Q1 2020 Earnings Call

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I would now what to handle.

The conference over to your host Ms., Michelle Esterman Chief Financial Officer. Please go ahead.

Thank you operator, we'd first want to remind you that the earnings release form 10-Q, and quarterly slides are available on our website at www Dot Altisource dotcom. 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 covert 19 pandemic at potential impact makes it extremely difficult to predict the future state of the economy and its impact on healthy source.

Please review the forward looking statements section and the company earnings relief quarterly side and form 10-Q, as well as the risk factors contained in our 2019 form 10-K, and first quarter form 10-Q, which describes factors that may lead to different result.

We undertake no obligation to update these statements as a result of new information or future events.

During this call will present, both GAAP and non-GAAP financial measures in our earnings release in quarterly side, 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 Bill Shepro, our chairman and Chief Executive Officer.

I would now like to turn the call over to Bill.

So I can show good morning, and thank you for joining todays call.

Good my team is having an unprecedented and impact on human life. The economy, I mean industries in which we operate given this environment today ill provide a brief summary of our first quarter performance discuss the virus related disruptions in the real estate mortgage and servicing industries and describe the actions we are ticketing to address the show.

Work to medium term impact and the potential longer term opportunities from the crisis.

Our first quarter financial performance was lower than the same period last year from the 2019 disposition of certain businesses. The run off for the arc when service portfolios and the impact that covert 19 related governmental restrictions and changing vendor and consumer behavior pattern, our default related business.

Yes.

This was partially offset by stronger performance from our customers, although grenache when energy in resi and both are default and origination related businesses.

As you can see on slide five in the first quarter, we generated 17 cents of adjusted diluted earnings per share.

$4.4 million of adjusted pre tax income and $13.2 million of adjusted EBITDA or $113.2 million of service revenue.

Across our three core businesses as shown on slide six first quarter 2020 service revenue from customers other than the OCC wind energy in resi grew by 36% compared to the first quarter 2019.

And was modestly higher than the fourth quarter, Despite cobot 19 headwinds.

This year over year increase is primarily due to the growth in our customer base market share expansion and for our origination related services lower interest rates.

We anticipate that that pandemic will have a short to medium term negative impact on default related revenue from these customers, but in the longer term should support strong growth.

For a more detailed description of our first quarter financial performance compared to prior periods. Please refer to todays press release and 10-Q.

Turning to the business environment and the impact grown a virus is having on the real estate mortgage and servicing industry and out to source.

Today much of the country is operating under shelter in place and social distancing restrictions and non essential businesses are closed are operating in a work from home environment.

At the same time, the federal reserve lowered interest rates in early March.

Despite assistance programs from the federal government. The pandemic has had an unfortunate and large negative impact on the economy with a tremendous number of employee furloughs and terminations across the country.

Over the last several weeks 26.5 million people filed unemployment claims and the mortgage bankers Association estimates that 7% of borrowers were in forbearance as of April 19th.

Up from a quarter of a percent in early March.

The congressional budget office estimates that the unemployment rate will be 16% in the third quarter and greater than 10 per.

Sent for 2021.

These factors have led to a disruption in the real estate mortgage and servicing markets and greater borrower demand to refinance their mortgages.

Well, it's too early to estimate the duration of the pandemic slide seven summarizes certain coated 19 programs and what we believe the impact could be for Altisource.

We anticipate that the short to medium term revenue impact altisource will largely be driven by two factors.

First with most of the country confined to their homes and growing unemployment, we expect that home buying activity will be significantly lower.

This should largely impact or hubzu and settlement services businesses.

Second with governmental foreclosure and eviction moratoriums and other borrower relief.

Along with shelter in place and social distancing restrictions, we expect that foreclosure and eviction referrals will also be substantially lower.

We anticipate that this will negatively impact our equator title foreclosure trustee valuation and field service businesses.

At the same time, we anticipate that the low interest rate environment will support strong.

On growth and our origination related services.

Altisource like other companies in our industry is adapting to this rapidly changing environment. We have three areas of focus first maintaining the health and safety of our employees second adjusting our operations to mitigate some of the impact to our customers and business, while complying with governmental orders and.

Third addressing our cost structure and preserving liquidity to prepare for what could be a period of lower revenue than planned.

To help maintain the health of our employees and comply with governmental orders over a month and a half ago, we began implementing our business continuity plans and enabling work from home capabilities, where possible across the organization.

Our employees were able to rapidly adjust to this new environment with minimal operational disruption.

