Altisource Portfolio Solutions SA (ASPS) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Altisource second-quarter earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would like to introduce your host for today's conference Michelle Esterman. Ma'am, 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.

Today's presentation also contains financial measures that are non-GAAP financial measures. A reconciliation of these non-GAAP measures to their GAAP equivalents is included in the appendix to today's presentation.

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. I'm very pleased with our performance in the second quarter and through the first half of the year. I am proud of our leadership team and thousands of dedicated employees for executing well against our strategic initiatives and are working tirelessly to deliver high-quality services to our customers.

As Michelle will discuss in a few minutes, we believe we are on track to achieve or exceed $6 of adjusted diluted earnings per share, the midpoint of our updated scenarios. As you can see on slide 3, we believe that Altisource has developed distinct competitive advantages that will enable us to deliver sustainable growth and profitability for investors.

To provide you with insight into what our revenue and profitability could look like in five years we estimated our 2021 revenue and operating income assuming the normal runoff of Ocwen's portfolio and 40% annual growth of non-Ocwen revenue. Based on these assumptions our 2021 service revenue would be $1.87 billion. This includes $260 million of service revenue from Ocwen representing 14% of the total.

With operating margins between 23% and 27%, we would generate $430 million to $505 million of operating income before corporate costs and interest expense. While there is no guarantee that we will achieve these numbers we are off to a good start. We have grown non-Ocwen revenue by more than 40% in each of the last two years and anticipate the growth to exceed this in 2016.

To provide you with additional insight into our view of the future I will walk you through our vision and the progress we are making to obtain our objectives. Our goal is to become the premier mortgage and real estate marketplace, connecting market participants and providing related best-in-class services and solutions. We are executing on this roadmap through four strategic initiatives which in no particular order are to grow our servicer, origination, consumer real estate and real estate investment solutions businesses.

Beginning with our service or solutions business, our suite of services and technologies continues to be very attractive to loan servicers. The industry is looking for alternative vendors who can provide multiple services to improve efficiencies, controls and performance. Our scale, innovation, and proven results continue to open opportunities with existing and new clients.

Since our last earnings goal we have made considerable progress. We began providing property inspection and preservation services in June for the top four banks we previously discussed with you. We received approval from a top 10 bank client to also provide it with short sale services.

A mortgage insurance company selected us to manage its REO. A top 10 bank customers selected our Equator software to manage its short sales and is evaluating us for additional services. And a specialty asset management company selected us to provide REO auction services for a portion of its portfolio. In addition to these recent wins we are in various stages of a sales process with several medium to large financial institutions.

Given our progress and pipeline of opportunities, I am very optimistic about our ability to grow our non-Ocwen revenue in a meaningful way. We are clearly demonstrating the power of Altisource's platform to expand existing customer relationships and attract new clients.

Our second initiative is growing our Origination Solutions business which represents a full suite of services, solutions and technologies that meet the evolving and growing needs of loan originators and correspondence. We believe that we have developed a platform solution that resonates with the market and represents a very large growth opportunity for Altisource. This platform solution couples our CastleLine Certified Loan program with our fulfillment services for larger originators and correspondence.

We have had early success with this offering and believe larger originator customers will become Lenders One members and correspondence will become Lenders One preferred investors. By driving more loan volume to our preferred investors, providing world-class fulfillment services and issuing CastleLine's loan certification and insurance for closed loans we are providing a unique and extremely valuable solution to our clients and a meaningful revenue and earnings opportunity for Altisource.

We have already made great progress with this platform sales approach which has contributed to second-quarter 2016 Origination Solutions revenue growth of 20% compared to the first quarter of 2016. We have a pipeline of opportunities that should continue to provide growth for our platform solution and other Altisource Origination Services.

Our third initiative is growing our consumer real estate business leveraging owners.com. Owners.com is a real estate brokerage in an online marketplace that connects home buyers and home sellers and offers innovative and efficient realty services to both buyers and sellers. We believe the owners.com is uniquely positioned to redefine the role of the real estate brokerage in the era of on-demand, web and mobile-enabled transaction services such as Uber and Airbnb and marketplace services such as TripAdvisor and Expedia.

