Altisource Portfolio Solutions SA (ASPS) 2015 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Altisource third quarter 2015 earnings conference call. (Operator Instructions). I would now like to introduce your host for today's conference, Ms. Michelle Esterman, Chief Financial Officer. Ms. Esterman, you may begin.

Thank you operator.

We first want to remind you that the Earnings Release, Form 10-Q and quarterly slides are available on our website at www.altisource.com. These provide additional information investors may find useful.

Our 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 earlier today, 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 as well as our public filings. 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.

Good morning and thank you for joining today's call.

This morning, I plan on providing an update on the progress we are making on our strategic initiatives and Michelle will discuss our financial performance and 2016 financial scenarios.

I am very proud of our team whose focus is on providing high quality, compliant services to our customers and positioning the Company, through our strategic initiatives, for long-term growth. We continue to execute with existing customers, on-board new customers and receive very good feedback on our offerings from the market. I am also pleased with the financial results of the quarter with strong service revenue, earnings per share and operating cash flow.

Slide 3 provides a list of our strategic initiatives. Our initiatives in the mortgage and real estate marketplace are centered on our strategy to diversify and grow our customer and revenue base. We believe these are the right initiatives to support our growth. Each initiative addresses very large markets, is in line with our core competencies and provides the opportunity to leverage our competitive advantages to succeed. This morning, I will discuss each initiative, the contribution to 2016 service revenue assumed in our financial scenarios and the progress we are making in greater detail.

Our first initiative, as you can see on slide 4, is to grow our servicer related businesses by expanding services purchased by our existing customer base and attracting new customers. Even as delinquencies return to historical norms, there is a very large addressable market for our services. We are one of a few service providers offering a full suite of services and technologies on a national scale. We stand to gain market share as customers consolidate to larger full-service vendors.

As you can see from slide 5, Ocwen should provide us with a long runway of earnings assuming the normal runoff of its existing portfolio and no new acquisitions. Under the mid-point of our scenarios, we estimate that we will generate $535 million of 2016 service revenue related to Ocwen and its portfolio.

We are also making very good progress with other customers. As I shared with you last quarter, a top 10 U.S. bank selected Altisource to provide certain pre-foreclosure services and manage all of its REO. During the third quarter, we executed our agreement with this customer and successfully on-boarded its portfolio to our platform. As we market these properties for sale, begin to close transactions and provide additional services to this customer, we expect revenue to grow materially.

Our management and sales team also continues to develop a robust pipeline of opportunities. In addition to growing the services we provide to two top 10 banks, we are engaged in strong sales dialogues and responding to RFPs from several of the country's largest financial institutions. With the reception and success we are experiencing in the market, we believe the mid-point of our 2016 scenarios for this initiative of $93 million, as set forth on slide 21, is reasonable.

Our second initiative is growing our origination services and technologies business. As you can see on slide 6, the origination services market is also very large. Environmentally, the landscape for mortgage originators today is challenging as they struggle to maintain margins while the cost of regulatory compliance and quality increase. Further, there is a growing need to create uniformity in the origination process.

As a result of these trends, we are experiencing greater demand for our fulfillment services and certified loan insurance product. During the third quarter, we signed services agreements with 10 new fulfillment and certified loan customers and are engaged in meaningful conversations with larger prospects. These trends should also drive more business to our other origination solutions including title, valuation and our Mortgage Builder loan origination technology. To capitalize on this trend, we are expanding the focus of our enterprise wide sales team to include our origination offerings and building a middle market sales organization to focus on medium and smaller lenders, including the Lenders One members.

With the full year benefit of new customers and our investment in sales and marketing, we believe the mid-point of our 2016 scenarios for this initiative of $76 million is reasonable.

Our third initiative, which is outlined on slide 7, is growing Owners.com, our innovative online real estate brokerage. At over $60 billion, the real estate brokerage and related services market is massive. With a growing segment of the population demonstrating a desire to engage in self-directed transactions, we believe Owners.com is well positioned to become a market leader.

During the third quarter, we focused on improving the user experience for home buyers and developing our launch marketing strategy. With respect to the user experience, we plan to make certain new features and functionality available on the site in a few weeks and will continue to launch new features to help self-directed buyers and sellers throughout 2016.

