Onity Group Inc (ONIT) 2003 Q1 法說會逐字稿

Good afternoon and welcome to Ocwen's first quarter earnings call. All participants will be able to listen only until the question-and-answer portion of the call. Today's conference is being recorded. If you should have any objections, you may disconnect at this time. I would now like to turn the meeting over to Mr. Bob Leist, vice president and chief accounting officer. Sir, please begin when you're ready.

Thank you. Good afternoon, everyone, and thank you for joining us today. Before we begin, I want to remind you that a slide presentation is available to accompany our remarks. To access the slides, log onto our website at www.ocwen.com, select "Shareholder Relations," then "Conference Calls 1st Quarter 2003 Results," and then "View Slides." Each viewer will be able to control the progression of the slides during the presentation. To move the slides ahead, please click on the gray button pointing to the right.

As indicated on Slide 2, our presentation may contain certain forward-looking statements that are made pursuant to the Safe Harbor provisions of the federal securities laws. These forward-looking statements may be identified by reference to a future period or by use of forward-looking terminology. They may involve risks and uncertainties that could cause the company's actual results to differ materially from the results discussed in the forward-looking statements.

For an elaboration of the factor that may cause such a difference, please refer to the risk disclosure statement in today's earnings release as well as the company's filings with the Securities and Exchange Commission including OCN's 2002 10-K. We are happy to make Ocwen news releases, 10-Qs, 10-Ks, and other materials available to you via e-mail. If you are not already receiving our materials by e-mail and would like to be added to our distribution list, please e-mail Linda Ludwig and lludwig@ocwen.com.

As indicated on Slide 3, joining us for today's presentation are Bill Erbey, chairman and CEO of Ocwen; Ron Faris, president; Art Ringwald, president and CEO of OTX; and Mark Zeidman, Senior Vice President and CFO.

This presentation will be followed by a question-and-answer period during which we will be taking questions from those of you attending the conference by telephone. Without further delay, I'll now turn the call over to Bill Erbey. Bill?

Thank you, Bob, and thanks to all of you for attending Ocwen's first quarter conference call. I would like to open this meeting with my perspective on our performance for the first quarter after which Ron, Art, and Mark will provide more detailed information.

As shown on Slide 4, I would like to cover three topics in my remarks today -- one, an overview of our first quarter earnings; two, the operating results of our strategic fee-based businesses; and, three, our remaining non-core assets and results of our non-core businesses.

I want to begin by noting that our first quarter earnings include an arbitration charge of $10m. As we announced last week in a 2 to 1 decision, an arbitration panel awarded damages of $6m plus interest and costs to the former owners of Admiral Home Loan, resolving a dispute in which they had claimed damages in excess of $75m. This dispute arose out of a 1997 acquisition agreement pursuant to which a subsidiary Ocwen Financial Services Inc., or OFS, acquired all of the assets of Admiral Home Loan. OFS ceased operations in 1999.

As illustrated on Slide 5, our first quarter earnings reflect strong progress in our transition from capital-intensive to C-based businesses. Apart from the arbitration charge, we recorded pretax income of $1.6m. Aggregate core business pretax earnings were up 70% over the first quarter of last year, while non-core losses, excluding our litigation charge, amounted to a loss of $2.4m this year versus a loss of 16.8m in 2002. Our loss in the corporate sector also declined to 3.2m as compared to 6.9m last year.

The combined results of our core businesses have continued to improve in 2003. As shown on Slide 6, our core businesses reported average quarter losses of $7.4m in 2000, and $1.7m in 2001. In 2002 they reported average quarterly pretax income of 3.4m as compared to pretax income of 7.2m in the first quarter of this year.

I am pleased to report that for the second consecutive quarter, the Residential Loan Servicing business earned a record 9.2m of pretax income despite the continuing challenges presented by the low interest rate environment. Our strong first quarter results reflect, in part, the impact of our India operations, which continue to expand rapidly and to yield high-quality results.

