Altisource Portfolio Solutions SA (ASPS) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Altisource Portfolio Solutions fourth-quarter and full-year earnings conference 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 conference call is being recorded. I would now like to introduce your host for today's conference, Michelle Esterman, Chief Financial Officer. You may begin.

Thank you, operator. We first want to remind you that the earnings release, Form 10-K, and quarterly slides are available on our website 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 Law. Statements in this conference call and in our press release issued on Monday, which are other than historical fact, are forward-looking statements. Factors that might cause actual results to differ materially are discussed in our earnings release. 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.

Joining me for today's call is Bill Shepro, our Chief Executive Officer. I would now like to turn the call over to Bill.

Thanks, Michelle. Good morning, and thank you for joining today's call. This morning, I plan to discuss our vision and strategic initiatives for 2015, and Michelle will provide an overview of our 2014 financial performance.

First, I'd like to address the recent announcement that HLSS and New Residential have entered into a definitive agreement, under which New Residential will acquire all the outstanding shares of HLSS, subject to the approval of HLSS' shareholders. We welcome a transaction that provides enhanced stability for Ocwen, HLSS, and the mortgage servicing industry. We also appreciate New Residential's statements of commitment to Ocwen in both the call discussing the transaction and New Residential's earnings call. Of course, we think these commitments should be memorialized in writing.

Turning to our vision and strategic initiatives, at the highest level, we have two objectives to increase shareholder value. The first objective is supporting Ocwen. Ocwen is a very important and strategic customer to us, and we are very committed to doing everything we can to assist Ocwen in addressing the environmental issues they face. Second, it is more important than ever that we increase our focus on our longer-term customer and product diversification initiatives. In this regard, we will continue to focus our attention on four strategic initiatives.

These initiatives, in no particular order, include one, growing our origination services and origination technology businesses; two, attracting new clients to our comprehensive default-related businesses; three, expanding our innovative online real estate marketplace; and four, growing our property management and renovation services businesses. Slides 8 to 10 set forth the operating metrics for these initiatives.

As a fundamental element of our increased focus on customer growth and diversification, we have developed an integrated sales and marketing plan to support these four key initiatives. We recently centralized our sales and marketing resources across the Company and appointed a new Chief Revenue Officer and a Chief Marketing Officer to lead the execution of this plan. These teams are helping accelerate our shift into a market-facing, sales-driven service provider as we package and deliver the world class real estate and Mortgage Services we have developed and refined over the last five years.

Our first initiative is growing our origination services and origination technology businesses, with a focus on expanding our share of services purchased by the Lenders One members, Mortgage Builder customers, buyers of homes on our real estate marketplaces, and other loan originators. In our 2015 scenarios, outlined on slide 11, origination-related service revenue represents $47 million of revenue, with $35 million in our Mortgage Services segment and $12 million in our Technology Services segment at the midpoint of the two scenarios.

Over the last five years, we have done an admiral job of growing the Lenders One membership from 3.9% of the US residential mortgage origination market at the time of acquisition to 17% in the fourth quarter of 2014. While our origination-related services revenue has almost doubled from 2010 to $31 million in 2014, our addressable market is considerably larger. Today, the Lenders One members and Mortgage Builder customers represent for Altisource a largely untapped $2 billion-plus addressable opportunity for services that we provide.

In late 2014, we established a multidisciplinary team of Altisource's Senior leaders to focus on growing our origination-related services revenue, and this team has developed four key objectives for 2015. First, increase the number of Lenders One members and Mortgage Builder customers; second, sell more origination-related products and services to the Lenders One members and Mortgage Builder customers; third, expand offerings to the members to include non-origination-related products and services; and fourth, increase loan sales to secondary market investors with on focus on developing non-agency products. With our increased focus on these objectives and modest growth expected in the 2015 origination market, we believe we are well positioned for a strong and growing origination services business.