From a marketing perspective, we continued the development of an integrated multi-channel campaign designed to establish the brand and acquire customers. In order to optimize our marketing spend and benefit from the seasonally strong spring and summer months, we have decided to delay the initial launch of our marketing campaigns to January of 2016. We plan to launch in two large U.S. metropolitan areas. Based on the results from this initial market rollout, we will refine our marketing approach as we seek to optimize consumer awareness and adoption and expand into other geographies. By the end of 2016, we plan to have launched in approximately 15 markets.

Despite very little marketing, since the June relaunch of Owners.com, we have represented or referred buyers for the purchase of 24 homes and have 23 homes under contract to purchase. We are strongly encouraged by the organic adoption of our innovative service.

We have completed a lot of the hard work to position us to achieve the mid-point of our 2016 scenarios of $33 million. This includes creating a national brokerage license in all 50 states, integrating IDX listings from most major MLS boards, growing our workforce of licensed brokers, agents and support staff, enhancing the customer experience and developing local marketing and communication strategies.

Our last initiative, as shown on slide 8, is growing our rental and renovation services and technology businesses. With approximately 15 million single family rental homes in the United States and a small percentage of these homes owned by institutional investors, this is a very large, fragmented market. With a suite of services and technologies and the scale to reduce costs for real estate investors, we believe we are well positioned to grow. Further, our recent acquisitions of Investability and RentRange expand our offerings in line with our objective to connect real estate investors with home sellers, renters, service providers and home buyers.

We anticipate that our 2016 revenue growth will come from two sources. First, growing revenue from existing and new customers. Second, deploying a portion of our cash in a program to buy, renovate and sell homes as a principal.

Altisource Residential, or RESI, is a marquee client of our rental and renovation business. As they diversify their acquisition strategy to purchasing homes both in bulk and one-by-one, we are providing additional services to RESI. In this regard, we provided diligence and title services in connection with RESI's recent acquisition of 1,300 rental homes. Further, since RESI's September launch of its one-by-one program, we assisted it with diligence and provided brokerage and title services on its purchase of homes. We expect RESI's new programs, coupled with the competitive advantages we provide RESI, to substantially accelerate the growth of its rental pool, increasing our revenue.

We anticipate that our new customer growth will come from Investability, RentRange and Residential Investor One. Investability's investor real estate search and acquisition platform generates revenue through referral and lead generation services. RentRange generates revenue through the sale of rental home data to the financial services and residential real estate industries. Investability, RentRange and Residential Investor One's customers purchase many of the services offered by Altisource. We believe we can offer a compelling value proposition to medium and smaller rental property investors, driving revenue growth.

The second focus area for this initiative involves deploying a portion of our cash to purchase, renovate and sell single family homes. We anticipate, on a stabilized basis, that we will allocate $20 million of cash to this initiative and we will turn the homes every six months. We believe there is a market opportunity to generate attractive unlevered annual pre-tax returns of approximately 20% to 25% by improving the value of homes through a well-designed renovation program and have done so for one of our REO clients. These returns are enhanced because we directly provide many of the transaction related services that others typically outsource. These include brokerage, renovation and closing.

With our marquee customer, growing customer base and suite of services, we believe the mid-point of our 2016 scenarios for this initiative of $95 million is reasonable. You should note that proceeds from the sale of real estate in our purchase, renovate and sell program is presented as revenue in the scenarios. This accounts for approximately $23 million of the $95 million.

In summary, I am pleased with our financial results and the progress we are making on our strategic initiatives, all of which are centered on providing high quality, compliant services to our customer. Our successful execution of the strategic initiatives broadens our customer base, reduces our reliance on Ocwen and establishes a clear path for growth. We believe we have laid the foundation to achieve these objectives.

I will now turn the call over to Michelle for a financial update.

Thank you Bill.

This morning we reported third quarter 2015 service revenue of $245.5 million, adjusted Net Income Attributable to shareholders of $46.4 million and adjusted diluted earnings per share of $2.27. Slides 9 through 12 provide highlights of our results for the current quarter compared to prior periods. This morning I will discuss the financial results for the quarter and our 2016 financial scenarios.

