Q4 2021 Altisource Portfolio Solutions SA Earnings Call

March 3, 2022

Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience.

[music].

Ladies and gentlemen, thank you for standing by.

Welcome to the <unk>.

Fourth quarter 2021 earnings conference call.

At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

Ask a question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker Michel estimate Chief Financial Officer. Please go ahead.

Thank you operator.

We first want to remind you that the earnings release Form 10-K , and quarterly slides are available on our website at www Dot <unk> Dot 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 uncertainties associated with forward looking statements to continuing COVID-19 pandemic makes it extremely difficult to predict the future state of the economy and its potential impact on announcing source.

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 provided herein as a result of.

A 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 Bill <unk>, our chairman and Chief Executive Officer, I'll now turn the call over to Bill.

Thanks, Michele good morning, and thank you for joining today's call.

I'll begin on slide three alpha source demonstrated resiliency during 2021, a year defined by challenges from the pandemic and related borrower relief programs that significantly impacted our revenue and adjusted earnings.

We strengthened our balance sheet with a fourth quarter sale of point West. We ended 2021 with $98 $1 million in cash and $149 1 million of net debt, representing a 68% increase in cash and a 21% reduction in net debt compared to 2020.

We believe we are poised to return to revenue growth in 2022 with quarterly year over year revenue forecasted to grow over the same period in 2001, beginning in the third quarter.

The growth reflects the anticipated tailwind that our default business from the recent termination of the temporary pandemic related borrower relief programs and launch of new solutions customer wins and greater product adoption in our origination business with.

With the expected revenue growth and benefit of our prior cost reduction initiatives. We anticipate we will generate positive adjusted EBITDA for the second half of 2022.

This morning ill briefly discuss our fourth quarter results and our core origination and default businesses in greater detail.

Turning to slide four our fourth quarter financial performance was largely in line with our expectations with revenue impacted by pandemic related temporary borrower loss mitigation measures and seasonality.

Fourth quarter net income of $70 6 million benefited from a gain on sale of pointless.

On December one we completed the sale of our equity interest in point list and received approximately $102 million in cash significantly strengthening our balance sheet and generating an $80 million post tax gain.

He is $20 million of the proceeds to repay the outstanding balance on our revolver.

Assuming no adjustments, we expect to receive an additional $3 8 million in 2022 with the majority to be received in December .

This sale was a big win for Alpha source and we believe demonstrates that we have developed an attractive collection of valuable businesses.

Turning to slide five and our strategic priorities for 2022.

We have two primary areas of focus.

First continuing to build out and grow our origination business through new solutions customer wins and greater product adoption.

And second growing our default business leveraging our history as a leading provider of solutions that support loan servicers and the tailwind from the expiration of the foreclosure moratoriums and temporary loss mitigation measures.

Slide six provides additional information on how we intend to continue to develop and grow our origination business.

The mission for our origination business is to help small to midsized banks credit unions and independent mortgage bankers that are members of the lenders one cooperative improve their profitability and better compete.

We believe this mission strongly resonates with our lenders one members and prospects that are looking for a competitive edge, particularly in this challenging origination market.

In this vein in the fourth quarter, we grew lenders one membership by 11 members to 251 members and launched our Tri merge credit report offering and certain verification fraud and other solutions that are typically order during the loan manufacturing process.

We also launched the lenders one loan automation technology, which we referred to was Lola following a successful beta launch.

It makes it easier for lenders one members to order and receive our solutions through a single platform and automates loan manufacturing processes to improve their operational efficiency.

The launch of these offerings and increased adoption of our existing solutions, along with the growth and planned growth for.

And plan for growth of the number of lenders one members should support full year double digit revenue growth in the origination business. Despite the MBA forecast for a 34% decline in origination volume.

We anticipate the year over year quarterly growth in the origination business to begin with the third quarter Keith.

Keep in mind that the lenders one members are well positioned to gain market share in a rising interest rate environment as their typical branch office model favors purchase as opposed to refinance mortgage originations and the purchase market is forecasted to grow by 8% over last year.

Turning to slide seven and our default business.

Since early 2000, and this business has been severely impacted by the pandemic as temporary foreclosure moratoriums and loss mitigation measures significantly reduced referrals to outsource despite higher delinquency rates.