The majority of our global workforce is working remotely with a small number of employees continuing to perform a central functions at our facilities were permitted.

For these employees, we have implemented heightened hygiene protocols.

We're also seeking to minimize operational disruptions and deliver for our customers as best we can despite the impact from coated 19.

Our customers rely upon altisource to perform critical functions for their loan origination and servicing operations.

Our customer relationship management sales and operations teams are in regular contact with our customers and we are working diligently to manage what is in our control and pivoting our operations to address business related challenges and opportunities.

Finally, we are preparing the from fort could be a period of lower than planned revenue due to the effects of Covance 19.

We believe our current financial position along with changes, we're making to our cost structure will help preserve liquidity and benefit from what we believe could be a longer term opportunity in a rising delinquency and lower interest rate environment.

Turning to slide eight from a liquidity perspective, we believe that Altisource is well positioned with $79 million Inc.

Cash and equivalents $294 million of debt and $173 million of net debt less marketable securities.

Our marketable securities include 3.5 million resi shares that we anticipate will be sold for $43 million in cash if the previously announced sale of Reggie closes our debt is covenant lite and doesn't mature until April 2024.

In addition to cost reduction activities planned prior to the pandemic. We've taken several measures to further reduced our 2020 expenses to address the anticipated impact from coven 19.

Unfortunately as part of these measures we have to make the difficult decision to furlough and terminates.

Certain employees and temporarily reduced director executive and employee compensation.

Based on these and other cost reduction measures, we anticipate reducing our 2020 cash expenses by an estimated $45 million to $50 million compared to the fourth quarter 2019 annual run rate.

This is an addition to the savings and outside goods and services that generally declined proportionately with fewer service referrals.

As we are operating in unchartered waters and the impact on Altisource remains fluid we plan to continue to evaluate our cost structure and intend to make adjustments as circumstances may warrant.

We're also seeking to maintain capacity for anticipated growth in our origination related services continue to innovate across our businesses and prepare for what we believe will be strong medium to longer term demand for our default related services from growing loan delinquencies.

In time, we anticipate homebuyers will return to the market and we will sell our hubzu inventory.

We further believe the unprecedented level of for closure and eviction relief will subside and if unemployment rates remain elevated delinquency levels are likely to be higher than they were before the pandemic began.

To give you a sense of the potential impact to delinquency rates from this crisis Black Knight recently estimated that a 15% unemployment rate mortgage delinquency rates could rise from approximately 3.7% to 10.

0.3%.

While we believe the tremendous governmental relief efforts will help mitigate the horrific impact that this pandemic is having on consumers and the broader economy.

Delinquency rates were at historical lows prior to the crisis and are likely to stabilize at a higher rate post crisis.

As a leading national provider of services to support residential loan originators and Servicers.

We believe altisources in a strong position to support the industry and capture a sizable share of the business opportunity that a low interest rate and rising delinquency environment would present.

We conservatively estimate that every 1% increase in mortgage delinquencies increases the addressable market for our default related services by over $700 million from what was a total addressable market of roughly $4 billion pre crisis.

I'd like to conclude by thanking our employees, who quickly adjusted to our new operating environment and remain incredibly focused on serving our customers our performance for our customers will allow us to emerge from this challenging situation physician for long term success with new opportunities.

Ill now open up the call for questions operator.

Ladies and gentlemen, if you have a question at this time please press the star and the number one key on your Touchtone telephone.

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Your first question comes from Mike Grondahl with Norton Security.

Hey, good morning, Bill and Michelle.

The roughly 90 million of OCC when related revenues.

Did that compared to kind of year.

Your forecast or kind of internal budget.

Yes, Mike we were largely.

On track.

To achieve our plan in the first quarter until until March and then in March we started to see a disruption from the pandemic. So we actually were not that far off a plan I'd say probably in total look a couple of million dollars off a plan from an EBITDA adjusted EBITDA, our adjusted pre tax perspective.

Got it.

And I.

Back when moving to that new servicing platform.

Is there any catch up happening, there where does that sort of delays still exist.

No. So if you remember in the in the fourth quarter.

Our conversion rate for Oreo sales improved quite substantially over over prior periods in the first quarter again, we are largely on track to convert where we expected for Oreo sales and then than March hits and you had.

Delays in Oreo closings higher cancellations all are result of the the pandemic.

Got it so.

Really the first quarter on an adjusted EBITDA basis, just a couple million kind of spread between cold in in some of the other things you've mentioned got it.

That's right.

And.

