Altisource Portfolio Solutions SA (ASPS) 2023 Q3 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Altisource third quarter 2023 earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Michelle Esterman, Chief Financial Officer. Please go ahead.

Thank you, operator.

We first of all 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 remarks today include forward-looking statements, which involve a number of risks and uncertainties that could cause actual results to differ. In addition to the usual uncertainty associated with forward-looking statements, the continuing impact of government and service are responsive to the COVID pandemic together with the current economic environment, making 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 statement sections in the company's earning release and quarterly slides as well as the risk factors contained in our 2022 Form 10-K and 2023 Form 10-Qs, which describe factors that may lead to different results. We undertake no obligation to update statements, financial scenarios, and projections previously provided or provided herein as a result of a change in circumstances, new information, or future events.

During this call, we will present both GAAP and non-GAAP financial measures. In our earnings release and quarterly slides, you will find additional disclosures regarding [the] non-GAAP measures. A reconciliation of GAAP to non-GAAP measures is included in the appendix to the quarterly slide.

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

Thanks, Michelle, and good morning.

I'll begin on slide 4. We are pleased with our third quarter performance. For the quarter, we generated $874,000 of adjusted EBITDA, a $4.4 million improvement over the second quarter of 2023 and a $7.3 million improvement over the same quarter in 2022.

For the first nine months of 2023, we improved adjusted EBITDA by $16.1 million compared to the same period last year. Based on our current forecast, we anticipate positive company-wide adjusted EBITDA for the fourth quarter and full year.

Turning to slide 5. During the quarter, we generated $18.4 million in net proceeds from the sale of equity and used $10 million of the proceeds to reduce the principal balance of our term loan. As a result of the debt reduction, we eliminated 966,000 penny warrants, [can] exercise an option to extend the maturity date of our term loan and revolver by one year to April 2026, and we'll save an estimated $3.4 million per year in interest expense.

Extending the maturity date of loan is subject to customary conditions and the payment of an extension fee as described in our 10-Q. We ended the quarter with $36 0.6 million in cash and cash equivalents.

We continue to position Altisource to take advantage of what we see a significant potential opportunities with existing and new customers in both of our segments over the coming years as the default market continues to normalize and we gain traction with our newer solutions that strengthen Lenders One members performance.

As you can see on slide 6, our sales pipeline and wins in both of our segments remained strong. Our consolidated weighted average pipeline at the end of the third quarter was an estimated $46 million of annual revenue on a stabilized basis, representing 34% of our annualized third quarter 2023 revenue.

We are also winning new business. Since last quarter, we won business that we estimate will generate $16.9 million of annual revenue on a stabilized basis. During the third quarter, we continue to onboard and gross sales wins from 2022 and 2023, which combined are now at a $13.7 million annualized revenue run rate.

Turning to slide 7 and our countercyclical servicer and real estate segment. Third quarter adjusted EBITDA of $10 million was $2.9 million or 42% higher than the same quarter in 2022. Third quarter adjusted EBITDA margins improved to 37% from 24% in the third quarter of last year.

Adjusted EBITDA growth and margin improvement reflect product mix and cost reduction and efficiency initiatives, partially offset by lower revenue. The service revenue decline was primarily from our fourth quarter '22 exit of a low margin employee outsource business and fewer referrals in our lower margin field services business.

We also believe that the default market is continuing to recover, as evidenced by recent year-over-year growth in referral volume in our pre-foreclosure title and foreclosure trustee products. Both pre-foreclosure title and first-lien foreclosure trustee referrals were 42% higher for September 1, through October 20, compared to the same period in 2022.

For 2023, we anticipate that our servicer and real estate segment will have higher adjusted EBITDA and adjusted EBITDA margins compared to last year.

Moving to slide 8 and our servicer and real estate sales pipeline and wins. At the end of third quarter, our weighted average pipeline totaled $25.6 million of annual revenue on a stabilized basis.

The pipeline decline compared to the prior quarter, primarily because we converted an estimated $15.3 million of a pipeline into third quarter sales wins. One of the more notable third quarter wins was the signing of a master services agreement and a statement of work to provide REO asset management, brokerage, auction, valuation, and field services on a portion of a reverse mortgage servicers, REO portfolio.