As illustrated in Slide 7, these results were achieved without growth in our servicing portfolio, which, as of March 31st, was slightly down from year-end. Ron will cover our servicing results in more detail later in the call.

OTX results have also improved this quarter as graphed on Slide 8, posting a $2m improvement in net losses over the first quarter of last year. This reflects an equal measure and increase in OTX revenues as well as continuing cost reduction. As Art will cover in more detail shortly, we expect to continue our progress towards breakeven and OTX during 2003.

I also want to note that in the first quarter we have begun to report on two new core business lines -- global outsourcing and international. As I noted in the annual report, the development of our operations centers in India has provided us with an opportunity to market offshore business process outsourcing, or BPO, to third-party clients. This new business unit, which we call "Global Outsourcing" currently has two BPO contracts and earned $81,000 of pretax income in the first quarter from these activities.

While still very new, we hope to achieve strong growth in this business in the course of 2003. We believe that the combination of our Global Outsourcing capabilities and our technology products at OTX creates a strong value equation. Combining both of these resources gives us the ability to offer a solutions-based sales approach to originators and servicers in the mortgage industry. Rather than offering only technology products or only Global Outsourcing services, we can work with our customers to develop solutions that are tailored to meet their needs. As a result, we have initiated a coordinated sales effort with Global Outsourcing and OTX.

The second new business is our International Division, which now consists primarily of global servicing solutions, or GSS, a joint venture that we formed with Merrill Lynch to create and operate servicing platforms in selected world markets. GSS is in a startup mode. We began operations in Taiwan in late 2002, and we'll soon begin operations in Tokyo. We are currently exploring additional locations for GSS operations. We foresee that 2003 will continue to be a developmental year for GSS, as startup costs are likely to exceed earnings, but we project that we will achieve profitability in 2004. GSS is synergistic with our domestic commercial servicing business and OTX because GSS will rely on OTX's REALFam's [ph] workflow and default management technology.

As shown in Slide 9, since December of 1999, our non-core assets to be sold have been reduced from $1.9b to $242m as of March 31, 2003, a decrease of 87%. As I have mentioned in recent calls, we are now down to a small number of remaining assets, making the timing of future sales less predictable. While there were no material reductions in non-core assets in the first quarter, a number of sales transactions are under discussion. As of March 31st, the five largest assets accounted for 65% of the remaining total. We continue to maintain the strongest reserve levels we have ever had, and we believe that we are in the final stages of achieving our goal.

As shown in Slide 10, commercial assets comprised approximately 79% of the remaining non-core assets and consist primarily of 18 loans and properties. Pretax losses in this segment were $2m in the first quarter this year as compared to $18m last year, reflecting the absence of provisions for asset reserves in the first quarter of this year.

As shown in Slide 11, reserve levels on commercial loans in our assets remain at 24%, consistent with year-end. Our unsold affordable housing assets declined by $1m, or 6% since year-end. Of the remaining 16m of unsold assets, 6m are loans and 10m are properties. We also have 3m of affordable housing properties that are under contract but have not yet met all the qualifications for sales treatment.

Slide 12 illustrates that reserves on our affordable housing properties and loans stand at 49% at March 31st as compared to 48% at last December. I remain convinced that our strategy to liquidate non-core assets and use the proceeds to reduce leverage and continue to invest in our core fee-based businesses is the best course for our stakeholders. I believe that our first quarter results demonstrate our progress towards the completion of that strategy as core businesses continue to be profitable and losses in our non-core and corporate segments continue to decline.

Overall, I noted at the outset, exclusive of our arbitration charge, we recorded pretax earnings in the first quarter and, as we projected, we've begun to see the benefits from the charges we took in the last quarter of 2002. Today we have equity of 303m, and cash and cash equivalents of 217m. We are confident that the strong financial foundation will provide us with the ability to stay the course and achieve our strategic objectives.

I would now like to turn the call over to our president, Ron Faris.

