Altisource Portfolio Solutions S.A. (NASDAQ:ASPS) Q3 2020 Earnings Conference Call October 29, 2020 8:20 AM ET
Michelle Esterman – Chief Financial Officer
William Shepro – Chairman and Chief Executive Officer
Conference Call Participants
Mike Grondahl – Northland Securities
Rajiv Sharma – B. Riley FBR, Inc.
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[00:00:03] Good morning, ladies and gentlemen, and welcome to the Altisource third quarter Twenty twenty earnings conference call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time if anyone should require assistance during the conference, please press star zero on your touchtone telephone. As a reminder this conference is being recorded, I would now like to turn the call over to your host, Michelle Esterman, Chief Financial Officer.
[00:00:39] 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.YOUTUBE.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 current covid-19 pandemic makes it extremely difficult to predict the future state of the economy and its potential impact on Altisource. The inherent uncertainty of the impact of future events on energy sources also impacted by the timing and extent of offline or energy directing referrals of services to providers other than unlikely source. Please review the forward looking statements section in the company’s earnings release, quarterly slides and form Tinku, as well as the risk factors contained in our twenty nineteen form 10k and first quarter form can. Q which describe factors that may lead to different results? We undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both gap and non gap financial measures in our earnings release and quarterly slide. You will find additional disclosures regarding the non-cash measures. A reconciliation of Gap Tanon Gap measures is included in the appendix to the quarterly slide. Joining me for today’s call and Bill Shapiro, our chairman and Chief Executive Officer. I would now like to turn the call over to Bill.
[00:02:21] Thanks, Michel. Good morning and thank you for joining today’s call this morning. I’ll provide a brief summary of our third quarter financial performance and update on our progress to improve our adjusted, even margins and cash flow, and an overview of our operating and sales strategy to address the current environment, beginning with slide three. We are pleased with the progress we are making in a very difficult operating environment. We increased the adjusted EBITDA by eight point five dollars million in the third quarter compared to the second. We are implementing our 20 21 operating plan that targets two hundred and fifty to two hundred and seventy million dollars of service revenue and thirty five to forty three dollars million of adjusted EPS to our operating plan assumes continued covid-19 related headwinds and our default businesses throughout most of the year.
[00:03:10] We also continue to develop and grow our customer base, increasing the tremendous backlog of business which we anticipate will be available to us in late twenty twenty one and into twenty twenty two when we forecast that the default market returns to a more normal operating environment. Turning to slide four in our third quarter financial performance for the quarter, we generated eighty five point four million dollars in service revenue, a one point four dollars million adjusted pre-tax loss and six point four dollars million of adjusted EBITDA. Despite the ongoing pressure on our business from the pandemic and acquaints transition of field services, referrals on the NRC Mazars to another service provider adjusted pre-tax, improved by eight point six million and adjusted EPS to improve by eight point five million compared to the second quarter.
[00:04:00] The improvement in adjusted pre-tax and adjusted EPS. It was primarily driven by cost reduction measures taken in the second and third quarters and revenue mix changes with revenue growth in the higher margin marketplace business and a decline in revenue in the lower margin field services business. Our marketplace revenue grew by 40 percent as home buyers returned to the market and our average home sale prices increased by approximately 30 percent.
[00:04:29] Turning to slide five, as of September 30th, we had sixty seven billion dollars of unrestricted cash and cash equivalents. Excluding cash flow changes from the point on its business, which we separated but still consolidate Altisource is unrestricted cash increased by approximately 400000 from the end of June.
[00:04:50] We ended the quarter with net debt, less marketable securities of one hundred and ninety six point six million dollars. As of September 30th, we had marketable securities of thirty point two dollars million, representing our investment in front yard residential based upon front yards recently announced sale for 13 dollars and 50 cents per share. Net debt excuse me net debt, less marketable securities as of September 30th would have been one hundred and eighty point two dollars million, a decrease of sixteen point four million since the end of the quarter. We sold approximately one point six million shares of Frontyard for net consideration of twenty one point one dollars million. We will use these net proceeds to reduce our debt for a more detailed description of our third quarter financial performance compared to prior periods, please refer to today’s press release and form Tinku.
[00:05:44] As we discussed with you last quarter, and as shown on Slide six, we estimate that our twenty twenty one service revenue will be between two hundred and fifty and two hundred and seventy million with adjusted EBITDA of thirty five to forty three million at 14 to 16 percent, adjusted even to margins to achieve these results.
[00:06:04] We developed an operating plan that contemplates reducing the size of our workforce and facilities, footprint, professional services, fees, technology costs and other expenses, and implementing operating efficiency initiatives. We have begun to work to achieve our savings and believe we’re on track to deliver on our plan. Keep in mind that our twenty twenty one plan assumes that we are under continued pressure on our default related businesses, with referrals remaining depressed throughout most of the year. To give you a sense of the impact the pandemic has had on our business, data from a recent Black Knight Report shows that foreclosure initiations were 83 percent lower for April through August of twenty twenty compared to the same period in twenty nineteen.