Our second initiative is attracting new clients to our comprehensive default-related businesses. We estimate that default-related services currently represent approximately a $7 billion market. Even though the size of this market will decline as loan delinquencies return to normal levels, it will continue to represent a very large opportunity. We believe our scale, technology, operational efficiency, and focus on compliance provides us with a differentiated and competitive offering and an opportunity for us to gain market share. Our approach to growing our default-related services is to expand the services we provide to our existing customer base and attract new customers.

Across Altisource we have a very impressive customer base that we can cross sell default-related services to. Our customers include 6 of the top 10 financial institutions and one of the GSEs. We continue to develop these relationships and have seen results. We are also actively responding to requests for proposals from both existing and new customers. As you can see on Slide 12, the midpoint of our scenarios has $25 million of non-Ocwen default-related services revenue.

Our third initiative is expanding our innovative online real estate marketplace. Most buyers and sellers of homes are using the internet in some capacity during the home search process. With Hubzu, Owners.com, and our other real estate services, we believe we can provide a compelling offering to help agents, buyers, and sellers of homes transact more easily with greater transparency and with lower costs.

During 2015, we plan to enhance our Hubzu and Owners marketplaces to provide a world class shopping experience with new, innovative service offerings for buyers and sellers of homes. In 2014, we completed the acquisition of Owners.com. Historically, Owners offered self-directed sellers tools to complete a home sale with lower transaction costs. When combined with our real estate service capabilities, we are well positioned to build unique service offerings to meet the needs of the growing self-directed real estate segment. This segment currently makes up approximately 30% of existing home sales in the United States, and it's comprised of 21% of home sellers using limited-service real estate brokerage services and 9% using for-sale-by-owner channels.

Our last initiative is growing our property management and renovation services business, which today can provide these services in over 200 greater metropolitan areas. In 2015, we are focused on continuing to support Altisource Residential as its rental portfolio grows. As of December 31, Residential had close to 800 rental properties, or properties under renovation, almost 4,000 REO, and over 11,000 loans in its portfolio. As these loans and REO convert to rental properties, we are prepared to renovate, lease, and manage these homes.

We are also exploring ways to apply our property renovation capabilities beyond Residential. There remains a very large number of residential homes and bank and servicers portfolios that are not eligible for FHA and VA financing because of their current state of disrepair. This creates a significant value arbitrage by repairing these homes to meet the FHA or VA financing requirements. This expands the buyer's pool for these homes to include first-time home buyers. It also helps improve neighborhoods.

Our dedication to customer service, quality, and compliance is at the core of all of our businesses and initiatives. I shared with you last month that we recently received an A-plus accreditation from the Better Business Bureau for Nationwide Credit, one of the largest asset recovery management companies in the United States. Since our call last month, we received an A-plus accreditation from the Better Business Bureau for REALHome Solutions and Services, our national real estate brokerage business.

We are very pleased with these accreditations, and our leadership team, business managers, operations teams, and compliance personnel all remain keenly focused on customer service, quality, and compliance. We believe the accomplishments of 2014 position us for a strong 2015, and I look forward to updating you on the status of these initiatives throughout the year.

I'll now turn the call over to Michelle for a financial update. Michelle?

Thank you, Bill. On Monday, we reported full-year 2014 service revenue of $938.7 million, net income attributable to shareholders of $134.5 million, and adjusted diluted earnings per share of $7.17. Slides 2 and 3 provide highlights of our results for the current quarter and year compared to prior periods. We are pleased with the 42% service revenue growth in 2014 over 2013, driven by growth in the number of loans on REALServicing, a higher percentage of homes sold through auction on Hubzu, and the full-year inclusion of the November 2013 Equator acquisition.

During 2014, our earnings grew at a much lower rate than our revenue. We incurred expenses for people and infrastructure to support a larger Ocwen. Additionally, we were supporting certain longer-term initiatives that had no revenue associated with them. As we recently discussed in our investor call, given the current environments and our expectations with respect to Ocwen's growth, some of these initiatives no longer make sense on a risk-adjusted return basis. Later in my remarks, I'll provide you with an update on the plan we developed and are implementing to reduce costs and eliminate certain initiatives to be a leaner organization with a sharp focus on the initiatives Bill discussed.