The economics are compelling for consumers, real estate agents and Altisource. Consumers using our brokerage to buy or sell their home can save an average of $3,800 on a typical transaction. We anticipate that real estate agents who join our team will receive annual compensation that is more than twice the national average and Altisource will generate significant brokerage commission and marketplace services revenue.

We have identified two critical success factors to achieve scale. First, we must continue to refine our customer conversion process. While we are very pleased that our value proposition and messaging is resonating with consumers we must effectively convert interest into completed transactions over the lengthy purchase cycle. To improve the conversion rate of qualified leads we're focused on attracting and onboarding substantially more local real estate agents in line with our market-by-market rollout plan.

Second, we are developing mobile applications for our agents and buyers that makes it easier for our agents to manage their prospects and improves the buying experience for our customers. In addition to our first-quarter launch in Atlanta and South Florida we recently launched our buy side product in Boston. We continue to anticipate launching in at least 15 larger markets by the end of this year. Finally, as we evolve our business we expect to improve our efficiency and product offerings by enhancing our automation platform and mobile technology which will allow us to expand our portfolio of services delivered through our integrated service offering.

Our fourth initiative is growing our real estate investor solutions business, leveraging the investability.com marketplace that connects buyers and sellers of income producing properties and offers related marketplace services. This initiative is similar to the consumer real estate initiative, except the focus is on meeting the needs of real estate investors both large and small. With the investability marketplace, the rent range rental data and Altisource's national footprint large distributed network of vendors, technology and global workforce we believe we can offer customers a compelling marketplace to buy, manage and sell rental homes and the related services, generating revenue for Altisource at attractive margins. With real estate investors accounting for approximately 20% of residential real estate purchases this is a large and attractive market.

Altisource Residential or RESI is our marquee client in this initiative and we are focusing on supporting RESI's growth as it acquires homes and disposes of REO that do not meet its criteria. During the second quarter of 2016 we provided brokerage and settlement services to RESI in connection with its acquisition of homes through their one by one program and began providing property management services for RESI's bulk acquisition from Invitation Homes, bringing the total number of rental homes we are managing for RESI to 3,900.

We also recently started selling rental homes for other institutional rental home investors and have a pipeline of customers that want to leverage our tools to sell their home. While these listings represent nominal revenue to us today we believe they help establish investability of the marketplace to buy and sell rental homes, ultimately driving the large fragmented group of individual buyers and sellers of rental homes to transact with us.

To grow this business we plan to follow a rollout model similar to the one we are deploying with owners.com. With technology that makes it easy to evaluate, buy and sell income producing homes and the seamless ability to purchase services from our marketplace we believe we will make it much more accessible for individuals to invest in the rental home asset class.

In summary, I believe that Altisource is making strong progress developing a compelling suite of real estate and mortgage marketplace services that will transform us into a larger, more profitable Company with a diversified and growing revenue base. At the same time, we are maintaining a strong focus on supporting and providing high-quality services to our marquee customers.

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

Thank you, Bill. This morning we reported second-quarter 2016 service revenue of $241.3 million, adjusted net income attributable to shareholders of $31 million and adjusted diluted earnings per share of $1.58.

As you can see on slide 8, we have adjusted the 2016 scenarios to reflect our results for the first half of the year and anticipated performance for the balance of the year. We have made very good progress and believe we are well-positioned to achieve or exceed the midpoint of our scenarios.

Slide 4 provides highlights of our results for the current quarter compared to prior periods. This morning I will discuss the financial results for the quarter in greater detail.

Turning to service revenue, compared to the second quarter of 2015, service revenue was 2% higher. Growth in our asset management business more than offset lower revenue in the financial services and technology services segments. The asset management business' growth was primarily driven by a higher volume of property reservation referrals, a higher percentage of homes sold through auction on Hubzu and growth in the number of non-Ocwen homes sold on Hubzu.

