Altisource Portfolio Solutions Q2 2023 Earnings Call Transcript

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July 27, 2023

There are 5 speakers on the call.

Operator

And thank you for standing by. Welcome to the Altisource Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised.

Operator

Please be advised that today's conference call is being recorded. I would now like to hand the conference call over to your speaker today, Michelle Esterman, Chief Financial Officer. Please go ahead.

Speaker 1

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 impact of government and servicer responses to the COVID-nineteen pandemic, together with the current economic environment, Make it extremely difficult to predict the future state of the economy and the industries in which we operate as well as the potential impact on Altisource.

Speaker 1

Please review the forward looking statements section in the company's earnings release and quarterly slides as well as the risk factors contained in our 2022 Form 10 ks, which describe 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 Joining me for today's call is Bill Shepro, our Chairman and Chief Executive Officer.

Speaker 1

I'll now turn the call over to Bill.

Speaker 2

Thanks, Michelle, and good morning. I'll begin on Slide 4. Our adjusted EBITDA performance continues to improve over 2022. 2nd quarter adjusted EBITDA was 47% better than the same period in 2022 and year to date adjusted EBITDA was 81% better or $8,700,000 Based on our current forecast, we anticipate roughly breakeven adjusted EBITDA for the 3rd quarter and positive adjusted EBITDA for the Q4 and full year. For our 2nd quarter adjusted EBITDA was impacted by an estimated $900,000 From certain unexpected non recurring items, we remain ahead of our adjusted EBITDA plan for the first half of the year.

Speaker 2

Despite improving Q2 adjusted EBITDA compared to the same period in 2022, interest expense from the higher interest rate environment and our amended term loan contributed to the greater Q2 2023 adjusted net loss. 2nd quarter service revenue was lower than the same quarter last year, Primarily from the exit of a low margin customer care business in the Q4 of 2022, the decline in the customer's propensity to order services In 2 of our lower margin default related businesses and unexpected temporary delays in certain California foreclosures. We believe those temporary foreclosure holds are now behind us and that the associated revenue is largely deferred and not lost. We continue to position Altisource to take advantage of what we see as significant potential opportunities in the residential mortgage default market over the coming years as the market continues to normalize and consumers face financial stress. As you can see on Slide 5, Our sales pipeline and wins in both of our segments remain strong, and we continue to aggressively manage our expenses.

Speaker 2

Our consolidated weighted average sales pipeline at the end of the Quarter was an estimated $63,000,000 of annual revenue on a stabilized basis, representing 47% of our annualized Q2 2023 revenue. We are also winning new business. Since last quarter, we've won business that we will generate $18,600,000 of annual revenue on a stabilized basis. The July win of $12,800,000 Reflects a new asset management client that we estimate will generate $3,000,000 to $5,000,000 per year in adjusted EBITDA across Hubzu and most of our other default solutions. During the quarter, we continue to onboard and grow Sales wins from 20222023, which combined are now at $13,000,000 of annualized revenue run rate.

Speaker 2

Finally, from a cost perspective, in July, we began to implement a company wide cost reduction plan that we estimate will reduce annual cash operating expenses by $13,500,000 once complete. Turning to Slide 6 in our Servicer and Real Estate segment. 2nd quarter adjusted EBITDA was $200,000 or 2% lower than the same quarter in 2022. We estimate that the unexpected temporary delays in certain California foreclosures deferred $500,000 in adjusted EBITDA to subsequent quarters. Despite this impact, 2nd quarter adjusted EBITDA margins improved to 30% from 26% compared to the Q2 of last year.

Speaker 2

The margin improvement reflects product mix and cost reduction measures, partially offset by the revenue impact from those delays. We experienced a decline in service revenue, primarily from the exit of a low margin customer Care business in the Q4 2022, the decline in the customer's propensity to order services in 2 of our lower margin default related businesses and the temporary foreclosure holds. We believe the foreclosure holds are now behind us and that the associated revenue is largely deferred and not lost. For 2023, we anticipate that our countercyclical servicer and real estate segment will have higher adjusted EBITDA compared to 2022, driven by revenue mix and efficiency initiatives. Moving to Slide 7 and our servicer and real estate sales pipeline and wins.