Turning to our gross-profit margins, 2014 gross profit as a percentage of service revenue was 40% compared to 42% in 2013. The decline is primarily driven by a shift in revenue mix, as the lower-margin Technology Services revenue growth outpaced the higher-margin Mortgage Services revenue growth. Within the Financial Services segment, the revenue growth from the lower-margin customer relationship management business outpaced the higher-margin Mortgage Charge-Off Collections business. This was partially offset by gross profit margin improvements in the Mortgage Services segment from workforce efficiencies.

Income from operations as a percentage of service revenue was 18% in 2014 compared to 24% in 2013. The primary reason for the decline in margin was higher marketing expense to drive traffic to Hubzu, higher bad-debt expense in the Default Management services business, and higher costs in certain corporate functions to support the business growth. We recognized unusually high bad-debt expense in the Default Management business, generally as a result of a change in our customers' business model and fourth quarter discussions with these customers that led us to believe the portion of the receivables balance is no longer collectible.

Turning to expenses, our cost structure in the fourth quarter of 2014 was not in line with our current vision and expected growth. To address this, we developed and are executing on a plan to reduce cost. The plan includes eliminating certain non-revenue-generating businesses, reducing vendor and telecommunications costs, and eliminating staff and contractors to realign our expenses for this new reality. The cost reduction initiative is not limited to employee reductions and employee reductions do not represent the majority of the savings. When compared to expenses incurred in the fourth quarter of 2014, we expect to achieve expense savings of approximately $80 million in 2015.

We anticipate we will realize approximately 12% of the $80 million savings in the first quarter, with the remaining 88% achieved roughly equally throughout the remainder of the year. From a cash perspective, we generated $197.5 million in operating cash flow in 2014. This represents $0.21 for every $1 of service revenue compared to $0.28 in 2013. The lower 2014 operating cash flow per service revenue dollar is primarily the result of lower operating income margins that I just discussed, and to a lesser extent, timing differences in converting accounts receivable to cash.

As a capital light services business, we generate a lot of cash from our operations. In 2015, we intend to build our cash balance to provide us with runway to support our growth initiatives. During January 2015, we repurchased $4 million of our common stock and did not repurchase any stock during February. Since our last investor call, we've continued to monitor the Ocwen-related news and have suspended our share repurchasing activity. We plan to monitor the environment and may at some point in the future consider repurchasing our stock and our debt.

On our January investor call, we provided two scenarios to assist you in developing your perspective of our 2015 service revenue and earnings. While we're not planning to update these each quarter, we've included the scenarios and related assumptions in the presentation on slides 11 through 13. If we do not repurchase any additional shares in 2015 and use all of the remaining assumptions outlined in the slides, adjusted diluted earnings per share would be $5.81 at the midpoint. Related to these scenarios, Ocwen recently announced that it entered into two agreements to sell agency servicing rights with a total of 358,000 loans. We believe the mid point of our scenarios already take these transfers into account based on our estimate of service transfer timing.

In closing, we believe we have a lot of exciting opportunities in front of us and are well positioned to achieve our strategic initiatives to diversify and grow our revenue and customer base. We begin 2015 with a clear vision of our future growth opportunities and initiatives and are executing against a detailed plan to reduce our costs. I'd now like to open the call up for questions. Operator?

Thank you.

(Operator Instructions)

Our first question comes out of Mike Grondahl of Piper Jaffray. Your line is now open.

Thanks, guys. The first question, in the fourth quarter, the gross margin on service revenue was about 32%. Do you see that as a low point and sort of a gradual increase in 2015? How do you think that plays out?

Hi, Mike. So I think what we've provided you in our scenarios is pretax income margins for each of the segments, and we've also talked to you about our cost reduction initiatives, which will come both at the gross-profit margin line and the operating-income margin line. But if you see from the operating income margins, they're roughly in line or similar to 2014.

