Altisource Portfolio Solutions Q2 2024 Earnings Call Transcript

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Provided by Quartr
July 25, 2024

There are 5 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Altisource Portfolio Solutions Second Quarter 2024 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your first 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 atwww.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.

Speaker 1

In addition to the usual uncertainty associated with forward looking statements, the continuing impacts of government and servicer responses the COVID-nineteen pandemic, governmental fiscal policies and current economic conditions 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. 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 ks 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.

Speaker 1

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'll now turn the call over to Bill.

Speaker 2

Thanks, Michelle, and good morning. I'll begin on Slide 4. We had a strong second quarter and believe we are on track to achieve our 2024 guidance of 13% to 32% service revenue growth over 2023 and adjusted EBITDA between 17,500,000 $22,500,000 in 2024. For the quarter, we generated 36 $900,000 in service revenue and $4,400,000 of adjusted EBITDA and modestly increased cash to $29,700,000 We also went live and began to receive referrals from a renovation business customer and 3 foreclosure trustee customers. Our financial results reflect our strong sales wins, price increases, referral volume growth and lower cost base in what continues to be an incredibly difficult environment of close to historically low mortgage delinquency rates and lower origination volume.

Speaker 2

Service revenue in our servicer and real estate segment grew by 16% compared to the same quarter in 2023 in a market that had approximately 7% fewer foreclosure starts and 13% fewer foreclosure sales. Service revenue in our Origination segment declined by 5% compared to the same quarter in 2023, outperforming the 13% decline in total market mortgage origination volume. Slide 5 provides additional information on our total company financial performance. As you can see, the trends are positive. Service revenue was 11% higher and adjusted EBITDA was $7,900,000 better than the Q2 of last year.

Speaker 2

Adjusted EBITDA margins improved to 11.9% in the Q2 of 2024 compared to negative 10.5% in the Q2 of 2023. The improvement in service revenue, adjusted EBITDA and adjusted EBITDA margins compared to last year was driven by sales wins, price increases for certain services, stronger default referrals, business segment margin expansion and lower corporate costs. Adjusted EBITDA and adjusted EBITDA margins declined modestly compared to the Q1 due to approximately $600,000 of 1st quarter net nonrecurring benefits, comprised of $1,200,000 of benefits in the Corporate segment and $600,000 of costs in the Servicer and Real Estate segment. Excluding these net non recurring 1st quarter benefits, 2nd quarter adjusted EBITDA and adjusted EBITDA margins improved compared to the Q1. For the 3rd and 4th quarters, we anticipate strong service revenue and adjusted EBITDA growth over 2023 as we ramp sales wins in our more efficient and lower cost base.

Speaker 2

Slide 6 provides additional information on our servicer and real estate segment. 2nd quarter 2024 service revenue in this segment was 16% higher than the Q2 of 2023 and flat to last quarter. We continue to experience growth in certain higher margin businesses that support the earlier stage of the default process. Adjusted EBITDA of $11,100,000 was 50% higher than the Q2 of 2023 and 6% higher than the Q1 of this year. Adjusted EBITDA margins were 38.1 percent in the Q2 of 2024 compared to 29.5% in the Q2 of 2023 and 35.8% last quarter.

Speaker 2

The improvement compared to the Q2 of last year reflects revenue growth and efficiency initiatives. The improvement compared to the Q1 of this year reflects business unit efficiency initiatives as well as the $600,000 of non recurring expenses in the Q1 that I just discussed. Slide 7 provides a summary of our servicer and real estate sales wins and pipeline. For the quarter, we won new business that we estimate will generate $15,300,000 in annual revenue once fully ramped over the next couple of years. In the Q2, we signed 3 agreements to provide foreclosure trustee services.

Speaker 2

This is in addition to the market share expansion of trustee business with a customer that we won in the Q1. We completed the onboarding process of these 3 trustee customers and are ramping referrals. We anticipate that these wins will support service revenue and EBITDA growth. We also made progress ramping our renovation services for 1 of the largest owners of REO assets in the U. S.

