Q2 2020 Altisource Portfolio Solutions SA Earnings Call
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Good morning, and welcome to the Ultra stores second quarter 2020 earnings Conference call My name spread that nobody your operator for today at this time all participants were to listen only mode. Later, we will conduct a question and answer session during which you can delstar wonder if you have the question.
Please note. This conference is being recorded and I'll now turn it over to Michelle Esterman Chief Financial Officer, you may begin.
Thank you operator, we first wanted to remind you that the earnings release form 10-Q, and quarterly slides are available on our website at www Dot Altisource dotcom.
It provides additional information investors may find useful.
Mark today includes 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 statement incorrect covert 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 Altisource is also impacted by Alcons recent communication to us that has been directed by analysts or investors and live build services and other service referral from Altisource to another service provider. Please review the forward looking statements section and the company earnings release core.
Early side and form 10-Q, as well as the risk risk factors contained in our 2019 form 10-K, and first quarter form 10-Q, which describe factors that may lead to different result.
We undertake no obligation to update these statements as a result of new information our future events.
During this call we will present, both GAAP and non-GAAP financial measures.
In our earnings release and quarterly slides you will find additional disclosures regarding the non-GAAP measures.
A reconciliation of GAAP to non-GAAP measures is included in the appendix to the quarterly slide.
Joining me for today's call is Bill Shepro, our chairman and Chief Executive Officer, I would now like to turn the call overhead though.
Thanks for show good morning, Thank you for joining todays call. This morning, I'll provide a brief summary of our second quarter financial performance and discuss the operational and financial impact from Altisource from corporate my team and our Quinn's communication to work, but an MSR investors directing it to move certain service referrals historically provide itself was forced to another.
Their vendor.
I'll also cover our objectives for the balance of the year, including our preparation to capture the counter cyclical opportunity from higher delinquencies and our plans to reduce internal costs and grow earnings.
As a result of a pandemic altisources facing an unprecedented and challenging business environment with industrywide second quarter foreclosure initiation down by approximately 85% and lender completed foreclosure is down by 75 per cent compared to the second quarter of 2019, despite the 300.
Tritan, 6% increase in seriously delinquent loans over the same period.
Turning to slide five as anticipated our second quarter revenue of $91 million adjusted pre tax loss of $10 million and adjusted EBITDA loss of 2 million reflect a full quarter impact from cobot, 19, which was partially offset by our cost reduction efforts.
Since the National Emergency was declared in March federal and various state governments have taken measures to provide financial support to residential mortgage borrowers, including mortgage forbearance programs and foreclosure and eviction moratoriums.
For varying lengths of time during the quarter most states enacted stay at home orders and restricted services for only those beamed essential.
These measures significantly reduced our default related referrals and revenue for the quarter.
Strong growth across our origination related businesses from historically low interest rate environment success from our business development efforts and a rebound in June home sales, partially offset these declines.
As you can see on slide six second quarter revenue from customers suburban awkward energy in resi in our core lines of business was 5% higher than the second quarter of 2019, driven by strong growth in our origination related businesses, partially offset by a decline in some of our default related businesses primarily from government.
Until actions related to the pandemic.
In this difficult environment, we acted quickly to reduce costs work to mitigate the impact to our customers and supported the safety of our employees.
As a result, the vast majority of our staff for working from home and were able to preserve cash ending the quarter with $68 million in cash and cash equivalents.
Keep in mind that this excludes our marketable securities.
For more detailed description of our second quarter financial performance compared to prior periods. Please refer to todays press release and form 10-Q.
We anticipate this short to medium term pressure on our default related businesses to continue governmental forbearance programs, a moratoriums temporarily prevent servicers from pursuing foreclosure of delinquent loans.
More recently as set forth on slide seven awkward advised us that an MSR investor instructed to move certain referrals for field services to another service provider beginning in July with a balance anticipated to be moved over the next couple of months.
Hi can also advised us that this same investor intends to instruct awkward to utilize a different provider for certain other services.
At unspecified future dates we believe the MSR investor provided in this direction has NRC and that the referrals are being moved to service businesses that NRG either owns or in which it has invested.
We believe that these actions violate our agreements with Ocwen and we're currently in discussions with Ocwen to address this matter and have reserved all rates.
We estimate that revenue from the energy portfolios. Excluding revenue we earned from our co-operative brokerage agreement with NRG represented approximately 39% or $70 million $79 million of our first half 2020 service revenue the majority of which is in the lower margin field services business we.