Okay. And then--

But fourth quarter, I would go on to say, fourth quarter our costs were considerably higher than we anticipate in 2015 on a run-rate basis. And that's why we have these initiatives in place to reduce costs. So I would not necessarily look at fourth quarter as a proxy for 2015.

Okay, and then for Bill. Bill, can you be a little bit more specific what you're doing, what's new at Hubzu, and really what you're working on there to grow that business?

Yes, sure. I think that -- we have two properties, Mike. One is Hubzu. The other is Owners.com that we're focused on.

On Hubzu, we want to continue to sell our services to institutions like Ocwen and the top 10 bank that we recently sold to. And we're also going to be relaunching our preferred partner program where we focus on selling our auction services to real estate brokers and their consumers.

And then on Owners, Owners historically was a marketing engine. Our strategy there is to be the listing agent representing both sellers and buyers of homes. I don't want to give much more than that, Mike, for competitive reasons, but at a 30,000-foot level, that's the approach.

And one follow-up tied to the preferred partner program, so is that opened back up for non-distressed properties? Is that what you mean?

No, we're going to focus on both the real estate brokers that want to leverage auction as an additional tool in their tool kit to sell homes. We're also going to, where we represent individuals on the Owners.com site, we'll be able to leverage Hubzu to help those consumers sell their homes, where we're the actual brokerage firm leveraging that program.

Got it, and then just the last question, you mentioned Lenders One. Is there any new products you're working on there? What do you see on the horizon that you can do to drive some value through there on the origination side?

So one, and I think I've said this in the past, we're really focused on being indispensable to the members. We've recently hired a head of our GPO, our group purchasing organization, to really focus on all the non-mortgage services so that every day when the members wake up, they know that Altisource has their back in terms of lowering their cost of operations.

That's not a huge needle mover in terms of earnings for us, but it builds a trust and credibility with the membership. The only thing we're doing is we're going to focus on some of these non-agency products where we can leverage the membership to distribute those products to lenders, and then we'll get a percentage of the origination amount.

We call that a preferred investor fee, and it will be higher because it's not agency product. And we'll also provide a lot of the related services, like due diligence, underwriting, processing, title, et cetera. And so we think if we could focus on driving those products, fewer of those products, but are more unique, we could drive a lot more revenue and earnings to our origination business than we have historically.

And then lastly, do you expect some of those non-agency products to be available in 2015?

Yes, we anticipate launching some of these this year, a few of them.

Okay. Thank you.

Thank you. Our next question comes from the line of Ryan [Zahara] of [JM]. Your line is now open.

Hey, guys. Thanks for taking my questions. I just want to understand, with respect to the buyback, what's changed from January 16, when you said you would consider the risks associated with Ocwen, but at that time still thought it was prudent to repurchase stock?

Ryan, since we had the investor call, there's a couple of notices came out related to Ocwen and related to HLSS. And while we think there's a very low likelihood that they'll be successful in their claims that they have alleged, we just felt like from our perspective, until there's more clarity around the resolution of those issues, it makes more sense to build up our cash position to make sure we have enough cash to support the runway to accomplish our strategic initiatives. Pretty much that simple.

And then, just understanding the investment in Ocwen's growth. Ocwen hasn't grown for 18 months. So I'm just trying to understand at what point -- have you guys made the term where you said, okay, it's not worth investing in Ocwen's growth because we don't think the platform is growing? If you can just expand on that.

Ryan, as I said at the beginning of my prepared remarks, there's two objectives we have. One is to help Ocwen, and a stable Ocwen is very good for us. As you look in those scenarios, they generate a lot of revenue and earnings for us.

So everything we can do to help maintain a stable Ocwen is very important to us. And at the same time, we recognize they're not going to grow the way they were growing historically.

In fact, right now, there's some runoff of their portfolio, or a decline in their portfolio. So we're very, very focused on our diversification initiatives as a way to replace some of that revenue and earnings that's going away.

And then just two more quick questions. So what happened in Q4 that was different from the January call's expectations when you thought that adjusted earnings would be $0.38 to $0.51 a share?