Recently, however, we believe that we will fault market is entering the early innings of a recovery.

The federal government's pandemic related foreclosure moratorium expand expired at the end of July and the Cfpb's temporary loss mitigation measures expired at the end of last year.

As a result, servicers have begun to restart and initiate new foreclosures.

We are beginning to see some of the leading indicators that support our growth expectations and are experiencing an increase in referrals and several of our default businesses.

Hubs you referrals in the fourth quarter were 158% higher than the same quarter in 2020, and ending hub do inventory of over 6300 homes marks our third consecutive quarter of inventory growth.

For the first two months of this year, we have also experienced a significant increase in trustee <unk>.

Foreclosure title and hubs you referrals with these businesses growing referrals by 57%, 22% and 217% respectively over the same two months last year.

The growth in hubs you referrals was largely driven by higher foreclosure auction referrals, a portion of which will result in future revenue.

While it's difficult to predict how servicers are going to respond to the exploration of the temporary governmental measures and how home price appreciation may impact the default market. We expect these positive trends to continue as the year progresses.

We also have insight into which of our solution should begin to grow earlier in the recovery process and which should take longer.

Slides eight and nine provide you with an illustration of the way we believe our default revenue will recover as the market returns to what we believe will be historical norms.

We anticipate that the first services to return will be title and valuation work on foreclosure initiations. We expect this will be followed by foreclosure auction referrals.

Homes that don't resolve prior to the foreclosure auction or sell at the foreclosure auction usually become REO referrals.

On the Oreo referrals, we typically first generate field services revenue and at the home sale generate title insurance real estate brokerage and auction fees.

<unk> inventory was depleted during the pandemic and the sale of Oreo is the last step in the default process. We anticipate that it will take time for our Oreo inventory levels to return to our normal operating level.

We currently estimate that will be in a normal post pandemic operating environment by the middle of 2023.

A driving factor of revenue and our default business as delinquency levels.

December 2021, 90, plus day delinquency rates were 2% or 59% increase compared to the pre pandemic delinquency rate.

As shown on slide 10, we estimate that our default business revenue could grow on a stabilized basis to between 214 and $237 million holding all other assumptions constant.

At the low end, we assume a return to the historically low delinquency rates immediately prior to the pandemic.

At the high end, we assume delinquency rates are at the higher December 2021 levels.

Based upon our anticipated return to revenue growth in both our origination and default business businesses, we forecast <unk> will begin to generate positive adjusted EBITDA for the second half of 2022 on a significantly reduced cost structure.

For the full year of 2021 cash costs, excluding outside fees and services, which are typically incurred only if revenue is generated were $49 $3 million lower than 2020.

Before I conclude I'd like to provide you with an update on the board's process to evaluate our options to enhance shareholder value with respect to our origination business that we announced on July 29 2021.

We recently concluded this process and after exploring a range of alternatives for the origination business. We determined that it is in the best interest of the company and our shareholders to retain and further invest in the business. We have an exciting strategic plan and believe the origination businesses unique distribution engine and strong growth prospects.

Will be a significant catalyst to create value for shareholders.

The last couple of years have not been easy, but I am pleased that we have strengthened our balance sheet and are forecasting a return to revenue and adjusted EBITDA growth in.

In addition to market tailwind and our default business. We are building an exciting and innovative origination business that we believe will create substantial value for our shareholders and customers.

I'd like to thank and recognize Alpha sources Board leadership team and employees, who supported the company as we navigated through the pandemic, while continuing to provide high quality services to our customers.

I will now open up the call for questions operator.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound.

Please standby, while we compile the Q&A roster.

Our first question will come from Mike Grondahl with Northland Securities. Please go ahead.

Yes, good morning, guys.

<unk>.

First question is is you mentioned some of the referral strength in January and February built.

Would you describe that as sort of in line with kind of your expected recovery.

<unk> had maybe a little bit behind.

What should our takeaway from from January and February .

So I think in those three businesses foreclosure auction referrals.

Rusty.

And.

Valuation it was in line with or slightly better than we were expecting.

For those first two months.

Again, the first when you win.