On a stabilized basis, we estimate that this new business represents $12.8 million in annual revenue and a $3 million to $5 million per year in adjusted EBITDA. We began receiving referrals in September and anticipate that we'll reach revenue and earnings stabilization by the middle of 2024, if not sooner.

Turning to the macroeconomic environment and slide 9. During the pandemic, consumers benefited from stimulus checks, the suspension of mortgage and student loan payments, and a historically low interest rate environment. As a result, consumer savings reached an all-time high, delinquencies declined, credit scores improved, and home values appreciated.

Since early 2022, mortgage for foreclosure moratoriums and forbearance programs ended, borrowing costs soared, and just this month, student loan payments resumed. As a result, consumer savings declined to 3.9% in August 2023 from 26% in March of 2021. Credit card debt is at a record high. 401(k) hardship withdrawals were 36% higher in the second quarter of '23 compared to the same quarter in 2022. And auto and credit card delinquencies continue to rise.

Early-stage mortgage delinquency rates are also rising. Comparing September to June 2023, 9.4% more mortgages are delinquent by one payment and 10.7% more mortgages are behind by two payments.

The cracks in the housing market are beginning to appear. For September 2023, the seasonally adjusted annual rate of home sales are down 15.4% compared to September 2022. And the medium home sale price in September has declined since June 2023. So there are still up to 2.8% compared to September 2022. This is typical in the early stages of a housing downturn. At first denial, followed by capitulation.

Home affordability, which is highly correlated to home prices recently reached to near 40-year low. Our recent CNN Business article explain that for home affordability to return to the 25 year average, home prices would need to drop by 28%, interest rates would need to declined by 400 basis points, or income would need to increase price 60% or some combination thereof.

Naturally, an increase in unemployment would accelerate this correction and result in increased delinquencies and foreclosures, particularly for low down payment mortgages and those loans that were originated over the last couple of years. We estimate that for every 1% increase in 30-day delinquency rates, the addressable market for our default services would increase by $700 million.

Turning to slide 10 and our origination segment. We performed well in a difficult origination environment. Third quarter revenue was roughly flat and adjusted EBITDA improved by $1.3 million over the same period in 2022 despite a 10% decline in industry wide origination volume. Revenue reflects customer wins from our newer Lenders One solutions, which are designed to help our members save money, partially offset by our other origination businesses, which were impacted by continued challenges in the market.

For 2023, we anticipate our originations segment service revenue to outperform the MBA's forecasted 29% decline in the origination market and adjusted EBITDA to improve compared to 2022 from sales momentum in our Lenders One business and cost savings and efficiency initiatives across the segment.

Slide 11 provides a summary of origination segment sales pipeline and wins. During a very difficult origination market, we remain focused on increasing adoption of our solutions that help our Lenders One members save money. Our weighted average sales pipeline as of September 30, is $20.4 million of annual revenue on a stabilized basis.

We won an estimated $1.7 million in new business during the third quarter. From our 2022 and first half of the year 2023 sales wins, we recognized approximately $2.8 million of revenue in the third quarter or $11.1 million of revenue on an annualized basis.

Moving to our corporate segment in slide 12, we continue to maintain cost discipline. Third quarter adjusted EBITDA loss in the corporate segment of $8.7 million was $3.1 million or 26% better than the same quarter in 2022. For the year, we anticipate the corporate adjusted EBITDA loss to improve compared to 2022. This reflects our July cost cutting and efficiency plan.

To conclude, we continue to improve our adjusted EBITDA results. Our third quarter adjusted EBITDA was $7.3 million better than the same period in 2022 and year to date, adjusted EBITDA is $16.1 million better than the same period last year. Our sales pipeline and wins remain strong, and we continue to aggressively manage our expenses.

We believe the strength of our sales wins and pipeline, cost savings initiatives, normalization of the default market and consumer weakness, positions Altisource for positive adjusted EBITDA in the fourth quarter and full year and attractive growth as we look to 2024 with potential upside of mortgage delinquency rates rise.

I'll now open up the call for questions.

Thank you. We will now conduct the question-and-answer session. (Operator Instructions)

Raj Sharma, B. Riley.