Estimate that the field services portion of this service revenue was $58 million because it is difficult to predict the timing of the potential change of Altisource as the service provider. Our 2021 forecast conservatively assumes that we don't generate any revenue from these portfolios. The investors decision to change service providers does not impact.
The co-operative brokerage agreement, where we provide our oreo brokerage and auction services than busy.
To address lower than previously anticipated revenue from Ocwen and the extension of foreclosure and eviction moratoriums, we're developing a plan to implement additional cost reduction measures.
As you can see on slide eight based upon our current planning we are forecasting altisource to generate 2021 service revenue of $250 million to $270 million adjusted EBITDA of $35 million to $43 million and adjusted EBITDA margins of 14% to 16%.
This forecast includes the anticipated impact from the pandemic for loss of service referrals from the Ocwen MSR investor that I, just discussed and our anticipated cost reduction measures.
We believe there is a substantial opportunity for revenue growth and margin improvement from these amounts in 2022 and beyond.
Given the very volatile environment associated with a pandemic and the recent OCC when news theres greater uncertainty that could cause our actual results to differ materially from our forecast.
We believe that despite these near term headwinds we have a strong set of mature and comprehensive real estate mortgage businesses that are well positioned and ready to capture the opportunity from the higher delinquency environment. Once the temporary governmental programs are lifted.
Keep in mind that the default business for Altisources not lost rather to has been pushed off as a result of these programs in a normal market. We estimate that for every 1% increase in delinquency rates the addressable market for our default related services increases by approximately $700 million.
Based on the increase in 30, plus day delinquencies since the beginning of year, we estimate that the addressable market for our services has grown by over $2.7 billion.
With our attractive and growing customer base, we should begin to benefit from the growing addressable market as the temporary governmental relief expires.
Turning to slide nine and our business objectives as we look to the balance of year. We have three primary objectives first preserve cash second position the default related businesses for a tremendous medium to longer term upside.
Third continue to grow our origination services businesses.
Beginning with our objective to preserve cash.
This brings me to our second objective turning to slide 10, and our default related businesses. We are optimistic about our long term potential for these businesses. Despite the short term challenges as shown on slide 11, delinquency and unemployment rates are rising at a historically fast pace.
According to Black Knight, the National 30, plus day mortgage delinquency rate in June was 7.6% compared to 3.2% in January and the number of seriously delinquent mortgages increased from 400000 to $1.9 million the highest level since early 2011.
The unemployment rate remains high at 11%.
As we look ahead, we believe the unprecedented level of foreclosure and eviction relief will subside and if unemployment rates are elevated delinquency levels are likely to remain substantially higher than they were before the pandemic began.
This should drive a strong rebound in our default related businesses toward the middle to end of next year and is very much in line with the feedback we are receiving from our clients.
In the meantime, we're enhancing our technology to improve the efficiency of our field services business and extend the reach of our Hubzu marketplace.
Turning to our third objective and growing our origination businesses as you can see on slide 12, we have a robust suite of origination solutions that benefited from a low interest rate environment and strong business development activity.
In addition to market Tailwinds, we have a large opportunity to grow our origination related businesses by capturing greater wallet share from the lenders one mortgage co-operative members and converting our sales pipeline.
Slide 13 provides you with an update on select sales wins.
We are confident and Altisources long term potential we believe that as the default related market returns and as we continue to grow our originations related businesses will be a stronger more diversified company that is better positioned to withstand varying economic cycles, 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 lifecycle.
Ill now open up the call for questions operator.
Thank you will not begin the question answer session. If you had the question. Please press star one done your telephone keypad, if you'd like to be removed from the Q. Please press deposit side or the hash key is going to speakerphone. Please pick up your handset first before you dialing once again if you have the question. Please delstar lot at this time.
We're standing by for questions.
It from B. Riley, we have Rohit Sharma. Please go ahead.
Hi, good morning.
The.
As a loss in the analysts are.
Yeah, which is an R&D related.
You know you would already alluded to that the first quarter on any sort of change any more color in that and on the timing.
Yes. Good morning is say hi, good morning.
Changes any any sort of.
Paul on the timing of when and obviously again is entirely phase out and also.
He is in the impact across.
Hi, I know you mentioned that is a cross default services and marketplace.
So anything different from what you had alluded to the first quarter.
Sure, Yes, Russia, good more if you recall, yes earlier in the year, we mentioned that we estimated that the NRC business.
Excluding the co-operative brokerage agreement, which is not impacted by this was about 40% I think for the first half of our revenue service revenue for the first half of the year represented about 39% so slightly below what we said earlier in the year from it from a timing perspective.