Thank you, Bill. My remarks today will cover the servicing business, Ocwen Realty Advisers, unsecured collections, and Global Outsourcing. I am pleased to report that these four business lines generated a total of $11.6m of profit in the first quarter, an increase of $2.6m, or 29% over the first quarter of 2002.

Turning to Slide 14, you will see that our servicing business reported pretax net income of $9.2m in the first quarter compared to $7.5m in the first quarter of 2002. As shown on Slide 15, our servicing portfolio balance at the end of the first quarter was $30.2b, a slight decline from the fourth quarter of 2002. However, we have continued to see strong new product flow in the residential servicing business and anticipate that our portfolio will expand further in the second quarter.

Net revenues in the servicing business remain flat as the same quarter last year at $25.7m. The primary reason for the lack of revenue growth has been a result of the lower net earnings of float balances due to the ongoing decline in short-term interest rates that we have experienced over the past two years. Our net interest-related income including interest earned on collection account balances and compensating interest payments on payoffs, declined by $2.1m, or 31% over the same period the prior year. We expect that our net float earnings will continue to be negatively impacted on an ongoing basis due to the low short-term interest rate environment.

On the expense side, we continue to make progress in reducing our per-unit cost of service alone. During the first quarter of 2003, we reduced our average per-unit cost of service alone by 8% over the average for all of 2002. During the first quarter we added 77 new servicing staff members to our India facility. At March 31, we had approximately 698 active servicing staff in India, up from 187 at the end of 2001.

As shown on Slide 16, as a result of implementing our REALServicing software in January 2001 and our initiative to migrate a portion of our labor force to India, we have reduced the average cost of service alone by over 50% over the past nine quarters.

Our expenses in the servicing business declined by approximately $1.8m, or 10% over that of the first quarter of 2002. The profit margin in the servicing business also remains strong at 36% for the first quarter of 2003.

As shown on Slide 17, our unsecured collections, or asset recovery business, posted record pretax income of $1.3m in the first quarter as compared to a $900,000 profit during the same period in 2002. We continue to make progress in improving our collection capability, reducing our cost structure, and in attracting new fee-based collection contracts.

Slide 18 shows that Ocwen Realty Advisers, our property evaluation division, also reported record pretax income of $1m for the first quarter of 2003, compared to $520,000 in the first quarter of 2002, reflecting an improvement in margin from 12.6% to 26.6%. The improvement in margin is a direct result of expanding our vendor network, fully deploying REALTrans as our vendor management and product fulfillment system, and utilization of our lower-cost India labor force. We have also made great strides in expanding our client space and improving customer satisfaction amongst those clients.

Both the asset recovery business and Ocwen Realty Advisers complement our servicing business, capitalize on our core competencies, and provide additional value-added services to our core client base. Both business lines continue to make progress in reducing their cost structures and improving their product quality through the better use of technology and our India labor force. At March 31, 2003, we had 83 staff in India associated with these two business lines.

As we had previously reported and, as Bill mentioned, we continue to pursue new opportunities to leverage our technology and global capabilities. During the first quarter, our Global Outsourcing business generated $350,000 in revenue, a 70% increase over the fourth quarter of 2002. This resulted in net profit of $81,000 for the quarter. We have two active clients, and services for a third client will begin during the second quarter. We anticipate opportunities to grow this business over the coming quarters.

Thank you, everyone. I would now like to turn the call over to Art Ringwald.

Thanks, Ron, and good afternoon, everyone. I'm pleased to report that during the first quarter of 2003, OTX's pretax operating loss improved by $2m, or 38%, for a 5.3m in the first quarter of 2002 to 3.3m in the first quarter of 2003. This improvement was driven by increased revenues and reduced expenses with the lion's share of the revenue growth coming from REALTrans.

Reviewing first quarter 2003 results against the normalized fourth quarter 2002 results, OTX delivered its best-ever quarter-over-quarter reduction and operating losses. As shown on Slide 20, we dramatically lowered our annual pretax operating loss run rate from a normalized 17.9m in the fourth quarter of 2002 to $13.3m in the first quarter of 2003, a 4.6m, or 26% improvement. This was the result of annualized revenue increases of 3.5m as well as annualized expense reductions of 1.1m when compared to the fourth quarter of 2002.