I think, I think we're only off a couple of pennies from what we projected, Ryan. So it was just a minor cleanup of the books between that call and now.

And then just one last thing, can you just expand on your comments at the beginning of the call about memorializing in writing some of the commitments that were made on the NRZ-HLSS merger call?

Yes, sure. There's not much more we want to say beyond what we said in the prepared remarks. But I think, look, NRZ and HLSS said all the right things, at least from Altisource's perspective, in wanting to work with Ocwen, which obviously benefits Altisource. We would love to see that, those commitments made in writing, and we'll leave it to HLSS and NRZ and Ocwen as to how they move forward.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Matt Liebowitz of Nomura. Your line is now open.

Hi. Thanks for taking my question. Just quickly, looking at Page 12 of the presentation when you guys go through the 2015 scenarios, I just wanted to see if you guys could give some color about what accounts for the differences in the service revenue for the liquid loans from the non-GSE versus the GSE loans?

The difference, it's very simple. On GSE loans, the GSEs take back the real estate once it becomes REO. And on the private label securities, we continue to manage the REO.

Great. That's very helpful. So you don't contemplate a scenario where these might converge more?

Correct. We don't.

Okay, great. Thanks. That's helpful. That's it for me.

Thanks.

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

Hey, good morning. A couple questions. First, what were the initiatives that you were supporting that had no revenue associated with them that you're backing off now?

Fred, we're not going -- they're initiatives that we're no longer supporting, so at this point we're going to focus on the initiatives that we are supporting.

Okay. Got it. I guess how much of the $80 million in cost saves that you discussed are associated with non-revenue-producing initiatives?

We haven't broken that out, Fred.

Okay. And then you mentioned in the comments about the change in capital allocation plans that you might buy back the term loan in the future. Would you need an amendment to the term loan for that to happen?

No, Fred, we didn't say we'd buy it back. We said we'd consider repurchasing, essentially, some of the debt. And, no, we don't need an amendment to do that.

Okay. Got it.

Not that I'm aware of at least, we don't.

Okay. Is there anything that you would amend in the term -- is there any amendments you would make to the term loan potentially?

Not that we're aware of, Fred. Fred, it's a covenant life-term loan. We're in full compliance with the term loan.

There's an excess cash flow provision if our net-debt-to-EBITDA ratio goes above a certain level, which we think there's a lot of head room at this point. So, no, we're -- and the loan matures in December of 2020.

Got it, okay. And then on the -- Ocwen announced that they're selling an incremental, what, quarter of their GSE portfolio. And that didn't change your EPS guidance at all.

So I just wanted to understand what's the -- can you give us a sense of the relative profitability contribution of GSE servicing to ASPS? And then also your expectations for the runoff of that portfolio that are baked in over time, or not necessarily the runoff, but the timing on Ocwen's actual sales?

Yes, Fred, we provide in our assumption slides our expectations for the sale of those portfolios. You'll see it on slide 12. And we don't provide the actual timing, but we assumed most of it was taking place a little bit and after the first quarter and the majority taking place in the second half of the year, which is roughly in line with how Ocwen is estimating they're going to sell those GSE servicing rights.

Got it. And then just on the profitability of GSE servicing?

I think the best thing you could do, Fred, is you essentially could do a walk based on the assumptions that we provide you in the presentation in terms of how much revenue we make per loan per year. And you can estimate what our margins are in that business, and I think that would allow you to back into what the impact to our revenue is and earnings.

Right. What I'm trying to understand is are the margins materially different between the GSE and non-GSE loans?

Yes. The margins in the GSE loans are lower because, again, we don't manage the real estate.

Okay, well, that sort of gets to my next question. Can you give us a rough -- I know you break out the Hubzu revenues -- but can you help us understand what the profit contribution from Hubzu is to the overall mortgage services segment?

No, we don't break that out separately, although we do give you some metrics as to how many homes we've sold. So I think you'll see our home sales were pretty robust in the fourth quarter, and we expect them to be very robust going into the first quarter as well.