The incremental 45 to 50 million.

You're pulling out of the business through streamlining the business.

Any rough thought how much is that is cost of goods sold how much of that might be SGN a savings.

Sure So Mike Fincke about all of that as everything all cash expenses other than cost of goods sold.

In addition to the $45 million to $50 million, our cost of goods sold sold will largely come down in line with lower referrals. So if we receive for example, fewer field service referrals are fewer inspections, and we don't ordered inspection from from so in in the field and so those costs will also come down.

And so what's largely.

Directly within our control and not necessarily tied to referrals, we've reduced by 45 to 50 million it amounts to roughly a 15% reduction in our expense base again excluding.

Outside goods and services from our fourth quarter run rate.

Got it so.

I guess I'm still trying to understand.

The break down between cost of goods sold in SGN eight is most of the cost of goods sold then.

So when I say cost of goods sold certainly employee costs inside of cost of goods sold so when I, sorry, I should really separate you have employee costs in cost of goods sold and then you have outside goods and services outside goods and services will decline based on receiving fewer referrals volume, yes, that's not included.

Good outside goods and services is not included in the 45 to 50 million, but we expect that the come down with the decline in referrals.

Comp and benefits and other costs inside cost of goods sold and inside of SGN, Amy we anticipate will come down by about $45 million to $50 million on top of outside goods and services.

Got it.

And the line you guys break out in the PNM for for.

SGN eight in the first quarter, it was $28 million not inside cost of goods sold.

Thats going to come down meaningfully then over the course through the year.

Yes, I think you're going to see reductions and Michelle you could jump in here both in cost of goods sold as well as in ESG today, that's exactly right you'll see it in both places Mike.

Okay great.

And then lastly, just if you look at 2020, what's your sort of best guess on sort of cash flow were cats cash usage this year.

Look there Mike there's a lot of uncertainty around to the impact that Cove, it's going to have in our business, where only a month or.

So month and a half into this so based on our.

Best guess, what we're trying to deal with our cost reduction plan is to try to stay as close to.

The cash position, we had at the beginning of the year at the end of this year. So we're looking to try to maintain.

I expect there will be down, but pretty close to where we started the year at the end of the year. That's how we've targeted our cost reduction plan of course, there's a lot of unknowns related to the pandemic and the impact that is going to have on our various businesses. So we'll see but thats basically how we did our planning is to basically preserve liquidity.

Got it.

Maybe just lastly, it looks like you had a couple or several nice win in the first quarter.

In any one to call out there a couple look to be large on your on your slide.

Yes, let me just pull the slides during the second nine.

Okay.

Yes, we had a couple of good wins I think want one thats worth.

Pointing out the verification services. This channel partner agreement, we see as a large opportunity where basically a reselling all sorts of verification services and based on the initial feedback we're getting from the lenders. One members. We believe we can save our members a very meaningful amount of money and make it.

Decent margins still on that product and we anticipate that kid will ramp throughout the year and as we generate more referrals our cost of goods sexually goes down from from the vendor we're buying the product from two we anticipate the revenue to grow and the margins to continue to improve as the year progresses on that product.

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Let's see if theres anything it's worth noting we did just launch a week or so ago, a field services opportunity with a very large servicer nonbank servicer that launched a week or two ago and we're now working to launch.

With the same customer Hubzu and this is on their FHLB portfolio. So we're excited about that opportunity and then in Treliske switches are up.

Loan fulfillment business, we do underwriting processing and closings as well as QC, we're getting a lot of traction in that business frankly, it's about getting enough people hired and trained Theres a.

Theres a lot of demand for that service and we're first working for growth.

Providing some capacity to our existing clients that are good customers, but we have a couple of very promising prospects that could be quite large in that business as well.

Got it great. Thank you.

Thanks, Mike.

Again, ladies and gentlemen, if you have a question at this time. Please press the star the number one key on your Touchtone telephone. If your question has been answered you wish to remove your so from the Q. Please press the pound key.

Your next question comes from Rohit Sharma with B. Riley FBR.

Hi, good morning.

My question is when you think.

They lose shall we think is going to be the impact.

As the more Tony when the current slowed businesses since as you sort of expect no more toy and.

How long do you expect that last.

And also.

And the Ami Musky expect that last and also the other lead question is the advances.

The advances and payments that services are facing and all that related.

Issues about the help that's different agencies that are for lighting, how does that impact the data ability to not a mass or advance and to help that you're going to get how does that impact youre referral business and slow.