Focusing on REALTrans, annualized revenues in the first quarter as shown on Slide 21, grew to $3.6m, a 70% improvement over the fourth quarter of 2002's annualized revenue of 2.1m. Transaction volume, as shown on Slide 22, grew nearly 50% to 231,000 transactions in the first quarter, up from 156,000 last quarter. I am also pleased to note that our second quarter run rate, based on April results, is about 300,000 transactions. These volume increases are due to several factors including the continued systemwide rollout of the REALTrans platform across Washington Mutual; a full three months' worth of activity related to new products introduced in the fourth quarter of 2002; and, finally, the effects of increased refinance-related volume on our existing client base.

We also made significant progress with regard to our First American initiative. As you may recall, BMS selected REALTrans to drive their Better Management platform. As a result of this selection, REALTrans completed on April 23rd the integration of the first in a series of several products with two top-five lenders.

The continued rollout of the First American initiative, along with the ongoing rollout to additional Washington Mutual offices and the completion of currently scheduled integrations should result in REALTrans breaking even in the fourth quarter. The most significant risk to achieving this is our ability to complete the scheduled product rollouts and integrations with previously signed customers. Put another way, achieving our breakeven goal for REALTrans is now largely a matter of execution as opposed to landing additional sales.

As to the overall financial performance of REALTrans, the annualized pretax operating loss improved by more than 50%, from 8m in the first quarter of 2002 to 3.9m in the first quarter of 2003. As I have noted on each call, I continue to be optimistic about OTX's future and believe that we are making significant progress in driving OTX to break even.

I'll now turn the meeting over to Mark Zeidman.

Thank you, Art. I'd like to discuss two remaining aspects of the company's performance during the first quarter of 2003. First, the corporate division's first quarter loss of 3.2m and, second, I'd like to give an update on the company's balance sheet, including its cash and liquidity position.

First, as regards to corporate division, the corporate division consists primarily of costs that are general in nature and are not allocated to the business units in support departments and also the net interest expense incurred to finance assets such as cash, income taxes receivables, and similar types of assets that are not identified with any particular business unit.

As Bill mentioned earlier, the 3.2m loss in the corporate division in the first quarter of this year compares favorably with the 6.9m loss reported in the corporate division in the first quarter of 2002. The decrease in the loss is primarily due to the following two factors: First, as you can see on Slide 24, unallocated costs of the Technology Services Division were reduced from 2.7m in the first quarter of 2002 to only 600,000 in the first quarter of 2003, an improvement of approximately 2.1m. The company's management accounting policy is to allocate out certain hardware, software, and related infrastructure support costs, business units based on an internal transfer pricing methodology established during our budget process. To the extent that actual costs differ from these standard costs, any variance remains in the Technology Services Division.

Two factors contributed to the significant decline in the unallocated costs of the Technology Services Division. First, the actual expenses of the division were reduced by $1m from 5.9m in the first quarter of 2002 to 4.9m in the first quarter of 2003. The reduction in costs was accomplished in part due to reductions in staff levels and in part due to reassignment of personnel to OTX. Second, during our recent budget process, we revised our standard costs and charge-out policies and, as a result, increased the amount we charge to the business units by 1.1m from 3.2m in the first quarter of 2002 to 4.3m charged out in the first quarter of 2003.

The second factor in the reduced loss in the corporate division is that the net interest expense incurred in the division decreased by 922,000, going from a net expense of approximately 2.1m in the first quarter of last year to a net expense of 1.2m in the first quarter of 2003. The savings were primarily related to a decrease in the size of the portfolio of securities that we own at Ocwen Federal Bank for the purpose of meeting the qualified thrift lender test. This test, which requires that a thrift has no less than 65% of its total assets invested in residential assets, have been met in the past by investing in a portfolio of Triple A-rated, residential, collateralized, mortgage-backed securities.