The decline in financial services revenue was primarily from lower revenue in the customer relationship management business as we have severed relationships with and reduced the volume of services provided to certain clients that were not profitable for us. The expected decline in the financial services revenue was driven by REALServicing and IT infrastructure services. Revenue from REALServicing declined as a result of Ocwen's reduced servicing portfolio and the license fee reduction we discussed earlier this year. IT infrastructure services revenue declined as we have transitioned certain support resources to Ocwen as part of our previously announced separation of the Company's technology infrastructure.

From a revenue diversification perspective we are making progress. As you can see on slide 9, second-quarter 2015 non-Ocwen adjusted service revenue was 21% higher than the second quarter of 2015 and the first half of 2016 was 29% higher than the first half of 2015.

Turning to gross profit and margins. Gross profit in the second quarter of 2016 was $81.4 million or 34% of service revenue compared to $100.2 million or 42% of service revenue in the second quarter of 2015. The decline in gross profit margin was primarily driven by revenue mix and greater investment in our growth initiatives. We anticipate that our margins will expand as revenue from these initiatives grow.

Operating income was $27.2 million in the second quarter of 2016 compared to $56.2 million in the second quarter of 2015. The decrease was primarily driven by the declining gross profit, a $3.8 million increase in amortization of intangible assets and a 2015 nonrecurring gain on the Equator earnout of $7.6 million.

Adjusted pre-tax income was $36 million in the second quarter of 2016 compared to $51.7 million in the second quarter of 2015, a 30% decrease. This was driven by lower operating income, the one-time costs associated with the purchase of the RESI shares and a 2015 nonrecurring gain on HLSS securities. The decline was partially offset by gain on repurchase of debt and lower interest expense from debt repurchases. Adjusted diluted earnings per share of $1.58 in the second quarter of 2016 was lower than the second quarter of 2015, driven by lower 2016 adjusted pre-tax income partially offset by a reduction in diluted shares from share repurchases.

From a cash perspective we had a very good quarter. We generated $40.4 million of cash from operations representing 17% of service revenue. We used $46.3 million cash to reduce principal balance of our senior secured debt by $52.2 million, repurchased $8.1 million of our common stock, invest $18.8 million in RESI stock and invest $6.5 million in facilities and technology. At the end of the quarter we had $158.6 million of cash and available-for-sale securities.

With respect to our investment in RESI we acquired RESI shares because RESI is an important customer and we support RESI's strategy. Although the activist situation at RESI was resolved while the stock is trading at such a discount to book value we believe it's important to retain our holdings. We will continue to reevaluate our strategy with respect to RESI as its situation evolves. In the longer term owning RESI shares is not core to our capital allocation strategy and we anticipate that in the future we will redeploy these funds elsewhere.

The last topic I will discuss this morning is capital allocation. Since the beginning of the year we repurchased 765,000 shares of our common stock at an average price per share of $25.79 and $51 million of our senior secured term loan at a weighted average discount of 13.2%, bringing our outstanding debt to $482.6 million. As of June 30, 2016, our net debt less marketable securities was $324.1 million, a 27% decrease from June 30 of 2015.

Looking forward we plan to continue to execute a balanced approach to capital allocation that includes debt repurchases, capital investments in technology and facilities, share repurchases and potential bolt-on acquisitions. In closing, we had a strong financial quarter and are making very good progress on our four strategic initiatives.

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

(Operator Instructions) Lee Cooperman, Omega Advisors.

Thank you. Let me apologize in advance. I'm on vacation in Utah and I don't have my files and worksheets with me, so some of these questions might be basic but be that as it may there is a series of questions.

Number one, what would you say is the minimum cash you need to run your business? Rough idea, I don't need anything exact.

Look, because we want to make sure -- I guess to run our business we don't need that much cash to run the business. But because we want to make sure should anything bad happen even though we think that likelihood is very, very small we want to make sure we have the cash to support ourselves. We like -- we're maintaining a healthy balance sheet in the meantime, more than we would typically need.

Should I assume $100 million? No number you want to volunteer?

I think $100 million is a fair number. From our perspective we just want to make sure in the unlikely event (multiple speakers)

I understand, I understand. Second, what is your desired level of debt?