[00:06:48] Despite the 87 percent growth in the number of non-current mortgages in August of twenty twenty compared to August of twenty nineteen.
[00:06:58] Turning to slide seven, based upon the current timing for the expiration of the federal government’s eviction moratoriums and forbearance plans, we are forecasting that the default market will return to more normal operating conditions in late twenty twenty one and into twenty twenty two in a normal market. We estimate that for every one percent increase in delinquency rates, the addressable market for default related services increases by approximately 700 million. Based upon the increase in delinquencies since the beginning of the year, we estimate that the addressable market for our services has grown by over two point five dollars billion to six point three billion. However, because of the foreclosure and eviction moratoriums and forbearance programs, there’s a very large backlog of business.
[00:07:45] With our attractive and growing customer base, this should provide Altisource with significant revenue tailwinds beginning in late twenty twenty one and into twenty twenty two when we anticipate that the default market is likely to return to a more normal operating environment in addition to anticipated revenue growth with a structural improvements that we are making to our cost base, we believe we also can achieve significant margin expansion. Altisource is one of a few companies with scale that offers a full suite of default in origination related services, over the last several years we have developed a strong customer base that includes many of the largest servicers in the industry. Our pipeline of opportunities is also one of the strongest it’s been, with servicers anticipating higher referral volumes as the moratorium’s and forbearance plans come to an end. Turning to slide eight and the progress we are making with customers other than Naquin, NRC and RedZone and a very difficult default environment, we grew revenue from these customers by 11 percent during the first nine months of Twenty twenty compared to the same period in twenty nineteen. Slide nine provides an update on select customer wins.
[00:08:56] During the quarter, we began providing loss mitigation services for a top 10 bank finalize the work to begin receiving field services. Referrals on a government contract executed a statement of work to expand our auction services for a top twenty five servicer to include foreclosure auctions. And we’re notified by a top twenty five nonbank servicer that they were expanding its use of Altisource as field services on its FHA portfolio to an additional twenty nine states over the next couple of quarters. We are also focused on developing and growing our origination related businesses, which are benefiting from customer growth and the low interest rate environment, we are doing so by leveraging our role as the manager of the lenders, one cooperative to drive additional business to outsource while helping to improve the cooperative member’s profitability. The lenders, when members collectively represent approximately 15 percent of the residential loan originations market and promote it, provide a tremendous growth opportunity for the firm. To sum up our strategy, going into twenty, twenty one, our focus is on improving our margins and protecting our liquidity, performing well for our customers, growing our sales pipeline, capturing a greater share of originations related business, and supporting the health and welfare of our employees. We’re also making sure that we are well positioned for strong growth when demand for our default related services returns in late twenty twenty one and into twenty twenty two. This growing demand, combined with the structural changes we continue to make to our operations, should help drive revenue and profitability, growth and higher margins in twenty twenty two. We are demonstrating that we have an efficient and scalable business model that can adjust to the current environment and should benefit tremendously once delinquent loans begin to move through the normal default life cycle. I’ll now open up the call for questions.
[00:10:49] Operator Ladies and gentlemen, if you have a question at this time, please press star, then the number one on your telephone keypad. If your question has been answered, are you wish to remove yourself from the queue, please press the pound key. Our first question comes from Mike Grondahl of Northland Security.
[00:11:21] Yeah, hey, good morning. Hey, two things, could you first maybe talk about the progress you’re making on the origination side if there’s anything to call out there? And then maybe secondly, any third party wins or how is that going in? Anything ramping up in the first part of twenty twenty one?
[00:11:48] Good morning, my aunt originations. You know, it’s incredibly strong origination market this year. Some are forecasting it’ll be up to four trillion dollars of origination volume this year. That business is working off of is relatively small today, but we are making good progress. I think we grow the originations businesses by about 30 percent. Michel, correct me if I’m wrong from the second to the third quarter. And so we are making progress. We have this incredible asset in lenders, one where where those members collectively represent about 15 percent of the U.S. originations market. And we have not done as good a job as we should have over the years, leveraging that cooperative to provide our products and services to those members and also to continue to help those members improve their margins. So we continue to believe there’s a very large opportunity and are very focused on on that. And that will contribute to we believe that will contribute to our growth going into next year. So so we’re pleased with the progress. We’re continuing to add additional origination related services and then rolling those out to the members of lenders, one and at least in our operating plan for twenty, twenty one, we expect some significant growth coming coming from those activities. Know on the sales pipeline. I highlighted a few, Mike, of our of our sales. When we have this government contract that we believe is going to be on board in a month or two that was under protest for the last couple of quarters, the process finally came to a conclusion and we should start seeing referrals.
