Altisource Portfolio Solutions S.A. (ASPS) CEO William Shepro on Q1 2022 Results - Earnings Call Transcript

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Altisource Portfolio Solutions S.A. (NASDAQ:ASPS) Q1 2022 Earnings Conference Call April 28, 2022 10:30 AM ET

Company Participants

William Shepro - Chairman and Chief Executive Officer

Michelle Esterman - Chief Financial Officer

Conference Call Participants

Mike Grondahl - Northland Securities

Raj Sharma - B. Riley

Operator

Welcome to the Altisource First Quarter 2022 Earnings Call. My name is Cheryl, and I will be your operator for today's call. [Operator Instructions] As a reminder, the conference is being recorded.

I will now turn the call over to Michelle Esterman, Chief Financial Officer. You may begin.

Michelle Esterman

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 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 COVID-19 pandemic makes it extremely difficult to predict the future state of the economy and its potential impact on Altisource. Please review the forward-looking statements section in the company's earnings release and quarterly slides as well as the risk factors contained in our 2021 Form 10-K, which describe factors that may lead to different results.

We undertake no obligation to update these statements, financial scenarios, and projections previously provided, or provided herein as a result of the 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 slides.

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

William Shepro

Good morning and thank you for joining today's call. Beginning with Slide 3, I'm pleased with our first quarter financial results. We generated service revenue of $37.8 million, marking the first quarter of sequential revenue growth in 11 quarters. Our first quarter adjusted EBITDA loss of $4.1 million represents a $4.7 million improvement over the fourth quarter of 2021. We benefited from revenue growth as the default market begins to recover, a favorable revenue mix, a lower cost base and approximately $1.8 million of nonrecurring items. We currently have a $155 million unweighted annualized sales pipeline that based upon our forecasted probability of closing could translate into $50 million to $62 million in revenue on a stabilized basis.

What's exciting about our probability-adjusted sales pipeline is that it represents 33% to 41% of our annualized first quarter revenue. Keep in mind that our sales pipeline only includes new business and excludes revenue growth from existing customers on existing products. We ended the quarter with $80 million in cash. We typically use more cash in the first quarter than each of the remaining quarters of the year. During the first quarter, we used approximately $10.6 million for items that we don't expect to pay for in the remaining quarters of 2022. These items include previously accrued taxes related to a large onetime repatriation of cash from certain of our subsidiaries, annual bonuses, and certain prepaid expenses that relate to the entire year.

We believe our cash burn will significantly decline as the year progresses and anticipate ending the year with between $65 million and $70 million of cash, but this could fluctuate up or down based on working capital. This estimate includes the anticipated refund of approximately $5.8 million in U.S. taxes and the anticipated distribution of $3.5 million in escrow funds from the point of sale. We have 2 core businesses; Servicer and Real Estate and Origination. As you will see in our 10-Q, we are now reporting these 2 businesses as segments and are separately reporting corporate and other. We believe this new segment structure will provide additional visibility into the performance of each of our core businesses. This morning, I will discuss these businesses in greater detail.

Turning first to Slide 4 in our Servicer and Real Estate segment, which is our largest business. This segment has faced environmental issues for the last couple of years as pandemic-related borrower relief measures significantly reduced revenue. With the expiration of these relief measures at the end of 2021, this business now has strong tailwinds. Compared to the fourth quarter of 2021, service revenue for this segment grew by 18% and adjusted EBITDA grew by 54%. The strength in our first quarter primarily reflects higher Hubzu revenue from the September '21 restart of foreclosures from pre-pandemic delinquencies and higher revenue in the other default businesses from the December 31st expiration of the temporary loss mitigation measures.

For the rest of the year, we expect total segment revenue to continue to grow sequentially. In the second quarter, we expect flat to a modest decline in Hubzu revenue impacting our second quarter margins, given the lag between referrals and sales. We anticipate Hubzu will resume its revenue growth in the third quarter and continue to grow into 2023 as the market stabilizes. We believe the Servicer and Real Estate segment will be much larger in the coming years. To understand this, we think it would be helpful to explain the impact that pandemic-related borrower relief measures had on our default business and how we think the market and our default business will recover.