Speaker 2

Since the program went live in late April, we have received over 35 renovation referrals, which we estimate will generate average revenue of close to $100,000 per property. We anticipate referral volume, revenue and earnings from this customer will ramp as the year progresses. We ended the quarter with a segment weighted average sales pipeline of $20,300,000 of annual revenue on a stabilized basis, most of which we forecast will impact 2025 and beyond. The decline in the sales pipeline compared to last quarter primarily reflects the significant sales wins I just discussed and the addition of earlier stage opportunities to the pipeline, which have a lower assigned win probability. Turning to the macroeconomic environment on Slide 8.

Speaker 2

As we have discussed in the past, there continues to be early signs of consumer financial stress. Consumer savings has declined, credit card debt is near a record high and early stage delinquencies are rising. Additionally, home affordability, which is highly correlated to home prices, remains low. Despite this significant increase in interest rates in the last 2 years, we believe home prices remain high largely because the inventory of homes for sale is very low. This appears to be changing.

Speaker 2

According to the National Association of Realtors, the inventory of existing homes for sale in May 2024 was 18.5% higher than May of last year and seasonally adjusted existing home sales were 2.8% lower. As inventory grows, home prices in certain markets may decline as the supply demand dynamics normalize. Should this happen, stress consumers that have low down payment mortgages or loans that were originated over the last couple of years may no longer have equity in their homes and will therefore have fewer options to address loan defaults. This could increase foreclosure initiations and drive foreclosure conversion rates to more normal levels. Moving to our Origination segment on Slide 9.

Speaker 2

We are pleased that adjusted EBITDA improved by $1,800,000 compared to the Q2 of last year despite a 5% decline in service revenue and a 13% decline in industry wide residential origination volume for the same period. Adjusted EBITDA was flat to the 1st quarter on similar service revenue. Adjusted EBITDA improved over last year from cost savings and efficiency initiatives. As you can see on the slide, the origination segment's gross profit, gross profit margins, adjusted EBITDA and adjusted EBITDA margins all improved relative to prior year. Slide 10 provides a summary of our origination segment sales wins and pipeline.

Speaker 2

On an annualized stabilized basis, we won an estimated $1,500,000 in new business in the second quarter. Our weighted average sales pipeline at the end of the quarter was $14,700,000 We continue to focus on rolling out new solutions to help our Lenders 1 members make more money. We believe the regular launch of new solutions to Lenders 1 members, combined with greater adoption of our existing solutions, will strengthen our value proposition for LendersOne members and support further revenue and earnings growth in our origination segment. During the Q2, we signed agreements with our first homeowners insurance customer and have a pipeline of 35 member prospects. We believe that the Homeowners Insurance program can improve the loan closing process for our members and their borrowers and establish an attractive revenue annuity for Altisource as policies are issued, the majority of which we believe will be renewed.

Speaker 2

Turning to our Corporate segment in Slide 11. We are maintaining strong cost discipline. 2nd quarter corporate adjusted EBITDA loss of $7,200,000 was $2,400,000 or 25 percent better than the Q2 of 2023 $900,000 worse than the Q1 of this year. The Q1 2024 results included an estimated $1,200,000 of net non recurring benefits. Absent these benefits, 2nd quarter 2024 adjusted EBITDA loss in corporate modestly improved compared to the Q1 2024.

Speaker 2

The lower adjusted EBITDA loss compared to last year reflects our cost savings and efficiency initiatives. Moving to Slide 12. In summary, I'm pleased with our second quarter and first half of the year performance and believe we are on track to achieve our 2024 guidance of 13% to 32% service revenue growth over 2023 and adjusted EBITDA between $17,500,000 $22,500,000 in 2024. We continue to win new business and are making good progress ramping sales wins on a much lower cost base in a historically difficult market. As a result, service revenue for the 1st 6 months of this year is $3,500,000 or 5% higher than the same period last year and adjusted EBITDA is $11,000,000 higher despite the decline in foreclosure starts, foreclosure sales and mortgage origination volume over the same period.