In the first quarter of 2002, we owned an average of 136m of such bonds. The bonds earned a yield of 3.86% but were funded by corporate division liabilities with a weighted average interest rate of approximately 7.31%. Therefore, this portfolio yielded a net negative spread of 345 basis points and, as a result, cost Ocwen about 1.2m in net interest expense in the first quarter of 2002.

In 2003 the size of the portfolio needed to maintain compliance with the qualified thrift lender test had been reduced to an average of only $12m, and the weighted average cost of financing this portfolio had been reduced to only 6.11%, or a reduction of 120 basis points. The reduction in the average cost of financing reflects the redemption of high-yield bonds executed in the fourth quarter of 2002 and the continuing reduction in the amount of high-cost broker deposits.

As you can see on Slide number 25, the reduction in high-cost liabilities has been dramatic, comparing March 31, 2002, to March 31, 2003. Some of the benefits of this restructuring are reflected in the improved results of the corporate division.

Turning to the company's balance sheet, Ocwen closed the quarter with approximately 1.2b of assets, about the same as it had as of December 2002. Points worthy of note on the balance sheet include the following: As you can see on Slide 26, cash increased by approximately 25m during the quarter to 217m at the end of March 2003 as compared to 192m at the end of 2002. Accordingly, cash and cash equivalents represented fully 17.4% of total assets at the end of March. Of this amount, approximately 56m was at the holding company, and 161m was at Ocwen Federal Bank.

Also, we continue to consider that the maintenance of adequate liquidity is a high priority. In this regard, we have had some recent successes in diversifying the company's credit lines. For example, we obtained a renewal for one year within our 100m credit facility for servicing advances at the bank that had been tested mature in April 2003. We also closed on a new 60m credit facility at the bank to finance both servicing advances and purchase mortgage servicing rights and, third, we executed a new $20m credit facility at the holding company level on one of our largest non-core assets, an office building in Jacksonville, Florida.

Unfortunately, it was not a particularly good quarter in terms of resolutions of non-core assets, which stood at 242m at the end of March, approximately the same as of year-end 2002. Although this was disappointing, it's important to recognize that first there are only about two-dozen non-core assets remaining, and not all of them are currently up for sale. Therefore, some quarters will show little, if any, resolution activity.

Second, a large non-core asset sale that had been scheduled to occur in the first quarter was unavoidably delayed. However, we believe that the asset is still likely to be resolved sometime in the second quarter and, lastly, the most important target is not the amount of non-core assets to be sold in any given quarter, but the amount to be sold over the course of the year.

We have targeted the sale of approximately 90m of our remaining non-core assets during 2003 and believe that this target is still achievable.

Lastly, from a liability point of view, we continue to reduce our reliance on high-cost debt. We closed the quarter with only 171m of broker deposits remaining as compared to 199m at the end of 2002. By the end of 2003, we should have less than 100m of broker deposits remaining. As the average yield on these deposits exceeds 6.5%, every dollar that matures helps to improve our bottom line. Similarly, we have another 43m of 11 7/8 senior notes that are scheduled to mature in October 2003. The retirement of these bonds will further reduce our debt burden and help the company regain profitability.

Now I'd like to turn the call back over to Bill.

I would now like to turn the call open to questions.

Thank you, sir. At this time, if you would like to ask your question, please dial star, then 1. You will be announced prior to asking your question. To withdraw your question, please dial star, then 2. Once again, at this time, if you would like to ask your question, please dial star, then 1, on your telephone keypad now. Your first question comes from Bob Napoli representing U.S. Bancorp Piper Jaffray.

Good afternoon. Just a couple of questions -- on the OTX business, targets at breakeven by the fourth quarter -- one of the things that clearly is going to happen between now and the fourth quarter is that mortgage market origination transactions are going to drop dramatically, assuming interest rates don't fall further from this level. Is that built into your forecast or what mortgage market origination number is built into your forecast?