In July.
We started operating started to move some of the inspection work from Altisource too.
Two Guardian, which is the and our Zealand company and we believe that activity. So inspections moved in July and we believe the Oreo related.
Work, we do in field services will move over the next couple of months.
And then as to the other services were not aware of timing, where that theres occupants, having conversations with NRG about redirecting those services, we're not aware of the timing, but in the forecast. We we talked about in my prepared remarks, we just make the assumption, which we think is very conservative.
That it's all move before the beginning of next year and again, none of this impacts the marketplace business.
Great.
And then on the more toys, so when you think.
The moratorium and any sort of color on that and that timeline.
Serious delinquencies are rising get an incredible eight.
Wendy once the more billions Alisky led you think that lifted and then.
When you take the flow through.
Youre yeah.
And can state.
So the forbearance program was put in place. So the governmental forbearance program I think it was in late March and today of close to 4 million borrowers under some form of forbearance and those plans can extend for up to a year.
Where where the borrowers don't necessarily have to be making any payments.
On top of that you have the moratoriums that were originally supposed to expire at the end of June that were extended to the end of August both foreclosure and eviction. So that basically is put in absolute halt. So if you think about our you know about the and even in a historically low environment like last year doing historically low.
Can you probably had something like 120000 foreclosure starts at quarter end, you probably had and this is just an internal estimate a rough estimate of 30000 completions or so each quarter and in the second quarter. This year. There were 18000 foreclosure starts and I think under.
10000.
Maybe even been substantially less than that foreclosure completion.
And so the ended its drop like Iraq, but whats the good news Thats the bad news for us to the good news is the revenues not lost when you think about our business.
If you contrast that with the origination space Raj. So in originations you have interest rates at historically low levels and you're pulling through to today. All these future refinancing activities and your ears servicers talking about refinancing of certain percentage of their book this refinancing.
In our case, we actually have a very large amount of business that's building.
But not here today, so the normal business that would we would be working on.
We're not receiving because of the moratorium and then on top of that what's happening as you're seeing this massive three times increase in delinquency rate and we're not yet benefiting from that so we believe that's building a tremendous pipeline of future business for Altisource and then to answer your question as to when.
The moratoriums at least as of right now are extending to the end of August we're hearing it's possible, but it could be extended further although nothing has been.
Decided by the government.
And then the forbearance plans those will roll off.
If they go a year sometime between late March next year and next summer and then is that we'll start the loss mitigation of process and we think our clients are telling us anywhere from 25% to 50% of those.
Our loans and forbearance may go through some form of of loss mitigation, and which will generate very meaningful revenue for for Altisource.
Yes.
Thank you.
Thanks fresh.
From Northland Securities, We as Mike Grondahl. Please go ahead.
Hey, Bill.
Any estimate.
On the second quarter sort of list revenue due to the forbearance situation.
Yes so.
Hi, Mike during the second quarter, we actually performed a little bit better than our our planning related to to covert 19.
The marketplace business got hit really hard in second half a March April and May and them.
Because we have a if you still have a decent size inventory of Oreo as the market came back we're not getting a lot of new inflow, but we have an inventory so as the homesale market really got strong starting in June that came back from Mike I would say, we're probably off by at least 25% if not more in terms of total revenue in the second call.
Quarter compared to what we would be in in more normal environment. Michel I don't know if you have anything to add to that but.
Yes, I think Thats fine though.
Yes.
Got it and then.
R&D expense side.
Is it possible to kind of.
A few of the areas, you're targeting and sorted that total dollars do you have sort of a range of dollars. You think you can pull out.
Yes, Okay. If you remember we initially had worked on a plan that was going to take our run rate down Michel correct me if I'm wrong from the end of last year was it.
$45 million to $50 million, yes, that's right.
And so Mike that were some planning that we had already started related to what's going on in our environment and then when the moratoriums got extended.
And the news from Auckland sort of crystallize the that risk to that we've been talking about for some time.
Weve started developing additional plans and I think Mike without going into all the specifics, we're very very actively working on on plans.
That will get us to that 14% to 16% EBITDA margins for next year, but think about like in field services, Mike, which is one of our lower lower margin businesses, probably a 10% to 15% margin business.
Most of the cost in that business our variable if we don't receiver referral, we don't incur an expense and the same applies to a lot of or other services. So our outside goods and services automatically go down.
The decline in referrals and then beyond that we're working we're looking at basically everything at the company in terms of.
Discretionary spending unrelated to what we need to support our the growth that we anticipate is coming.