Sure. So first on Hey, Raj first on the moratorium I think theres two things that are taking place right. Now one is the federal government in several states have put a moratorium on foreclosures and evictions and so that essentially halts.

Any of that activity and so that would reduce our inflows into Oreo it would reduce the referrals potentially related to those businesses. So the and the more moratorium at the federal level. My recollection is that 60 days some of the state moratoriums.

For foreclosure eviction megawatt a little bit longer.

Second component of what's taking place are the forbearance plans and so the government on both government loans and GFC loans has put out a program that allows consumers to obtain a forbearance plan initially for up to six months and then for up to an additional six months and under that for.

Barron's plan the borrowers can essentially.

If they've been impacted directly or indirectly they can participate in the program and stop essentially making their mortgage payments for six months and then again that could be extended for up to a year. So what we anticipate is going to happen.

Is that as these moratoriums come to an end, we will see a pickup of of referrals, both the foreclosure related referrals and Oreo related referrals, but in terms of a large increase from where we might have otherwise have been this year I don't think we'll start seeing that impact until you get in.

And maybe the fourth quarter and into the first quarter of next year when those forbearance period start to expire and then I think a lot's going to depend on where unemployment. This if unemployment is relatively low people should be able to and there are people are still working they should be able to modify their loans tack on those surpassed two payers.

Actually to the end of the of the mortgage or increase their amortization period, if unemployment is higher.

Those consumers may not be able to pay their mortgage and that default process will begin so the way we've approached our business Raj as look in the short term we want to make sure we very quickly adjust our cost base.

To be able to manage through which we believe will be a temporary decline in referrals.

We also want to make sure we keep capacity for what's going to be a growing origination business. We anticipate that interest rates are going to remain low for the foreseeable future.

And we also want to make sure we're getting ready for what we believe could be a large increase in delinquencies as you go into next year and so we want to be able to continue to innovate across our products and make sure. We've got the capacity to support that anticipated growth.

And then about the about the services and the ability to age bands payments, how does that impact you you down on a certain services really find it hard to advance payments and there is helpful. There is no help hot and just want to understand how that impacts.

Yes.

Altisource.

Yes, so I think.

It.

The environments changing fairly rapidly, but the government has put in place programs that cap servicers advances at four months. So alone goes under a forbearance plan the service or as to advance for four months, it's still unclear at what point that service or is going to get repaid that advance.

But they are advancing obligations would stop on those loans that are under forbearance. After four months. So I think that as a was a good first step to help support.

Well, thank a non bank servicers with their advancing obligations and so I don't think Raj, it's going to have necessarily a direct impact on altisource.

Of course, it's still to be seen because the government programs don't don't cover private label security. So that's still an open question how those advances will be handled but I think historically I know ocwen has historically managed their advancing obligations of very well and so we don't anticipate that necessarily has a direct impact on.

On Altisource.

Got it. Thank you I just one last question I'd you just mentioned how you addressable market goes up with every percentage point increase in delinquency rates and so it goes just wanted to clarify that due to what it goes up are you said by 700 million and and prior to co lead was four.

Billion addressable markets. So up 817, 18% is the increase in the invest in the addressable market for every one percentage point increase in delinquency rates.

Is that likely am I looking into it.

Yes, and what we did was we looked at them.

Both for GFC loans, FHLB loans, and private label or whole loans, and and basically a 1% increase across each each of those products would result in roughly $700 million increase to the addressable market.

For Us and and then you expect that to start a depending of course on things the way. They data now you expect the those the volume starts to increase is fourth quarter of first quarter.

That's the flow.

That is so without that we increase it will.

Yeah. The project Altisource, we're assuming the second and third quarters will be the hardest hit from.

From the impact from from Cobot, 19 will start to recover but we won't fully recover in the fourth quarter and then depending on what happens with unemployment and the delinquency rates going into next year, we could start to see.

An increase in delinquency rates and and and is meaningful improvement in revenue.

And then on the origination side, we're seeing it now given the the sustained low interest rates the origination volumes are continuing to grow.

Across all the services, we provide to loan originators.

Got it. Thank you so much thank you branching I'll get off line.

Thanks structure.

Okay and your next question comes from Raman Kamali with credit Suisse.

Yes.

Hi, Bill Heyman shell, Thanks, taking my call Hopedale doing well.

I don't understand.

What the business it looks like today, I guess month samples wrapped up into shape it offensive.

By segment I assume field services.

Should remain relatively active.

Whereas the other segments are probably a bit more compromise.

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