You're focused on bringing down debt, I think you have $480 million some odd -- $487.6 million gross. What would you like to see that number? What would be a comfort level? Zero, (multiple speakers)?

The answer to that question, also, obviously depends on if we had a crystal ball and more clarity to some of the issues with our client it would be easier to answer that question. But I think longer term two times earnings is a healthy -- two times EBITDA is a healthy level of debt. 2.5 and you'd bring it up to do deals potentially and then you would over time bring it back down.

I don't want to come across as an academic moron but when you talk about clarity you apparently have enough clarity to give people guidance on your earnings. You are saying that you expect to earn a minimum $6, so everything flows from there.

Third question, I think in the first call I may be wrong but I think you said that for the year you thought you would generate either $120 million to $170 million in cash or $120 million to $190 million in cash. What is the cash generation you are expecting this year if you could update that number? Assuming the minimum $6 --

Michelle, what did we generate for the first two quarters in cash operating cash? It's $40 million I think in the second quarter --

$40 million in the quarter, it was (multiple speakers). First quarter we had $29 million of operating cash.

So Lee, I would think the run rate we're at is probably a reasonable assumption that the run rate in the second quarter for the rest of the year.

So that's $40 million times four or $160 million?

We would do $40 million in the third and the fourth. And what have we done year to date?

Just shy of $70 million.

$70 million. So $70 million plus $40 million -- $110 million.

$70 million plus $80 million is $150 million.

Yes.

So what's the answer to the question? You guys are mumbling in the background, I can't hear you.

So Lee, about $150 million I think is a reasonable number.

$150 million. Okay, good. Now, the aggregate investment you now have in RESI on your balance sheet, is that the $38.08 million that the securities held for sale, that's the RESI investment, $38 million?

That's correct. That's correct.

Okay. Let me just say this, RESI has a repurchase program in place. They think the stock is undervalued. Whether it's more undervalued or less undervalued than ASPS only time will tell.

But I think all of us -- I don't want to see it that way. Speaking for myself I would much rather us own more debt in ASPS or more equity in ASPS and not have the investment in RESI. Now that this mini crisis has gone and your shysters have left the scene it seems to me with RESI having a buyback program you guys ought to do a deal where you could sell them your stock and take this cash and buy back our own debt or buy back more of our own equity.

I have not yet had a chance to see your 2020 estimate but I assume with $430 million to $505 million of operating income comes up with a very high EPS number. And it would seem to me that I'd rather see the $38 million invested in our own securities than somebody else's securities as much as RESI seems undervalued.

Right. So Lee, I guess fundamentally I agree with you. The question is a matter of timing.

It still is trading -- RESI is still trading at a tremendous discount to book value and they are a very important client of ours. So we want to continue to show support through ownership of their stock.

But longer term I absolutely agree with you, Lee. As their stock improves it's not something -- is not core to our business to own shares of RESI. I agree.

Just one last question. I think Michelle addressed this in a sense, she kind of recited all the potential uses of cash.

How would you guys order the best use of your cash at the present time? And let's say the uses of stock repurchase, debt repayment, reinvestment in business, cash dividends, how would you prioritize say the rest of this year in terms of how you would like to use your cash flow assuming events unfold along the lines you anticipate?

I think the approach we've been taking is probably the approach we will continue to take.

Okay. Well in this first quarter you bought back $12 million worth of stock. The second quarter you bought back $8.1 million. Then you bought back $50 million odd of debt, so in terms of dollars spent it seems that debt would have a higher priority than equity.

Yes.

Also, can you just help me out, I can't access the web, being on vacation I'm on a cell phone. What was the earnings per share number that you guys were guiding towards on your aspirational goals when you talk about the slide deck that you presented. What did that number come out to be in 2020?

Lee, what we did was give you just estimated revenue and operating margins. We didn't actually indicate what EPS was.

I see. I got you. We will figure that one out.

Okay, thank you. I appreciate your response to my questions.

Kevin Barker, Piper Jaffray.

Thank you. In regards to the change in scenarios in regards to non-Ocwen revenue, does that also relate to the increase in tangible amortization expense?