Corporate costs.
Business unit costs, we're lucky at all of it and developing planned got it got it.
It would be so we sort of should expect Threeq you in four key lives when that store bearing stuff is really going to have them. Most effect could you were selling.
Selling the inventory you had in Twoq, you, but you don't get much inflows, so that's where you're going to get hit the hardest is that fair.
Yes, so we're working hard so we think in the second half of the year Mike.
And again.
There's a lot of uncertainty because we don't know fees moratoriums are going to get extended we're not sure exactly what's going to happen when the moratoriums extended because some of those borrowers presumably have off that would have been impacted.
Our benefited from the March moratorium also have forbearance plans in place. So theres a lot of uncertainties right now that makes it very very hard to predict the second half of this year, but based so with that caveat.
Based on our internal planning, we're we're we're and.
And the cost savings were working on we're trying to basically keep the cash burn as low as possible for the second half of the year and I don't know that will breakeven from an EBITDA perspective, but we think we're working hard to get too close to breakeven and again a lot of caveats around.
What's going on both with Ocwen and the timing of the of the move to other vendors on enters these behalf as well as what's happening with the moratoriums.
Sure sure Energy just last question what are your legal right.
What are you kind of pursuing with Ocwen. You said you were discussing talking with them.
What are you hoping to gain.
Yes, sure. So let me start by saying we have a very good working relationship with Ocwen and we're having a very constructive dialogue with Ocwen right now.
Regarding.
This move by by NRG year, this direction by energy to our Quinn I don't want to get into the details Mike, but as there's more to report we will but we're having a we maintain a very strong relationship working relationship with act when we're having a very.
A robust and constructive dialogue with ocwen around resolving these issues and hopefully there'll be more to report.
As soon.
Got it okay.
Thank you.
Great. Thanks, Mike.
And once again, if you do have a question. Please delstar one your telephone keypad.
You were standing by for any further questions.
Yes, we have a follow up from Rohit Sharma. Please go ahead.
Hi, Bill I am show.
One follow up on can you.
Comments on your liquidity in how I know you just said youd domestically breakeven. So there's no change in it can you comment on any debt obligation coming up.
And your ability you a cash levels and usability too.
To be able to withstand.
This.
This decline.
Volume is too.
Yes good.
Yes arise we feel we don't based on the planning we've done in our current forecast we feel good about our liquidity.
And I think we ended the quarter was $68 million I looked at our cash position a couple of days ago. It was over $70 million.
So a cash continues to be strong and.
As you know where capital light business that we spend very very little on on capital.
If we spent another million million half the rest of the year I think thats probably.
A reasonable estimate so we feel very good about our liquidity and then when you look at our planning for next year and those EBITDA levels, though.
We're talking about but.
Plenty of liquidity to.
To cover our debt service. So we believe we have plenty of liquidity a cover our debt service and generate some excess cash flow next year.
Right.
And our last point drag on the loan it's a covenant light loan.
There is an excess cash clause, so if a net debt to EBITDA.
Gets above.
A certain level a certain percentage of our 2500, 50% of excess cash flow that we generate during that period is used to reduce the debt, but theres no.
There is no financial covenants.
Alone doesn't mature until April 2024.
No.
There's some minor.
Minor amount of amortization I think contractually amortization is about $13 million between now and maturity.
Great. Thank you. Thank you nice demobilization of that doesn't occur until March 10 2023.
Yes, so we feel very good about.
Our liquidity and we've got a very good plan that we're developing that we think positions altisource as a stronger more diversified fast growing company that can take advantage of.
The growing delinquency rate, which we believe this revenues not been lost but but deferred.
And also just one last question on the services there is other new services you.
Adding some new business this.
This quarter any new wins.
Yes, we continue to to win deals and grow the pipeline are there some business we're doing for a top five banks that we're going to launch in September to support them with their forbearance programs, that's going to launch.
In a month or so we're having.
We're we're very close this signing agreements with several banks been nonbanks related to our marketplace business. So when when Rick when volumes return, we'll have additional customers and that so we should benefit.
From that so we're we're very pleased with the pipeline and.
It continues to grow and make progress.
Okay. Thank you so much.
Thanks, Brett.
And once again, if you do have a question. Please delstar one and your telephone keypad.
Standing by for any further questions.
Okay, showing no further questions at this point.
I'll turn it back to the Bill Shepro for closing remarks.
Thanks, operator, thanks for joining todays call and we look forward to.
To talking to as the quarter progressive pickup.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for joining you may now disconnect.
Yeah.
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