Speaker 2

If we achieve the midpoint of our adjusted EBITDA guidance, we will have grown adjusted EBITDA by approximately $52,000,000 over 3 years. As we ramp new business, we are cautiously optimistic that we will exit the year at a $30,000,000 plus adjusted EBITDA run rate. I'll now open up the call for questions. Operator?

Operator

Thank you. At this time, we will conduct the question and answer session. Our first question comes from Raj Sharma with B. Riley. Please go ahead.

Speaker 3

Hi, thank you for taking my questions. If you could talk about how is service revenue growing 16% with fewer foreclosure starts and fewer foreclosure sales? How much of that is price increases? And also if you could talk about the excuse me, if you could talk about the incrementally new revenue from the pre and the early foreclosure process?

Speaker 2

Hey Raj, Bill Shepro here. Good morning. So I think that a couple of things are taking place in service and real estate segment. Michelle, you could jump in as well. I think one component of it is some price increases in our field services and valuation business, which is contributing to the growth.

Speaker 2

2, if you remember in the Q2 of last year in California, one of our customers had some holds on foreclosures, those have been released. And so from a comparability perspective, we don't have that issue this year in Q2. 3rd is, we're winning new business and we're adding on the earlier stage we're adding business to our earlier stage processes and that includes primarily the foreclosure trustee business where we've started receiving referrals from 3 new clients, 2 of which we think could be meaningful and one still will be exciting new business, but more modest. And then finally, although it's in the early innings, we launched the renovation business in the Q2. I think it only contributed about $200,000 or so to revenue in the second quarter, But that's ramping very nicely.

Speaker 2

I think as of a week ago or so, we had received 35 referrals. I think we're now up to north of 40 referrals from this customer. And so that business is ramping nicely and we're very optimistic that that can be a very meaningful contributor as we go forward.

Speaker 3

Right. Thank you for that. And then can you give a sort of an estimate on the margins on the pre and the earlier part of this, the foreclosure process versus your usual servicer business?

Speaker 2

Yes, sure. Look, a lot depends on the product, but the trustee business, because of our global operations is a very high margin business inside the business units. I think north of 50% in the title business that's more probably, Michelle, what in the 30s?

Speaker 3

Yes.

Speaker 2

The EBITDA margin level. The field services business is typically mid to high teens margin business and then that also can take place earlier in the process. And so the margins can be reasonably attractive, not necessarily as attractive as the margins inside of Hubzu at the very end of the process, but they're still pretty strong.

Speaker 3

Right. That's very helpful. And then I wanted to understand your confidence level on the on how confident are you in the pre and the earlier foreclosure process to continue through this year and next? Is this a structural new addition to the revenue base or is it sort of until the actual foreclosures pick up?

Speaker 2

Yes. So Raj, I think if you look at the reporting that comes from ICE or Black Knight, delinquency rates are still very low, both 90 plus and early stage delinquencies. Early stage delinquencies did tick up in the 2nd quarter, but it's unclear if that was just a timing question as to what day was the last day of the month. So they did tick up, we'll see if it's a trend or not. But generally speaking, delinquency rates remain very low.

Speaker 2

And so we want to focus on the earlier stage processes just because foreclosure initiations, while they're still down almost 30% from where they were pre pandemic, they're up quite a bit from during the pandemic. And so that's an area we want to continue to focus on and work to grab market share. And then we're also expanding some work we're doing in the foreclosure trustee business with an existing customer. We added, I think 6 new states with them and we've also started providing services on their reverse mortgage portfolio in the trustee space. So we think that represents some growth for us.