Turning to service revenue, we were very pleased that third quarter 2015 service revenue was almost the same as last year. Growth in our asset management business largely offset lost revenue from the November 2014 discontinuation of the lender placed insurance brokerage business, the full amortization of Equator acquisition deferred revenue in November of 2014 and fewer third quarter 2015 property valuation referrals. The asset management business' growth was primarily driven by a higher number of non-Ocwen homes sold and growth in the property inspection and preservation business.

Turning to margin, gross profit as a percentage of service revenue in the third quarter of 2015 was the same as the third quarter in 2014. Mortgage services'consistent gross profit margins coupled with its revenue growth offset a decline in Financial Services' gross profit margins from revenue mix.

Operating income as a percentage of service revenue in the third quarter of 2015 was slightly lower than the same quarter in 2014 primarily from an increase in sales and marketing to support our growth plans. Adjusted diluted earnings per share of $2.27 in the third quarter of 2015 was 4% higher than the third quarter of 2014 driven by share repurchases and our share price.

As you can see on slide 10, we highlighted one infrequent item during the third quarter. We repurchased $11 million of our senior secured term loan at an 11% discount, recognizing a gain of $900 thousands on extinguishment. Normalized Adjusted Net Income for the third quarter of 2015 of $45.6 million was largely consistent with the second quarter of 2015 of $45.7 million.

From a cash perspective, we generated $54.3 million of cash from operations in the third quarter, representing 22% of service revenue. We used cash from operations to purchase $11 million of our debt for $9.8 million, repurchased $5.0 million of our common stock, invest $6.2 million in facilities and technology and $11.2 million in the CastleLine acquisition. At the end of the quarter, we had $150 million of cash.

As a capital light services business, we expect to generate significant cash from our operations. In the fourth quarter of 2015, we used $18 million to acquire Investability and RentRange. We also plan to use cash to repurchase a portion of our debt and potentially for a small acquisition. Following this acquisition, we plan on focusing our attention on organic growth and not on acquisitions. With respect to share repurchases, we may repurchase a modest amount of shares based on the environment and our share price. Finally, as we've discussed with you in the past, we plan to continue building our cash to provide an adequate runway for our strategic initiatives should it be necessary.

Turning to the full year 2015 compared to our scenarios, we continue to believe that Adjusted Pre-Tax Income at the mid-point of our 2015 scenarios of $136 million is reasonable.

Slide 13 sets forth the financial scenarios for 2016. Similar to last year, we have provided you with two scenarios. Scenario A represents the sum of the low end of all of our assumptions and scenario B represents the sum of the high end. As you can see on slide 21, at the mid-point of our 2016 scenarios compared to our 2015 scenarios, we believe we can replace the lower revenue from Ocwen with growth from our strategic initiatives with consistent margins.

At the mid-point of our 2016 scenarios, service revenue is growing by 3% when compared to the mid-point of our 2015 scenarios and Adjusted Pre-Tax Income is $134 million.

Company-wide pretax income margins at the mid-point of our 2016 scenarios are the same as the 2015 mid-point. Growth in the higher margin Mortgage Services segment offsets lower margins in Technology Services. Technology Services' margins are negative as revenue is primarily declining from Ocwen's lower loan count and, to a lesser degree, from the transition of the management of Ocwen's infrastructure technology to Ocwen. Costs are not declining at the same pace as we continue to make investments in our software technology platform as a fundamental element of our strategy. In the longer term, we anticipate that our company-wide pre-tax income margins will expand.

Slides 21 and 22 in the appendix provide additional information on the scenarios. These were organized to provide more visibility into each of our strategic initiatives. We also reorganized the 2015 scenarios to conform to the 2016 presentation. Please note that the 2015 scenarios and assumptions have not changed or been updated. Further, to give you a better understanding of which businesses are included in each initiative, we've provided a visual representation on slide 26. As you can see from this slide, certain of our businesses are dedicated to a single initiative while other businesses support multiple initiatives.

We believe the mid-point of our scenarios is reasonable. However, we will not necessarily achieve the mid-point in the manner specifically laid out in the slides. Some of the businesses may perform better and some may perform worse.