As we analyze our current product profile, the drop in re-fis of about 40%, meaning if they were at 50%, just pick an easy number. A 40% drop would move them down 20 to 30, doing it that way, would create about a 7% to 9% reduction in the quick volume that we have in revenues. Consequently, yes, we think we have that fairly well covered, because we should have enough new integrations and new customers to more than offset the likely downturn.

Unfortunately, I can't forecast how high rates are going to go our how severe the follow-up will be, but my main point here is I think we're far more insulated from that than you might think, just looking at it from 40,000 feet.

I'm confused -- a 40% drop in re-fis equates to a 7% to 9% drop in your revenue?

In total [clicks] [ph]. In other words, we have certain products that are not re-fi sensitive, and we have some products that are. So what we did was the math based on our current mix of products at this moment. If we had a 40% drop in re-fis, it would only reflect a 7% to 10% drop in the [click] volume of revenues of the total OTX REALTrans product. So we think, if we can maintain those kinds of ratios, we should be in good shape barring some kind of major, major shift.

Okay. On the servicing business, you pointed out you had a slight decline in the unpaid principal balance in your portfolio, but you said you expect an increase this quarter. What are you seeing out in the market? It seems to us like the subprime market remains extremely strong as far as new originations. What are you seeing as far as product flow and then pricing? Have returns adjusted for the lower interest rate environment? I mean, has the pricing adjusted for the low interest rate environment?

I think that -- first, on the product flow, I agree that the subprime market appears to remain strong, and there is a fair amount of opportunities for us out there, and so that's why I believe that the second quarter will show an increase from where we currently stand.

As far as pricing goes, I think there has been a combination of some, probably finally pricing in of the lower interest rate environment but, at the same time, there is more competition in the market. So I'd say prices have held steady to maybe even slightly increasing a little bit.

What kind of growth would you like to have in that business this year?

We had originally targeted to grow the portfolio about 15%, and we still expect that's doable.

Thanks. My last question would just be -- if you look at the non-core segments, we continue to -- while the pain has reduced, we continue to quarterly get additional losses out of the non-core businesses. How long do you see that happening? Can you take some kind of discontinued business charge and just put that all in one lump sum, discontinued business, and remove the noise from your quarterly financials in that regard?

It's difficult to do that, given that in order to treat these business as discontinued, you have to be, I'll say, virtually certain that you can dispose of the assets within the year, and cannot be certain that that's the case. As I mentioned before, most of the assets are being marketed but not all of them. So I don't think today we're in a position to do that. But we look at it periodically.

Okay, thank you.

Your next question comes from [Andrew Kanab] representing Lighthouse Partners.

This is a question for Art. Art, I had a question on the Banc of America relationship that they just established with Fidelity National. Banc of America was one of your bigger wins for your REALTrans platform and now seeing that B of A has gone with Fidelity National, I wouldn't think that you would be getting further [clicks] from that source. Can you correct me if I'm wrong and outlay what went wrong with B of A, considering that you came from that shop and also that was a stronghold for the REALTrans platform?

The portion of B of A that we're in is the ELOG [ph] division in California and, as far as I know, there has been no effect on that relationship. I haven't talked to anybody at B of A about what's going on but in the press release it seems to be they're basically outsourcing a variety of factors in a way that's different than we are. We're obviously doing outsourcing. We'd like to see it work, because we think outsourcing is a great business model. But I think what they're doing with Fidelity and what Fidelity has in the relationship and what the parties bring, as I understand it, is a very different business model than the OTX model. So I don't consider it a defeat. It's not a playing field we were actually on in the way that they're approaching it. So I wish them well. We think Outsourcing is a great model. We're pursuing it vigorously. They have taken a different tack in a totally different strategy, as you know, with regard to Fidelity's acquisition of a whole bunch of vendor platforms and this and that. And so I hadn't thought about it in those terms, and I don't think it is a defeat in that sense.

But B of A had been -- you would consider it on your platform, and they had been contributing --

-- they still are --

-- [clicks] -- have they ramped up or have they allocated more to REAL EC?