Speaker 2

While we wait for the default market to recover, we continue to build our pipeline and are winning new business. At the end of the second quarter, Our weighted average pipeline totaled $38,600,000 of annual revenue on a stabilized basis. In April through July, We won business that we estimate will generate $15,700,000 in annualized revenue once stabilized. One of the more notable wins that I mentioned earlier was the July signing of a Master Services Agreement to provide REO Asset Management, Brokerage, auction, valuation and field services on a portion of the servicers REO portfolio. On a stabilized basis, we estimate that this new business represents $12,800,000 in annual revenue and $3,000,000 to $5,000,000 per year in adjusted EBITDA.

Speaker 2

We anticipate that we will begin to receive referrals in the Q3 and reach revenue and earnings stabilization by the middle of 2024, if not sooner. Turning to the macroeconomic environment in Slide 8. There are several indicators that consumers are financially stressed, which could be precursors to a rise in mortgage delinquency rates. Inflation, which reached a 40 year high in June 2022, Has eroded the American consumers purchasing power. As you can see on the graphs, auto and credit card delinquencies continue to rise and 30 year fixed interest mortgage rates remain more than double from pandemic lows reducing home affordability.

Speaker 2

Average personal savings rates, which were at 26% in March of 2021, have declined to 4.6% in May 2023. Additionally, in 20222023, 37% of workers have taken a loan, Early withdrawal and or hardship withdrawal from their 401 or similar plan or IRA with both years marking an all time high. While 30 plus day mortgage delinquencies are close to historical lows, we believe that there are early signs of stress. In June, the number of U. S.

Speaker 2

Mortgages that are delinquent by 1 payment increased by 2.2% and those that are behind by 2 payments increased by 1.7% from May. Should borrowers remain under financial stress Where the economy enter a recession, we anticipate that mortgage delinquency rates will rise. Turning to Slide 9 and our origination segment. In a difficult origination environment, we performed well with 2nd quarter adjusted EBITDA 44% better than the same period in 2022, despite the $400,000 negative impact from the settlement of a non recurring litigation matter. 2nd quarter service revenue was 13% higher than the 1st quarter and 1% higher compared to the 2nd quarter last year.

Speaker 2

Service revenue growth reflects the progress we are making in onboarding customer wins from our newer Lenders 1 products. As you can see on the bottom left of the slide, Our 2nd quarter revenue growth compared to the same quarter in 2022 reflects significantly better than market performance from the Lenders 1 Business as we gain traction with our solutions that are designed to help our members save money. Our performance was partially offset by our other origination businesses, which performed largely in line with the refi market. We anticipate the Origination segment's performance to improve as the year progresses from sales momentum, efficiency initiatives and product maturity for our newer reseller offerings. For the full year, we anticipate the Origination segment to generate flat to modest year over year revenue growth And adjusted EBITDA improvement despite the MBA's forecasted 22% annual decline in 2023 origination volume.

Speaker 2

Slide 10 provides a summary of our origination segment sales pipeline and wins. Our weighted average sales pipeline as of June 30 is strong at $24,600,000 of annual revenue on a stabilized basis. This includes $9,000,000 in weighted revenue opportunities related to pricing proposals to Lenders 1 members and prospects for our newer reseller business. We closed $2,900,000 in estimated sales wins during the quarter. From our 2022 and first half of the year 'twenty three sales wins, We recognized approximately $2,900,000 in revenue in the 2nd quarter or $11,500,000 of revenue on an annualized basis.

Speaker 2

This is significantly up from the $9,400,000 on an annualized basis as of the Q1. Moving to our Corporate segment. We continue to maintain cost discipline. 2nd quarter adjusted EBITDA loss in the Corporate segment was $2,300,000 or 19% better than the same quarter in 2022. For the year, we anticipate corporate costs, Excluding interest expense and one time debt amendment costs to be lower compared to 2022.