Speaker 2

But all in all, I think the delinquency market has been fairly muted. That may change. Mean, Michelle, during my prepared remarks, we mentioned what's going on with home inventory. And I think in May, homes for sale were up 18% compared to the prior year and sales were down a couple of percent. So that's pretty interesting.

Speaker 2

So it appears there's a bit more homes are available for sale and due to the bid ask spreads, the less homes are selling. That could be typically that's a precursor to home prices coming down like we've already seen in markets like Austin. And I think if that happens, you're going to see some of the more recent cohorts of originations, particularly those with very high loan to value and also those loans, even if they had more equity, that equity was after a massive run up in home prices that may not continue or even come down. That's where I think there's some risk for higher delinquencies and that could be perhaps the 1st shoe to job that starts to benefit us.

Speaker 3

Right. Thank you. And then just lastly on the big win in Q2 of the $15,300,000 the annual, that's the annual estimate for the next year or 2. Could you talk about that win? And is that related to the renovation services at all?

Speaker 3

Sure. The business that's getting did I hear it correctly, you're getting about $100,000 of property for?

Speaker 2

Yes, roughly, I think we're just shy of $100,000 in renovation costs on the referrals that we've received so far where we've submitted bids and have them approved by customer. So that's sort of the ticket price, if you will, or the total renovation cost that will be booked as revenue as we complete the renovations. And so I think, look, I like to look at our wins our larger wins in aggregate, Raj. So if you look in the Q4, we won this very large renovation opportunity in the 1st and second quarter. I think in the second quarter, we won these 3 trustee clients and all 3 are now sending referrals.

Speaker 2

We think in aggregate, if you were to look at the sales scenario slide, I think it's in the appendix, We've included that again this quarter. You'll see that between those three wins, Michelle, what's roughly you're looking at $70,000,000 $80,000,000 of revenue is my

Speaker 1

recollection? $88,000,000 is what we have in the deck on

Speaker 2

Yes. So we're estimating from those wins and several others on the origination side, but those would be the 4 largest wins as well as the expansion of trustee work with an existing customer into new states. Raj, we feel good about building up to that level of revenue from those sales wins. And in fact, there's an opportunity for us to look, if we're optimistic, there's an opportunity we could outperform it. If that renovation business were to turn into 100 files a month at $100,000 a month, you're looking $10,000,000 of revenue a month and we're not including anywhere near those levels in the forecast.

Speaker 2

But I think there's an opportunity for us to certainly achieve what we've included in the appendix of the slide deck, today's slide deck.

Speaker 3

Got it. Thank you. I'll end there with my questions and take it offline. Thank you again for answering my questions.

Speaker 2

Thanks, Haresh.

Operator

Thank you. Our next question comes from Mike Grondahl with FNBO Northland. Please go ahead.

Speaker 4

Hey, guys. Thank you. Hey, Bill, on the I think you mentioned 35 homeowners insurance in relation to that program. Are you taking any risk with the homeowners insurance policies or are you just kind of an agent, if you could explain that?

Speaker 2

Sure. So we launched with a insure partner called Policygenius, a homeowners insurance program where we're acting we're both just acting as agents. So we're licensed as an insurance agent essentially across the country as is Policygenius. And under the program as members join the program and their loan officers are meeting with borrowers, we're getting lead referrals to provide homeowners insurance to those customers and we're trying to simplify and reduce the friction in getting that homeowners insurance policy. And so through our partner through Policygenius, we can provide multiple offers of homeowners insurance to the consumer.

Speaker 2

And then we're essentially earning a commission. That commission, I think, these are really rough numbers, but roughly half of the commission comes to us, half to our partner and then that's what's changed just modestly in the second for homeowner insurance renewals in the future. And so we're not the short answer is we're not taking any risk.

Speaker 4

Right. You're not taking that risk.

Speaker 2

We have 35 perspective. We have 35 perspective.

Speaker 4

Kind of on a sale.