Okay, got it. And the change in revenue per sale on the overall loans, I noticed that, obviously, the mix of non-Ocwen related sales was up. What was the driver of lower revenue per sale quarter over quarter? Was it auction mix? Was it non-Ocwen?

I don't have it at my fingertips, Fred, although I think that may fluctuate a little bit quarter to quarter. But there's nothing fundamentally that's changed related to that business.

Okay. And then last one, on a revenue-per-loan basis when you run the numbers for the GSE revenue, GSE revenue per delinquent loan versus historical, it's down almost 50% in Q4. And the projections have the service revenue per delinquent loan for non-GSE loans remaining flat going forward.

What's the difference there between a 50% drop and remaining flat going forward on the revenue side? Is that just Hubzu -- something must have changed on the GSE side that's not changing on the non-GSE side.

Right. So you mentioned Hubzu, but Hubzu's not in the GSE.

Right.

And I think you'll see historically that there is more variability on the GSE side. But a couple of things contributing to the change from the third quarter would have been lower revenue from property preservation services, also the discontinuation of the lender-placed insurance brokerage line of business.

And we also boarded some GSE loans during the quarter. Sometimes when you have loans that board, you won't necessarily see all of the services being ordered in the quarter that's quoted.

Yes, but even the projection for 2015, the same drop in revenue-per-delinquent loan is contemplated for GSEs versus non-GSEs. Lender-plus insurance went away completely, right, from non-GSE and GSE?

Correct.

That's right.

So I'm just trying to understand what -- how revenue on the non-GSE side stays flat, but GSE revenue is down 40% or 50%.

Fred, I think what you're seeing is there's some price changes that we have that are going to take place in 2015 related to the REO, which is going to convert revenue that was -- in service revenue, we weren't recognizing -- we were only recognizing net revenue because the balance was a pass-through expense. Now we're going to be recognizing the gross revenue as opposed to the net.

And so you'll see reimbursable expenses go down and service revenue go up. And that's happening in the non-GSE on the PLS portfolio because we manage REO in the PLS portfolio. And it's not happening on the GSE portfolio because we don't manage GSE REO.

Okay. So is there an impact to margins from that?

I think, Fred, as we said, I think you should listen to what we said on the last call we had with you because we said that some of our revenue per loan is going to be going up. In some cases, the pricing, it may result in more absolute dollars of earnings, but lower margins.

And in some cases, the prices may be coming down, which obviously would reduce margins and absolute earnings, absolute dollars of earnings. But net-net, we think the overall impact to our income from the price changes going both direction won't be material. And I think that's what we said on the last call.

You can see the margins that we're laying out in our scenarios on slide 13 by segment.

Right, got it. Thanks.

Thank you.

(Operator Instructions)

Our next question comes from the line of Michael Fine of Carlson Capital. Your line is now open.

Hey, guys. Wondering if you could just help us think, get some insight into how you're thinking about your capital structure? Some guys touched on the term loan and the share buybacks earlier on the call, but just, is there anything you could tell us to help us figure out what the capital structure looks like in 12 months from now?

I mean, it's not often that you find a company with such good cash flow characteristics with the term loan fitting at $0.80. And what would change your mind or how are you guys approaching that, thinking about what to do with your excess capital?

I think today if you listened to the last call we had and today's call, really what we want to do is build up the cash to support our -- give us enough runway, or plenty of runway, to support our longer-term growth initiatives. And while there's some uncertainty and there's different pieces of news coming out almost daily related to the businesses, we think it's a good approach.

Should something change, and we get a lot more comfortable with the stability of our customers, we'll revisit our capital allocation approach. And at that time, we would consider using some of our cash to potentially buy some of our debt back or also potentially to buy some of our shares back.

Okay, great, thanks.

Thank you.

Thank you. And I'm showing no further questions at this time. I'd like to hand the call back over to Michelle Esterman for any closing remarks.

Thank you. Thank you for joining the call today. We look forward to talking to you next quarter.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day, everyone.