Speaker 2

This reflects the additional cost cutting initiatives that we began implementing in July. To conclude, Our 2nd quarter adjusted EBITDA was 47% better than the same period in 2022, despite the estimated $900,000 impact from the temporary closure holds and non recurring litigation settlement. Our sales pipeline and wins remain strong, and we continue to aggressively manage our expenses. We believe we will begin to recover from the California foreclosure holds in the Q3 and are well positioned in 2023 to return to year over year revenue growth and generate positive adjusted EBITDA. We anticipate roughly breakeven adjusted EBITDA for the 3rd quarter and positive adjusted EBITDA for the Q4 and full year, positioning the company for significantly stronger performance in 2024 With potential revenue and adjusted EBITDA upside from the significant number of servicing portfolios reported to be in the market for sale if acquired by our customers.

Speaker 2

I'll now open up the call for questions. Operator?

Operator

Thank you. We will now conduct a question and answer session. Please standby while we compile the Q and A roster. Our first call question comes from Mike Grondahl of Northland Securities. Mike, your line is open.

Speaker 3

Hey, guys. Thanks. Hey, Bill. First question, just on Hubzu inventory levels, When would you think that's going to inflect higher?

Speaker 2

Yes. So Mike, I don't think our view has changed. I think as these new foreclosures work through the system, it starts to stabilize the middle of next year. Right now, our inventory is holding relatively flat because most of our business is REO related. As those new foreclosures work through that inventory, we would expect to see Sorry, work through that process, we would expect to see it grow.

Speaker 3

Got it. So if Hubzu inventory is sort of inflecting middle of next year. Is it fair to assume sort of your revenue in Flex middle of next Dear also, is that the right way to think about it?

Speaker 2

Yes. I mean, I would say, Mike, look, we're very focused on the revenue side on new sales In addition to the market recovering. And so, while we anticipate the market is going to recover, we want to make sure we're out there selling as hard as we can and winning new business in the meantime. And based upon revenue growth that we anticipate will take place throughout the rest of this year And revenue growth into next year, from our core business and our new sales wins, we think we can continue to improve our earnings quite significantly. In terms of the new foreclosures, clearly, Hubzu is our most profitable business.

Speaker 2

And as those foreclosure initiations work through the process and become REO, that represents more growth for us.

Speaker 3

Great. That client, the asset management client, I think representing $12,800,000 looked like a big win in July and it's going to drive, I think you said $3,000,000 to $5,000,000 of annualized EBITDA, are there more out there like that? I mean, is that something you can replicate And kind of run with a little bit?

Speaker 2

Yes. So, Mike, first of all, we're really excited about that opportunity. We're working very hard with this customer to get launched hopefully in September is our plan. In terms of other opportunities, we're working on some other opportunities as we speak That look like they would be next year launch dates, not this year, should we be successful in winning those opportunities. So we do have a couple Of opportunities we think that could be represent more growth for Hubzu and some of our related services In a manner similar to this opportunity.

Speaker 2

But of course, until you win the deals, it's not done. But we're pretty excited there.

Speaker 3

And then just lastly, the July cost reduction with the $13,500,000 of annual savings. I guess talk about that for a moment. Is that kind of to set you up for 2024 And just kind of pushing that margin and profitability, kind of guaranteeing it in 2024, I guess help me understand the July cost reduction.

Speaker 2

Yes, sure. So a couple of things. One is, I think we'll We'll be at $1,000,000 a month of savings beginning, Michelle, in the month of September. Is that right?

Speaker 1

That's right.

Speaker 2

And in terms of look, I think, Mike, we need we were at one point, pre pandemic, And we also want to make sure we have very significant operating leverage as the market comes back. And I think by taking these actions today, We help ensure we have stronger operating leverage going forward. And depending on the timing of the market Depending upon the timing of the market, we have more flexibility for when it recovers, we have more flexibility. And so we thought it was an important step to take And I'm proud of the work the team has done to help us identify those cost savings and get those implemented quickly.

Speaker 4

Got it.

Speaker 3

Okay. Hey, thank you.

Speaker 2

Thanks, Mike.

Operator

Thank you very much. One moment for our next question. Our next question comes from Raj Sharma of B. Riley Financial. Raj, your line is open.

Speaker 4

Yes. Thank you. Thank you for taking my questions. Bill and Michelle, I just wanted to And the foreclosure holds and the impact on the 2Q revenues, can you give us some more color on that? When did they come off?

Speaker 4

Do you are they were they done entirely in 2Q and no impact in 3Q? And if there are any such similar holds in other states.