Finally, turning to 2017, we believe that we are positioning the Company to generate higher service revenue and earnings in 2017 when compared to the mid-point of the 2016 scenarios. This, of course, is dependent on the successful execution of our plan.

In closing, we are very excited by the opportunities in front of us. Our successful execution of our strategic initiatives positions Altisource as a diversified and growing company in very large markets. We believe our recent customer wins demonstrate our value to the market. We look forward to updating you next quarter.

I'd like to now open the call up for questions. Operator?

(Operator Instructions). Mike Grondahl, Piper Jaffray.

Yes, thanks guys. A couple of questions: The revenue per non-GSE loan was up at $565 per quarter. Can you talk about what's driving that up, that increase year-over-year?

Sure, Mike. So compared to the third quarter of 2014, service revenue per delinquent loan increased from higher revenue from our property preservation services, and of course this was partially offset from lower revenue from the lender-placed insurance brokerage business that was discontinued and slightly lower valuation.

Ok. And then on the four initiatives that you list on page 6, 5 through 8 I think it is, which ones do you have the most confidence in? I mean which two of those do you think you feel the best about?

Mike, that's sort of like asking which child we like the best. But look we are very excited about each of the initiatives. I think in terms of the progress we are making right now, we feel very good on the servicer related services, we are getting great feedback and we are seeing really good RFPs, strong RFPs and really good response and we've got an active pipeline.

On Owners.com, I think if we are successful longer term, if we were to forecast out a couple of years, right now that would be our largest initiative, but of course there is a lot of wood to chop to get there. On originations, we are very encouraged by the agreements we have signed in the third quarter and the pipeline we are building for next year. And then on rental and renovation, as we give a competitive advantage, continue to give a strong competitive advantage to RESI and they perform well, we think that represents a huge opportunity and we also think that Investability and RentRange is, it's a tough question to answer. We feel really good about them Mike, and we think we can achieve what we have set forth to do next year.

Got it, yes the detail helps. Just following up on Owners, how many markets did you say? You said something about 15 markets. Was that the end of 2015 or the end of 2016?

So, Mike, we are going to launch in January in two markets, two large metropolitan areas and we think we will be in 15 by the end of the year, next year.

Got it. What were you saying, Bill, about 24 homes or 23 homes? I didn't quite follow that.

Sure. So far this year, since we launched the new site, the new experience in June, we have sold, so buyers have come to us to purchase a home and we've helped them buy a home and closed 24 times. And I think I said we have 22 homes under contract to close. So without really launching, we've just had some organic users come to us and we've actually helped them buy 24 homes and we have another 22 under contract. So we think that bodes well for when we actually launch the marketing.

Got it. Is your buyer's rebate, I think that's what you've been marketing there, that buyer's rebate of like 50%, is that the hook right now, do you think?

Yes and it's a little bit different in each market, but today we are providing value. Longer- term, there's a lot more we are going to offer buyers, I don't want to talk about it too much for competitive reasons. Today it's value, longer term there's a lot more that a benefit a buyer will receive by using Owners.

Got you. And lastly, could you just go into your strategy of spending $20 million buying homes and creating rentals and then I think flipping them on a six month basis? Talk a little bit more about that strategy and why you are doing it and what you hope to learn from it.

We have actually renovated 1,200 homes, I think is the number, a little bit more than 1,200 homes so far for our customers, and so we have a lot of experience renovating homes. We also can eliminate a lot of the friction costs associated with the business because we can be the real estate broker on the acquisition and sale of the home we can be the title agent and the escrow agent, for example.

But, Mike, the reason why we are looking at it is we have $150 million of cash, and we think we want to be conservative in terms of how we use that cash, in the event we need it, in the unlikely event we need it, but we don't like the returns we are earning on the money sitting in the bank, so if we can earn a 20% to 25% return doing something we are very good at, in the meantime, we think it's a very good use of our cash. We get to recycle the cash so it's there, should we need it, and in the meantime, we get to earn a very attractive return on it and something that we know how to do.

Got it, okay. Hey, thank you.

(Operator Instructions). And I'm not showing any further questions at this time. I would now like to turn the call back over to Ms. Esterman for any further remarks.

Yes, thanks for joining the call today. We look forward to updating you next quarter. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.