Yes, our anticipated amortization for the rest of the year has been incorporated into our updated scenarios.

Are they related to the previous acquisitions and the non-Ocwen revenue, the decline in non-Ocwen revenue expected? Or is that something separate?

Give me one second, Kevin. Yes, Kevin I think it's completely separate. The change in non-Ocwen revenue, I think the midpoint of our scenarios it's still pretty attractive.

I think it's close I think it's 59% non-Ocwen revenue growth. That's come down from what we had included in the previous scenario assumptions we had provided. And, frankly, it's just a matter of the sales cycle takes time and we're still very optimistic about our prospects.

We boarded that top four bank in June. I think it generated $100,000 in June but that client has the potential to be a couple million dollars or more a month in revenue as we perform for them and meet their expectations.

So it's just a matter -- these transactions unfortunately take a long time to find, then when you find them they take a long time to win and once you win them they take a long time to board or to integrate and then once they are integrated they take quite some time before they stabilize. But the opportunities are still really great.

Okay, and then you mentioned this in the past that seasonally the REO sales that come through tend to be highest in the second quarter and I think that's reflected in your service revenue per delinquent loan on the non-GSE side. Then I believe you'd left that disclosure in there. Thanks for putting that in there.

Do you expect to be at $692 per loan on a go-forward basis as well? Or do you think that will decline in the back half of the year due to seasonality?

I think you will see seasonality in the back half of the year, Kevin. And so the increase was primarily driven by our real estate sales and through increased referrals in our property preservation and inspection business.

Okay. And then as a percentage of (multiple speakers) -- so seasonally you would expect that to come back down in the third and fourth quarter, is that right?

Yes, the back half of the third quarter and into the fourth quarter, yes.

Okay. And then in regards to the reimbursable expenses as a percentage of total service and revenue it's come down to about 7% of total servicing revenue at this point. Do you expect that to continue to decline or is this close to the level that you expect it to be?

It should come down some more although I think it will continue to come down a little bit more. But it's getting close to -- we don't have the model in front of us, but I suspect it is getting closer to where it will be. It will come down a little bit more.

Okay. And then I noticed that the tax rate ticked up this quarter.

I believe you mentioned something about that in previous quarters. Do you expect the tax rate to remain near 14% or do you think it's going to remain closer to 10% on a go-forward basis?

I think for this year we are looking at something in the range of 12% to 14%. It will fluctuate from period to period, year to year depending on our mix of earnings across geographies.

Okay. And then there is no change in the Luxembourg tax ruling, is that right?

No.

No.

Okay. Do you have any updates in regards to that tax ruling? Or is that purely in the --

No, we have nothing further to say beyond what's already in our public filings.

Okay. Thank you for taking my questions.

(Operator Instructions) Mike Grondahl, Northland Securities.

Hey, good morning Bill and Michelle. First question is some of the initiatives you laid out on slide 5, especially maybe the two with the top 10 banks in the short sales and the one with the mortgage insurance company managing their REOs, can you size those for us or give us a sense of the timing? And are those in your guidance?

Yes, so we've worked that into this year's financial scenarios, Mike. But what we typically see -- so, for example, this top four bank I indicated it was we started receiving referrals in June. If we perform well we think that could be a couple to several million dollars a month of revenue.

With respect to the two other top banks, one of those banks we've grown quite nicely. I think we've seen that grow from nothing to north of I think $1 million a month now. And the other bank is their portfolio is winding down that business has come down some.

Then in terms of these new opportunities as we said obviously it depends on the opportunity and the customer but these opportunities can be $0.5 million to millions of dollars a month in revenue. Some of those we're onboarding and expecting to start generating the revenue soon and others will take some time. But they all take time to ramp up, Mike.

Particularly if you are selling real estate, you have to board the homes, typically there's a real estate agent in place over time and we're managing that agent, over time we're receiving new referrals and we're becoming the agent and then there is a lag to get a home actually sold and then start generating the other fees. So it takes several months but we did build that into our financial scenarios.

Got you. And last quarter you had mentioned you were in discussions with two top 10 banks related to services. Did you win those two, are these the two mentioned here? Just some clarity around that.