Speaker 2

That's right. We have 35 members or lenders that are right now evaluating the program. We already have one signed up and are now receiving referrals and we're optimistic. We've got an attractive pipeline and we look forward to closing some of these deals. What I like about this business is, it's not just the commission you are in the 1st year as the homeowners insurance policies renew.

Speaker 2

And I think the industry data is around 85 percent plus renew, we continue to earn a commission as those policies get renewed. And at the same time, what's very important to us is we're actually making the closing process more frictionless for our members.

Speaker 4

Got it. Yes, you're leveraging that seat at the table for sure. On this newer renovation business, dollars 100,000 per, can you just explain what you're doing there? I'm a little naive, but is that the actual renovation work? Or what are you doing to earn the $100,000

Speaker 2

Sure. Yes, of course. So basically, we're hired by this customer that's one of the larger owners of REO. And by the way, we hope to expand this to real estate investors and single family rental investors over time, particularly if that market starts to come back. But basically what we're doing is we go out to the property, we evaluate the condition all based upon business rules given to us by the clients.

Speaker 2

We determine based on their business rules what work needs to be done and we've got some pretty sophisticated tools to do this analysis and bid work. The client basically tells us what the price is that they pay for the services. We submit the bid. If the client says yes, we basically are managing the renovation work through a contractor network that actually is doing the work with our oversight and then we make the difference between what we're paid and what we pay the contractors.

Speaker 4

Got it.

Speaker 2

Less some internal costs.

Speaker 4

Sure, sure. Great. And then maybe it's too early, but any initial thoughts on 25, just sort of assuming the world stays round, how are you thinking about 25% at this point?

Speaker 2

Yes. So look, we put some couple of scenarios in the back of the 2nd quarter earnings slides presentation and we show what we think revenue and EBITDA would look like as we fully ramp the sales that we've already won. And by the way, that doesn't include that does not include our sales pipeline. All that would be incremental to both those scenarios we've included in the presentation. And I think we also talked about on the call that we're cautiously optimistic we can exit this year or end this year with a $30,000,000 run rate EBITDA.

Speaker 2

And so of course, there's some puts and takes. We've included some customer attrition or churn in our sales scenario to try to be reasonable in our approach. But I think that's where how we're thinking about the business right now, but we're not putting out any guidance at this point.

Speaker 4

Fair enough. Fair enough. Okay. Hey, thank you.

Speaker 2

Thanks, Mike.

Operator

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

Speaker 2

Great. Thank you, operator. We're very happy with our Q2 financial performance and believe we're well positioned for this year and beyond. Thanks for joining today's call.

Operator

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

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Key Takeaways

  • Altisource delivered $36.9 million in service revenue and $4.4 million of adjusted EBITDA in Q2, with cash rising to $29.7 million, and remains on track for full-year guidance of 13–32% service revenue growth and $17.5–22.5 million in adjusted EBITDA.
  • The Servicer & Real Estate segment grew service revenue by 16% year-over-year despite 7% fewer foreclosure starts, while adjusted EBITDA jumped 50% to $11.1 million and margin expanded to 38.1% thanks to sales wins, price increases, and efficiency initiatives.
  • New business wins in Q2—expected to add $15.3 million of annual revenue—include three foreclosure trustee clients and the launch of renovation services (over 35 referrals at ~$100k each), boosting the segment’s weighted pipeline to $20.3 million.
  • The Origination segment outperformed the broader market with only a 5% revenue decline versus a 13% industry drop, drove a $1.8 million increase in adjusted EBITDA, and introduced a homeowners insurance program with one signed customer and 35 member prospects.
  • Corporate expenses remain disciplined, narrowing the adjusted EBITDA loss to $7.2 million (a 25% improvement year-over-year), positioning the company to potentially exceed a $30 million adjusted EBITDA run rate by year-end.
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Earnings Conference Call
Altisource Portfolio Solutions Q2 2024
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