[00:13:29] That has the potential to be pretty meaningful on how do we continue to have a pretty attractive sales pipeline of prospective clients, both on the audio side and on the foreclosure auction side? You know, the challenge there, of course, is there’s no inventory. And if you think about a foreclosure starts, there were something like seventy nine thousand foreclosure starts in the third quarter of last year and only fifteen thousand foreclosure starts in the third quarter of this year. And then when you think about sort of our radio were completed foreclosures, that’s down from thirty three thousand nine hundred and in the third quarter last year to only sixty one hundred this year. So so the inventory of available inventory is down quite significantly. But we believe, you know, just getting that back to a normal environment will be tremendously helpful to us. And if you look at 90 plus delinquency rates, I think if you exclude foreclosures, they’re up over four hundred percent. So so when the market does normalize, presumably it will normalize its delinquency rates that are higher than where they are today. And that should provide a tremendous benefit to us, particularly with our with our current customer base and our sales pipeline.
[00:14:44] Got it. OK. Hey, thanks a lot.
[00:14:45] Thanks, Mike.
[00:14:50] Your next question comes from Raj Sharma.
[00:14:55] Hello, good morning. I just wanted to chat a little about just the timing of lifting of moratorium’s. You estimate is the end of this year or the end of the first quarter. And and then that’s so you talk a little bit about the timeline of how you get the business such that you are projecting the business to pick up at the end of twenty, twenty one.
[00:15:26] Yes, sure. So right now, the federal government, foreclosure and eviction moratoriums extend through the end of this year, and even servicers of nongovernment related loans, we believe, are largely following those government moratoriums, even though they may not necessarily be applicable or apply to to non-government loans. Then if you think about the force, so we’re forecasting those moratoriums, at least as of right now, to end at the end of this year, then you have the forbearance plans, which can extend up to a year. And again, we believe both. It applies to government loans, but also nongovernment servicers are following similar following a similar approach. The majority of those forbearance plans were entered into between really late March and July of this year. And so that’s when assuming for those that have to take the full 12 months, that’s when the vast majority of those will begin to roll off. And then at that point, we’ve got to follow the CFIB rules around loss mitigation activities and the waterfall. And so we probably won’t anticipate seeing a meaningful amount, a meaningful increase until late, you know, twenty, twenty one and going into twenty twenty two, we’ll see some increase in the second half of next year, but it won’t be very meaningful in our forecast until the end of the year.
[00:16:56] So your your guidance of to do 50 to 70 corporates that pick up only late one twenty one.
[00:17:07] That’s correct.
[00:17:09] Right now, I have a couple more follow on questions. I, I know that your statement of one percent increase in nationwide delinquencies leads to about a I calculated about 17 percent rise in the total addressable market. Is that more really is that more tied into the overall delinquency rate or the serious delinquency rate? And and because the overall rate is being held down right now. And so you expect that to kind of come in line with the serious delinquency rate as you look at moratorium’s and.
[00:17:48] So I think, Raje, the 90 plus day delinquency rate is up over four hundred and twenty five, I think it’s up about four hundred and twenty five percent if you exclude the right loans in foreclosure and it’s up I think three to hold me to a stranger and 50 percent or so including loans in foreclosure. And it’s also up on an absolute basis, I think almost four hundred basis points. And so we think even if it if delinquencies normalize, that something lower than this, you know, borrowers continue to roll off of their forbearance plans. When we get to the end of the government programs, we think delinquency rates will be significantly higher than where they were pre pandemic. If you think back to this time last year, delinquency rates were at historic lows. We think as the pandemic ends and as well as these programs roll off the governmental programs, delinquency rates should be significantly higher, even if they just got back to normal at those historic lows. It presents a large opportunity for us. But that opportunity, we believe, will be much greater because we think delinquency rates will be significantly higher than where they were a year ago.
[00:19:04] And what do you estimate there are about two point three, two point four million seriously delinquent mortgages right now. What percentage of these do you expect to go into loss mitigation or foreclosures?
[00:19:19] You know, when we were talking to servicers over the last couple of quarters and at the time there was probably over four million loans in the forbearance programs, and I think that’s really what we’re talking about here today. It’s about three million. The servicers, we’re estimating anywhere from twenty five to 50 percent of those borrowers may end up in some form of loss mitigation. And I think that still is a reasonable assessment today.
[00:19:49] Ok, I’ll take my question, I’ll take this offline, thank you so much.
[00:19:53] Thanks, Rob.
[00:19:57] I’m sure no further questions at this time. I would now like to turn the conference back to Mr. Veal Chef Ralph.
[00:20:05] You, operator, thanks for joining today’s call, and we look forward to talking to you again next quarter.
[00:20:09] Excuse me, I have a question in queue, if you would like to take it. Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. Have a wonderful day. You may all disconnect.