Turning to Slide 5, during the pandemic, nearly all foreclosures came to a halt. This reduced referrals to our default-related businesses by more than 80%. During this time, we continued to sell existing REO, depleting our inventory. With the restart of foreclosures on pre-pandemic delinquencies in the early fall, we began to rebuild our foreclosure auction and REO inventory. Then with the December 31st, expiration of the temporary loss mitigation measures, we are continuing to rebuild our foreclosure auction inventory and grow referrals for our other default businesses that support earlier stage delinquencies. For those loans that are just entering foreclosure, it takes time to work through the process. Some of these delinquent loans will re-perform or pay off. Others will go through foreclosure. Of those that go through foreclosure, some will sell to a third party at the foreclosure auction and some will become REO and ultimately sold. Depending on the state and other factors, this process could take approximately 6 months to several years.

Based on this default process, Hubzu, one of our higher-margin businesses will likely be our last business to fully benefit from the recovery of the default market. As the foreclosure auction and REO auction market fully recovers, we anticipate Hubzu will experience tremendous revenue and earnings growth. To illustrate this, please refer to Slide 6, which shows Moody Analytics, historical and forecasted REO acquisitions and Hubzu's historical revenue. As you can see, National REO acquisitions and Hubzu's revenue are closely correlated with both declining from the first quarter of 2019 through the fourth quarter of 2021. Beginning in the first quarter of 2022, Moody's Analytics forecast that REO acquisitions will begin to grow, reaching a high in the fourth quarter of 2025 that is more than 70% higher than the first quarter of 2019, a quarter in which Hubzu generated $32 million of revenue.

If Hubzu's revenue maintains its strong correlation to Moody's forecasted REO acquisitions, Hubzu's revenue growth would grow from $8 million in the first quarter of this year to over $50 million per quarter when fourth quarter 2025 REO acquisitions become sales. In periods of REO acquisition growth, revenue growth typically lags by a couple of quarters, reflecting the average time to market and sell REO. In addition to benefiting from tailwinds in the servicer and real estate business, we're also focused on adding new customers and are making good progress. Our unweighted annualized sales pipeline is currently $90 million on a stabilized basis. We estimate this could translate into $31 million to $39 million in annual revenue on a stabilized basis based upon our forecasted probability of closing.

Turning to Slide 7 and our origination business, this business experienced strong growth over the last couple of years from high origination volume in a low interest rate environment, customer growth, and new product launches. The origination market now faces challenges with the MBA forecasting 2022 market origination volume to decline by 36%. We anticipate stronger than market performance for our origination business because we believe we can offset the impact of the market declines with newer product launches and higher product adoption.

As expected, service revenue in our origination business declined compared to the fourth quarter, but at a much lower rate than the overall market decline. This reflects flat sequential revenue in our Lenders One business and revenue declines in our origination title, valuation, and fulfillment businesses. Lenders One demonstrated resiliency in a very difficult origination market as market declines were offset by member adoption of our newer product launches. The revenue declines in our other origination businesses reflect lower market origination volumes as well as customers bringing certain services in-house to retain their employees.

From a sales perspective, our unweighted annualized pipeline is currently over $65 million on a stabilized basis. This represents $18 million to $23 million in anticipated annual revenue based upon our forecasted probability of closing. In a very difficult origination market, our Lenders One members are focusing on reducing costs and are looking to us to help them improve their profitability and competitive position. We believe our solutions are well-suited to achieve their objectives.

Based on our progress in launching new products and increasing product adoption, we believe that our 2022 origination revenue will be roughly flat compared to 2021 in a market that the MBA forecast will decline by 36%. We have moderated our expectations to reflect our recent experience with longer-than-anticipated customer onboarding and revenue stabilization time lines for our newer solutions as well as for some of our origination businesses, the changing customer behavior to move work in-house to retain their staff. We continue to believe the origination business is well-positioned for long-term growth and will be a significant contributor to Altisource's revenue and earnings.

To conclude, we are pleased with our first quarter results and are executing well in our strategic plan. In our origination business, we believe we are building an exciting and innovative business that we anticipate will benefit from new product launches, membership growth, and a strong sales pipeline. In our servicer and real estate business, we should benefit from the market tailwinds and our strong sales pipeline. As we continue to execute on our plan and win more business, we anticipate we will return to a growth company and create substantial value for our customers and shareholders.

I'll now open up the call for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] We have a question Mike Grondahl from Northland Securities.

Mike Grondahl

Yes. Sorry, I got on a couple of minutes late. I had a little bit of trouble connecting. So you may have covered a little bit of this, but you saw a really significant increase in foreclosures. How long do we see a similar increase in sort of REO referrals. How do you think about or should we think about that leg?