Speaker 2

Sure. So, good morning, Raj. One of our customers agreed with the State of California in the second quarter to put their pending Foreclosures in that stayed on hold for roughly 60 days, but it didn't all start at once. So it was primarily a second quarter event That impacted primarily 2 of our businesses, our foreclosure trustee business and our title business that are both very high margin Services for us, we saw those hold start to come off at the end of June, And now we believe they're fully off and we're back in business in California. That revenue was largely The $500,000 I referred to of EBITDA is largely deferred.

Speaker 2

We think we'll come back in the 3rd Q4 this year.

Speaker 4

Great. Thank you. And any other such holds or commentary in other states?

Speaker 2

No, we're not aware of anything at this point in time. I mean, the only thing I would say no, we're not aware, Raj, of Any impact from our customers in other states today.

Speaker 4

Got it. And then just secondly, just Touching upon the cost reductions one more time, these are in addition to several cost cuts that were done last 2 years. What areas are these cost reductions in?

Speaker 2

Yes. I'd say the vast majority, and Michelle correct me if I'm wrong, are coming from comp and benefits with some coming from A much smaller amount coming from technology and insurance costs, things like that. Michelle, is that correct?

Speaker 1

That's right. That's right. Yes.

Speaker 2

Right.

Speaker 4

So because our impression was that the fixed costs, The cost cuts that were done in the last 2 years are largely fixed costs. This is more variable?

Speaker 2

No, I would say look, we're still yes, I'd say, Raj, we're still addressing sort of fixed cost infrastructure, both inside the corporate department and inside the business units. And then to a lesser degree, variable costs.

Speaker 4

Great. And then congratulations on the big asset management win. Wanted to understand or maybe get your take on growth opportunities that are Inorganic, there are maybe more tuck in possibilities. Do you see in the environment out there potential To acquire or tuck in, in either of the segments?

Speaker 2

Yes. I mean, if you listen to the large the loan servicers that have reported their earnings already this quarter And those all those servicers that reported their earnings last in their last quarter's earnings, Q1 earnings calls, Everyone is talking about the very large amount of portfolios that are available in the market for sale. And some of those portfolios and platforms include a fee based businesses inside of them. And so we think there are some opportunities, should our customer or partners be successful in acquiring those portfolios And so there seems like there's a lot of activity short is the short answer and Now we'll wait and see how successful our customers are.

Speaker 4

Great. Other than the acquisition of servicing rights From the servicers and the flow through business to you, are there other opportunities that could Potentially be taking share through acquisitions in the default services market?

Speaker 2

Yes, we always keep our eyes open. We're very focused, of course, on organically growing our revenue, Being very aggressive in terms of managing our expenses, benefiting from the market to come back, but sure, like we will absolutely keep our eyes open for Other opportunities, if they make sense and for the company.

Speaker 4

Very quick. Great. Thanks for answering my questions. I'll take it offline. Thank you.

Speaker 2

Great. Thanks, Raj.

Operator

Thank you. At this time, I'm showing no further questions. I would now like to turn the conference back to Bill Sheparrow for closing remarks.

Speaker 2

Great. Thank you, operator, and thanks for joining the call, and we appreciate everyone's support. Take care.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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Key Takeaways

  • Altisource delivered 47% year-over-year growth in Q2 adjusted EBITDA and now expects roughly break-even adjusted EBITDA in Q3, with positive results forecast for Q4 and the full year.
  • The company’s consolidated sales pipeline stands at $63 million of annualized revenue (47% of Q2 revenue), and it secured $18.6 million in new business this quarter, highlighted by a $12.8 million asset management client projected to add $3–5 million in annual adjusted EBITDA.
  • In July Altisource began a company-wide cost reduction plan aimed at cutting $13.5 million of annual cash operating expenses, enhancing its operating leverage as the default market normalizes.
  • In the Servicer & Real Estate segment, adjusted EBITDA margins improved to 30% (from 26%), despite a $500,000 deferral impact from temporary California foreclosure holds that the company expects to recover in Q3.
  • The Origination segment achieved 44% higher adjusted EBITDA versus Q2 2022, grew service revenue sequentially and year-over-year, and maintains a strong $24.6 million pipeline amid a challenging market.
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Earnings Conference Call
Altisource Portfolio Solutions Q2 2023
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