Sure. Yes so one of them we've been told on the business side we've won and that one's mentioned with respect to Equator. We are still finalizing getting through their vendor management process which we expect should be done within a week, within a few weeks I suspect. But we've been told we won.

We've marked up the agreement. We've reached an agreement on the terms. We're now just waiting to sign it once their vendor review finishes their work.

And on the other customer we're still in sales conversations with that other large bank customer. And we're making progress but we haven't closed it yet.

Got you. And then lastly you mentioned the pipeline was pretty strong. Just a little bit more help on that pipeline.

Has it gotten stronger? What to expect and does that move 2017?

So with respect to I'd say three of our initiatives which we're growing at least all are partially with institutional clients. So in servicer solutions we're talking to not only the top 10 banks but let's say numbers 10 to 20 and having an active dialogue. It may take some time to work through the process, but we're having a very good dialogue and we're participating in RFPs.

Then I would say in our Origination Solutions business we're focused not on the top 10 lenders, we're focused on maybe numbers 10 through 30 of both bank and non-bank lenders. And we're moving, we've been in very active dialogue responding to RFPs and moving along. And I expect a couple of those transactions to close and those are our platform sales I was talking about. And then on the rental investor solutions business we're making decent progress growing the pipeline of rent range data sales and getting institutional clients to leverage our tools to sell homes and potentially also use us to help them buy homes.

Got you. And then the next question really is if we look at, I think it's slide 13, Bill, the new scenarios, a couple of things stick out there.

Could you just talk about the drivers of the increases at Ocwen and real estate investor services and then also the drivers of the decreases at owners.com and the originations area? I just want to make sure I understand the movements there.

So we have put the original scenarios together. I can't remember which quarter but it was a few quarters ago --

Yes, late last year --

Yes, it was third or fourth quarter, I think it was the third quarter last year. So what we tried to do is tighten them up a bit. And with respect to Ocwen what we're seeing is what we discussed around more referrals around property inspection and preservation, which is a driving increase combined with the change in billing on the REO.

And then in real estate investor solutions that's growth with better than expected growth with RESI and starting to drive revenue with other customers. And Origination Solutions we brought it back some primarily because we're focusing a lot on the platform sale and some of the other services not related to the platform sale have fallen back some. We're not as focused on those.

But we're really focused as we believe long-term growth is going to come from that platform sale. So we just adjusted our current-year assumptions there.

Got you. Then owners.com, just a slower, harder time converting the leads. Is that the thought?

Here's what I would say and I look at this daily. I think we're making -- I know we're making really good progress. If you look at the funnel to close a lead from the time a lead comes in to helping them find a home to making an offer to going under contract and then closing, what we're seeing is that we're making a lot more progress in the more recent leads than we have on the earlier leads back in when we started the program in February.

So I know we're making very good progress and improving our conversion and that's without getting all the agents we need in place and without having the mobile applications that we discussed for both the buyers and our real estate agents in place, which I think will help tremendously in converting more leads. So as we hire more agents and get those apps in place we're very optimistic and most importantly I see that we're making very good progress on our conversion rates on the leads. It's not worth discussing how many closings and things like that yet but we are making very, very good progress, so we feel good about it right now.

Got it. Then lastly just as it relates to real estate services, I want to confirm that you do have a real pipeline there outside of RESI and then secondly you were going to put some of your capital to work this year sort of buying properties and working them yourself. Did you ever start that?

So with respect to your second question the answer is yes. I think we've purchased close to 29 or 30 properties and may have another 15 or so under contract. So we're making progress there.

And more importantly we are focused on -- we've just brought on a couple of sales leaders into this initiative and they are doing a nice job building their pipeline along with our management team and their relationships. So we are starting to build a pipeline. RESI, obviously, is a very important customer but we are working to diversify the revenue there, as well.

Thanks for answering all those questions.

(Operator Instructions) At this time I'm showing no further questions. I would like to turn the call back over to Michelle Esterman for any closing remarks.

Thank you for joining the call today. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program.

You may all disconnect. Everyone have a wonderful day.