, so clearly there were, you’ve had some cost cuts and that’s also – that’s contributed, and the increase in revenues contributed to the increase in profitability. Are you done with the cost cuts or your cost base currently, is that to stay or are there more cost cuts to come more – we haven’t seen some of…

Yes. So let’s talk just first about on the corporate side, there were some one-time benefits we got in the first quarter. But even if you normalize for those one-time benefits, we still brought the cost down compared to the fourth quarter. So we won’t – we’re not anticipating those one-time benefits to continue in future quarters. I think there’s some modest, and Michelle, jump in, savings in corporate in the second half of the year. Michelle?

That’s right. It’s in corporate tech. It’s in the technology and communications line.

Yes. So I think you’ll see a little bit of savings there, maybe just a little bit in occupancy as well, a modest amount. But for the most part, I think we don’t have any new set of initiatives beyond what’s already been planned for the rest of the year. And then when you look at the business units, Raj, there will be a little bit of ramping up some costs in the second quarter in anticipation of what we think is going to be very meaningful growth going into the third and fourth quarter. But that would just be sort of a normal – you would expect there’s going to be some hiring in advance of that revenue coming in, in the second quarter. So we expect some modest revenue growth in Q2 compared to Q1. But EBITDA, there’ll be a modest impact to EBITDA given some of the hiring in advance of this revenue getting to sort of a stabilized level. But we think that’s very good hiring. And certainly, in line with our margin expectations. The new business is certainly in line with our margin expectations.

Got it. And just a couple more questions, if you can bear with me. The new – obviously, you are focusing on the earlier stage of the foreclosure process. You’re having wins there. There is the normal run rate scenario that you have talked about in the past, $45 million of EBITDA and $235 million revenues. How does that change? That changes incrementally by this $88 million.

Yes. Raj, I think that’s a very good question. Look, we did a bit of a back of the envelope. And there’s, of course, several assumptions that go into how we think about this. But if the market were also to get back to normal, and now, we’re assuming that our anchor portfolios, they continue to run off over the next couple of years, and we’re also assuming a little bit of a churn on our pre-pandemic legacy business. If you take that into consideration, and we’re back to a normal operating environment, roughly at normal, at pre-pandemic delinquency levels, we think EBITDA could grow by as much as what Michelle, close to $20 million, $25 million.

That’s right.

Probably closer to $25 million. And your revenue would grow by as much as $60 million above the scenario we presented today. So there’s a lot of upside, even if delinquency rates just stay at the historically low levels. But the market gets back to normal. The foreclosure initiations and foreclosure sale conversion rates gets back to normal. There’s a lot of upside. In addition, our scenario we presented today doesn’t include sales that take place beyond April 20. As we continue to win new business, that should improve our performance as well. We’re just isolating the first quarter and pro forma, analyzing the sales wins, we’ve already had.

Got it. Thank you for – that’s really good color. Thank you for taking my questions. I’ll take this offline. Thank you.

Great. Thank you, Raj.

Thank you. I’m showing no further questions at this time. I would now like to turn it back to Bill Shepro for closing remarks.

Great. Thanks, operator. We’re very pleased with our first quarter financial performance and believe we’re well-positioned for the rest of this year and beyond. And thanks for joining today.

Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.