William Shepro

So Mike, when the government allowed servicers to recommence or to start foreclosures on pre-pandemic delinquent loans back in the early fall, we started to receive some REO referrals and some of those foreclosures have completed and what we now saw in the first quarter, we were able to sell some of those homes. But we're not going to see the real increase in our inventory in REO until we think the middle of 2023, when it stabilizes because all those new foreclosures that are starting now, foreclosure could take anywhere from 6 months to a couple of years. Some of those homes will then sell at the foreclosure auction and those that become REO, we could take and start selling homes 3 months later to as long as 9, 10, 11, 12 months later, depending on the status of that REO.

So if you think about where we were just a couple of years ago, I was looking at our REO inventory back in the first quarter of 2020, Mike and it was roughly 6,500 REO, give or take, a little bit. Today, our REO inventory stands at roughly 2,500. We have an opportunity, we believe, as the market recovers to significantly grow that inventory back, but it's going to take us a couple of years. But when it comes back during the first quarter, I think of 2020, we generated -- Michelle, correct me if I'm wrong, something like $28 million, $32 million of revenue in Hubzu alone [indiscernible]. And you compare that to our first quarter of this year where we did around $8 million to $8.5 million of revenue in Hubzu.

So our highest margin business is going to be the last business to recover from a revenue perspective. But when it recovers, we think it can mean a tremendous amount of revenue and earnings for Altisource. The other thing that's interesting is we now are growing our foreclosure auction portfolio and not all those foreclosure auctions that are in our inventory will ultimately generate revenue, but that's up quite significantly as the foreclosures restart, that inventory is growing quite dramatically. And so that's another sort of leading indicator that the Hubzu business should be able to grow as those foreclosures reach sale. And then if they don't sell at the auction as they become REO and get sold.

Mike Grondahl

On average, what do you make per unit on a foreclosure sale versus an REO sale?

William Shepro

Yes. And look, we're not going to go into all the specifics, but we generally speak in a foreclosure auction, you probably keep anywhere from 2% to 5% of the proceeds. And in an REO auction, it really depends. In some cases, we're getting a buyer's premium. That could be a couple of percent to 5%. And in some cases, we also earn we're acting as the real estate agent, and we can earn anywhere from probably 50 basis points to a couple of percent.

Mike Grondahl

Got it. That's helpful. And can you remind us, is there a rule of thumb -- let's say, you got 100 foreclosures. Roughly, how many would end up at REO sale. Is there a way to think about that waterfall?

William Shepro

Yes. I mean I can give you really every customer is sort of different in terms at what point in the cycle they give us their foreclosures. So I'm going to talk very generally and customer mix can really impact this. But let's say, it's probably around 25% ultimately result in a foreclosure auction that generates revenue. Some customers who give us the foreclosure later in the process, the percentages could be much higher.

Mike Grondahl

Got it. And then your Hubzu inventory has grown 4 quarters in a row, 6,900 units. What's the average duration, does that sell in a quarter or 2? Are you seeing anything faster in this housing market?

William Shepro

So today, I think, Mike, from a sales perspective, yes, our time lines and conversion rates have been very good. It's been a very robust real estate market, not a lot of supply. Average home price sale has been increasing over the last couple of years. But when you look at our inventory today, we have about -- again, these aren't perfect numbers, roughly 2,500 of our 6,800 or so, 6,900 assets and inventory REO.

Mike Grondahl

Got it.

William Shepro

And with that it does take as we get back to a normal market, where there's over 40,000 foreclosure starts industry-wide a month, it takes time for those foreclosure starts to work through the process. Some of those borrowers will work out the loan. They'll either sell their home or modify the loan or re-perform and a percentage of those will ultimately get to the sale and some will become REO.

Mike Grondahl

Got it. Maybe two more on the financials. Do you still working towards year-over-year revenue growth in the second half. Is that still sort of roughly how you're seeing the year kind of shape up in the back half?

William Shepro

Yes. We do expect year-over-year revenue growth in the beginning of the third quarter and also the fourth quarter. So for full year, we anticipate our revenue this year will be more than last year.

Mike Grondahl

Got it. With growth in the second half still and still roughly about $15 million to $20 million of cash usage. I know 1Q was high at 10.5%, but you kind of spell about why the year roughly still 15% to 20%, is that fair or close?

William Shepro

Yes. I think, I said on the prepared remarks that we anticipate ending the year with $65 million to $70 million of cash. So it’s a little bit more than the $15 million to $20 million we’re going to use.

Operator

[Operator Instructions] The next question comes from Raj Sharma from B. Riley.