Hi. Thank you for taking my question. Really good results; big congratulations on the improvement in the EBITDA.

I had a question on industry wide foreclosure -- starts of sales. There seems to be a -- maybe some early shoots of improvement. Also days in foreclosure seemingly dropped pretty considerable relative to earlier part of the year from 1,200 days down to 700. Is that indicative of anything -- of an improvement in the space in --? And could you comment -- could you give a little bit more color on that?

And of course, the early delinquencies are rising. And how soon could that start showing up more significantly in your results, you think?

Hey, Raj, this is Bill. Thanks for your questions.

So I think we are seeing early indications that delinquency rates, particularly 30 and 60 days are starting to rise. That's a pretty significant increase just from a couple of months ago.

And we're also seeing here to bring it home, if you will, in our foreclosure trustee business and our insured title search and foreclosure information report business, which are title searches related to the start of a foreclosure. We saw a 42% increase in the month of September and month to date in October in referrals compared to the same time last year.

And the reason why we focused on September and October is, earlier in the month we got some benefit from the restart in California, so we wanted to normalize for that. So it does appear that both industry-wide and at Altisource, we're starting to see an increase in the earlier stage activities and referrals. And this could be a precursor over time as those foreclosures work through the system for an increase in our higher margin -- well, in our high-margin REO auction business or Hubzu.

Great.

And then another question is on your recently announced the cost cuts, $13.5 million. Could you give any sort of progress on that or any comments on the ongoing cost cuts?

Sure. Yeah. I think today we're at about $10.5 million a year of annualized savings. I think we achieved about a $900,000 of savings in the month of September. We should be -- Michelle roughly at $12 million or $12.5 million of savings by the end of the year and then the balance of the savings, the other, the additional $1 million, $1.5 will come on the second half of next year?

That's right.

So we're making very good progress with that initiative.

Great. Yeah. Thank you. I'll go back in line. I have no question.

Great. Thanks, Raj.

Thanks.

Thank you. (Operator Instructions)

Mike Grondahl, Northland Securities.

Hey Bill and Michelle. Two questions. One, could you just talk a little bit about any visibility you have on an increase in Hubzu inventory or when you think that may begin to inflect?

And then secondly, just in sort of a base case for '24, what do you sort of think of as potential cash flow or cash usage, just in a base case for '24?

Hi, Mike. It's Bill.

So with respect to Hubzu inventory, we spend a lot of time looking at how that business is performing. And clearly, it takes time for those new foreclosure initiations that increased quite substantially in the first quarter of 2022 to work their way through that system and get to the end. And we're also monitoring the conversion rate, what percentage of those foreclosures are actually converting to REO.

And given what's going on with the economy for all the reasons we talked about when we discussed the macroeconomic environment and home affordability, we do think over time, as those foreclosures continue through that process, that conversion rate will return in certainly closer to what it looked like prior to the pandemic.

And so then it's just a matter of how long it takes for those -- that is increase in foreclosures from the first quarter of 2022 to work its way through the system. I think we've been guiding people that it's typically about 24 months and in some states it's faster and other states, it's slower to get through the foreclosure. And then typically, it's another six months to sell the REO.

So those increase in foreclosure initiations typically take about 24 months to get to the sale and another -- to the foreclosure auction, another six months to be sold. So we should start to see increase going into next year from those first quarter of 2022 initiations.

In terms of a cash flow for next year, Mike, we're not providing guidance. What I will say is we're making very good progress, improving the earnings for the company. In the third quarter, I was very pleased to see consistent positive [EBITDA] each month and [EBITDA] improved each month.

In the fourth quarter, you typically would see, it's a seasonally slower period. I think our revenue will be roughly in line with where it was in the third quarter, but higher than the fourth quarter of last year. And we think our EBITDA is going to continue to improve, setting us up for a good run rate going into 2024.

[We lose you], Mike?

Hey operator, I'm not sure if there's any additional questions.

(Operator Instructions)

I am showing no further questions. I would now like to turn the conference over to Bill for final remarks.

Yeah. Thanks for joining today's call. We appreciate your support, and we're very pleased with the progress we're making in improving the EBITDA at the company and growing our -- and strengthening our sales pipeline. Talk to you soon. Thank you.

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