If I could try that for a moment -- I think, Andrew, certainly the relationship that Fidelity has with Banc of America is something that will probably keep us from expanding the relationship further within B of A. We are on their second marriage platform, and those [clicks] continue -- those add what the long-term will lead -- what the long-term outcome will be is anybody's guess with respect to that. We do find it interesting from a strategic perspective that the value equation that they're putting forth to the market, I think, is a very powerful one, and I think it makes a lot of sense. It is a value equation that we are also in a position to provide and not many other players are. And that is the melding of technology together with outsourcing. So in one sense, and I think it's helped to galvanize the thought process in the marketplace as to what's accomplishable with respect to taking costs out of the process. So you never like to have someone else in your client's face, but I think it's a very, very interesting value proposition, and it's one that we believe we can replicate.

Fair enough. On the REALServicing, I know you've changed the names and kind of changed the direction of that product. Can you give us an update? You were very enthusiastic on it two or three quarters ago, and I was just kind of wondering where you stood with that.

The default management product is not a real resolution, which is more consistent with our nomenclature and brand. We are out there actively selling it, and we are engaged in dialog with various lenders, and there's probably nothing else to report until we have a sale. So we are out there selling it, we do have interest, we're in active dialog with a couple of people right now, and we'll report, obviously, as soon as we have a significant sale or contract.

Are you changing your tack, where you're trying to -- you're referencing one of the big five would make real servicing more than profitable? Since you've had difficulties penetrating that market, are you now going more down in size of the potential targets?

Yes. We think the mid-size players are more likely to buy at this point in time, and so we have redirected our efforts generally more towards mid-size and, in some cases, subprime lenders who might be more amenable to making a change in the servicing platforms.

What's the number for REALTrans to get to breakeven -- the [clicks]. Did you mention that?

We are migrating away from the click concept as we add new products. If you do that math on the [clicks], our average click revenue has moved up rather smartly due to the introduction of some new products in the last quarter. So basically we're well along the path to breakeven. As I said, we have charted our growth, and if we complete the integrations we have underway now with the currently signed customers, REALTrans will be a breakeven in the fourth quarter.

So what's the average click charge? You were at $3, you know, a quarter or two ago. With these new product additions, what is it going to?

Well, let's run the math here --

In the meantime, Andrew, one of the ways to think about it is we covered approximately half of our operating costs in the first quarter with revenue. So we would need to approximately double the number of [clicks] we have at the current click rate -- current charge per click to reach breakeven, if that's helpful to you. We have a slide in there, too, that's not -- you know, you've seen some rather -- we've had to grow fairly rapidly just to get to this point where we are today. So it's not something -- we don't believe it's out of the realm of reasonableness to try to get to that position before year-end. Again, it will be impacted to some extent by the re-fi bill.

Okay.

If you take the 3.6 and divide it by the 231, which was the [clicks], it gives you an average revenue of about $15.

Okay, great, and then the last question is for Ron -- in terms of the Veterans Affair contract -- the government contract -- what's the status of that?

Well, we remain positive that we'll be awarded the contract for some background for some of the others. We won the -- what we call the commercial selection process, where they selected somebody in the private sector to go up head-to-head against the VA. We were then selected as the better provider over the VA, and right now we are sitting in an appeal period. We expect to hear the final results -- actually, shortly -- probably within the month of May and possibly even within the next couple of weeks.

Will you make an announcement before the next earnings and what could that mean in terms of the portfolio growth?

I'm not sure I can speak to whether we will or won't make an announcement. I don't know that we've --

Is it a material event?

Let us reflect on that and ask our general counsel on that, Andrew.

Oh.

Andrew, can I make a correction? We did the math quickly, and we divided quarterly by annual and -- I apologize for that -- the number is 390, which is still up significantly.

Okay.

Your next question comes from [John Marsani] representing ING.

Hi, good afternoon, guys. On the REALServicing, you guys had talked about three big customers -- are they still alive or where are you on that one?