Raj Sharma

So I just, Bill, wanted to talk about the REO slide, the 6 that you're talking about on the REO acquisitions and if they would track in line; I know you said it could go from $8 million in revenues to over $50 million by the end of 2025. What about this year, there seems to be a nice projection in the national REO acquisitions to the fourth quarter of this year and that shows about $30 million? With that, you still expect your $8 million a quarter in Hubzu to actually start ramping by the end of the year or...

William Shepro

Yes. As I talked about in the prepared remarks, Raj, when your inventory is actually declining, your revenue outperforms sort of the inventory decline. And then that sort of reverses itself. When the inventory grows, your revenue is going to lag that growth by a couple of quarters because it takes time from an acquisition or a referral to a sale. And so there's going to be a lag that could be probably a couple of quarters as you grow your inventory. So the reverse happens from what took place as the inventory declined. So we do expect the second quarter, I think, I said on the prepared remarks to be roughly slide or down a little bit in Hubzu, which is going to sort of impact our revenue mix to some degree in the second quarter. But we anticipate that Hubzu will begin to grow again in the third and fourth quarters as you start to benefit from some of the foreclosure auctions that take place on the newer referrals. And ultimately, as some of the REO for the faster foreclosure states as some of those homes become REO and get sold to a lesser degree.

Raj Sharma

Got it. And then I know you introduced a new sort of metric of the pipeline, the sales pipeline and your probability of closing. So these are the new accounts that you are looking and hoping to sign on that would give you additional revenues of $31 million to $39 million?

William Shepro

That's right. So that's right. What we did is we gave you the total pipeline, and then we broke it out between the Servicer and Real Estate segment and the origination segment. And then we also provided a range on a weighted average basis what we think our win rate will be. And that represents either new products with existing customers or new customers with new products. So that pipeline would exclude any revenue growth we anticipate on our existing products with our existing customers as a result of the tailwinds, for example, on the default side.

Raj Sharma

Okay. And is there time line of when that would close within a year?

William Shepro

Yes. So we put together sort of a weighted average. The timing for when it's going to close is a little bit harder to predict. And then, of course, what we're sharing with you is what that revenue would look like once we stabilize the client. So clearly, it's not all going to close this year. But we feel -- I mean I'll just give you an example in our origination business. I mean the reception we're getting for our newer products has been unbelievable. We have a massive pipeline for our newer solutions that we just launched on the origination side. But what we're learning is it takes longer to negotiate the contract.

And then once we negotiate the contract to onboard the customer, get all the APIs in place. And then basically, you're turning on at these originators one branch at a time. So it takes a while, in many cases, to stabilize the revenue, but the reception we're demonstrating we can save our customers a meaningful amount of money. And in today's origination market, originators are looking to save money. And so the reception we're getting is really strong. And now it's just, frankly, we're hiring more people to help with onboarding. We're really focusing on being able to turn around pricing proposals faster because the demand for those products is really, really strong.

Raj Sharma

Got it. And then just lastly, I know you don't break out the gross margins or the gross profitability. Could you touch upon what that means for Hubzu, for example, Hubzu business? I know in that you said it's higher margin that comes to the end. And then the origination business, I know it's going to be flat last year. Can you talk a little bit about it; is it on a divisional basis? Is it losing money? Is it...

William Shepro

I think it lost a little bit of EBITDA in the first quarter. You can also take a look at the Q. My recollection is it just lost a little bit. But we do anticipate that business ultimately, we believe, and again, a lot depends on your mix of revenue. And as we generate more revenue, we're optimistic we can bring down some of our cost of goods as we have more scale and buying power. But I think that business could be a 20% to 25% margin business on a normalized basis as we grow it over the next couple of years.

Raj Sharma

And that's the EBITDA 25%.

William Shepro

Yes, EBITDA margin.

Operator

We have a follow-up question from Mr. Mike Grondahl from Northland Securities.

Mike Grondahl

Bill, can you just repeat, if you said anything in your prepared remarks about 2Q, I think I understand the back half of the year, but because Hubzu is a little slower in 2Q and maybe the origination business with rising rates, is 2Q sort of flattish to 1Q? Is that what you were saying or even down a little bit?

William Shepro

Yes. We think it’s going to be down a little bit because of some of the onetime benefits we got in the first quarter and the mix of revenue. So even though we believe we’re going to sequentially grow revenue in the second quarter, the mix of business is going to impact the margins and we got some onetime benefits. And then we think that will then turn around in the third and fourth quarters.

Operator

Thank you. And at this moment, I show no further questions. Do you have any other remarks?

William Shepro

Thank you, operator. Thank you for joining the call, and we appreciate everyone's support. Take care.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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