I'm trying to remember which three we talked about -- two of them we decided not to anything, if I recall correctly, and I believe, but I'm not certain about this, that one of the ones we mentioned is still in play. I don't remember the specific three. That was six months ago.

I think you're right -- two of them decided they weren't going to anything, and I think one is in abeyance in terms of that.

And did you take anything away on the debrief about why they decided? They just didn't see value in what you were doing? Or what's the --

In one case they were so far down the path that it was hard to reverse, and from our perspective it appeared that there were significant internal politics that made it difficult to reverse the decision late in the game.

What I take away, John, from the marketing that we did so far was, keep in mind, any one of these products, if they are a significant improvement, which we view them to be, they are going to be, in some cases, threatening to departments within any organization. In order to sell this, one of the things we are thinking about is, a, to stratify the market not only by large, medium, and small players, but also what products you're going to be offering to them.

In the case of the large sales, the large prime servicers, what you tend to get is, you take -- they'll agree that their averaging servicing cost is $54, say, or $72, whatever it is, and when you approach it from a standpoint of only selling real resolution, suddenly the shift of cost -- the costs shift dramatically from one department to the next. So if we're going to go after the large accounts, we pretty much need to offer a more universal solution to them and, at the same time, basically, do it more from, like, the CFO or the CEO's perspective so that they can make an overall strategic decision. Because once you get down into individual improvements in given departments, the improvements tend to result in job losses, and as individual managers, then -- shall we say, other motivations in terms of making those decisions. So we are rethinking, in fact, how we offer it to the larger accounts.

Okay, and on the International Outsourcing business, it seems like -- I'm thrilled you guys made a profit and you're starting to break it out, but it's a pretty small number to be breaking out. Do you see that ramping up, big time? And maybe you could talk to what you see as the opportunity there.

I think we did feel that it is going to, over time, hopefully, you know, there are no guarantees, but hopefully it will be a meaningful contributor to the company and just felt like it's at the point where it's profitable and hopefully will continue to grow, and it made sense to break it out at this point in time.

Okay -- last question, Bill, and I'll keep asking this one until one of these days it will happen -- lots of liquidity, things looking better, stock still sitting down here at a very depressed rate. How about giving a little, you know, buying back some for the home account?

I'm certainly not pushing back against that as a business -- as something to do. We have committed to do, and I think we've made very good progress and hopefully you'll see more progress in that area, is to really get the debt bought down to a point where there's no longer a discussion.

One of the things you see in the earnings, John, is an enormous negative arbitrage as we've gone through these years. We start the year with a massive built-in loss because of the older, high-cost debt that's on the balance sheet, and we really -- from the perspective of conservatism to try to get debt away from us and, at the same time, to try to basically take that away so people can get more transparency to the underlying earnings stream, we're really going to pursue that to bring that to ground and then start looking at stock buybacks at that point in time.

It makes a lot of sense. I guess the one thing I would say is that time is money and a lot of your stuff is just calendar-related, and yet you do seem to have a fair amount of excess liquidity, and your stock is actually suffering as a result of the lack of the buyback. So you could very well end up with a situation where you don't have the opportunity to buy back at or near current prices by the time the calendar rolls around and before you can refinance your debt.

John, I'm not disagreeing. Your arguments are very cogent, and they are arguments we have with ourselves with regard to that -- or discussions that we have ourselves. I think that your points are well taken, it's a judgment right now that I think we really would like to get ourselves to the point that we have no overhang with respect to the capital structure at all and improve earnings by being able to pay off that very high-cost debt.

Okay, thanks.

Thank you.

Your next question comes from Josh Elving representing Piper Jaffray.

Hey, guys -- one quick question -- on the charge -- the $10m charge to Admiral Homes -- is that broken out over a couple of different business lines? Typically, sort of non-core?

That's included in the subprime business.

Entirely in the subprime?

Yes.

All right, thanks.

I am showing no further questions, sir.

Okay, thank you very much, everyone. Have a great evening. Goodbye.

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