When the foreclosures get restarted or new foreclosures are initiated these are the first services that you would expect to receive and Thats. What we planned for in our budget for this year and the numbers were.

Better than we budgeted but but.

Roughly in line.

Got it are expected.

And then.

Over the past couple of years.

You've right sized the cost structure.

Would you now stay the course.

Cost structure you have in place.

<unk>.

Pretty much where you need to be.

And you just kind of waiting for the recovery.

Yeah.

In the volume of the business.

Is there anything to call out on the cost structure.

And then kind of it so we can do.

Yes.

Let me just ask so.

What are you thinking about from a cash generation or a cash usage in 'twenty, two kind of related to that cost structure question.

Yeah. So on the cost structure I think as I said in the prepared remarks, we took our R. R.

Fixed and semi fixed costs down if you will by about $50 million and that excludes outside goods and services that would naturally come down when you have lower orders. So we really did a good job attacking the fixed and semi fixed cost base. There is some modest improvement in our plan.

On the on those numbers this year, Mike, but I Wouldnt say its very significant it's really all about growing the top line improving the gross profit margins.

Getting to the point, where we're generating positive adjusted EBITDA, which we think will happen in the second half of the year from a cash flow perspective, we think we will turn the corner and generate positive cash in the in the fourth quarter.

And what you'll typically see at Alpha sources. The first quarter is a bigger cash consumer for a couple of reasons and in many cases youre prepaying. Some of your contracts for the year in the first quarter <unk> got bonuses in the first quarter and our EBIT is not going to be as strong in the first quarter as I expect it to be later in the year.

So we're forecasting revenue to sequentially grow.

Beginning in the second quarter for the rest of the year and EBITDA.

Should also definitely sequentially grow from the second quarter through the end of the year. The first quarter revenue and EBITDA. We hope will be we anticipate it will be modestly better than the fourth quarter, but we're still it's still it's too early to tell with only our books closed for the first month of the year.

Got it so I think overall for the overall for the year you will use a little bit of cash is that the way to think about it.

Yes, so we're still anticipating that we're going to use cash.

Cash Mike when you think Youll see will consume cash for the first.

Two three quarters, and then we're going to generate cash in the fourth quarter I think for the year, we're still expecting cash to cash.

Cash to come down, but we and Michelle correct me, if I'm wrong and again. This is it's tricky to forecast because we're still waiting to see how we how everything comes out of the pandemic, but we're currently forecasting I think cash to be around Michelle was at the $80 million ish roughly $80 million.

So at the end of the year and growing growing at the end of the year as well.

Got it that helps directionally.

And then maybe just lastly.

In the press release, you do mention losses from our earlier stage businesses in the fourth quarter was 1 million and a half.

That represents Plano list before you sold it or is there.

Other earlier stage business that is generating those small losses.

So at this point.

Okay, great. Thanks, a lot.

Thanks, Mike.

Thank you thank.

Thank you I would like to ask a question. Please press Star then one.

You have a question from Raj Sharma with B Riley.

Hal.

Yes so.

Could you comment on how I know you on slide 10, you've given.

The range of service revenues in 2014 to $37.

Can you quantify a little bit how field services and hubs and origination business is going to break out sort of.

Same sort of.

Portion to before and how that cadence as you expect a pickup in hubs and really second half.

The EU could you could you give some more color on that.

Sure just with respect to hubs, we are seeing a pickup in the first quarter.

Because.

The inflow and the inventory the inflows were strong in the fourth quarter and the inventory is strong.

So we are seeing a pickup in.

In the first quarter on <unk> compared to the fourth quarter, and we think that will continue as the year progresses, we've gotten a lot of very significant number of foreclosure referrals Raj foreclosure auction now some of those ultimately the servicer will negotiate a resolution or the borrower will re performed pay it off.

But the significant number of those will make it to the foreclosure sale and will generate revenue that just takes time, so that will progress as the year goes by.

Michelle in terms of the mix of revenue between businesses as you look out a year or so I don't have that in front of me.

Few of any color you could add there.

Yes, I think so what's included here you mentioned field services and have it as a part of the default businesses and then the origination business does not include.

This is Jeff.

But in terms of breadth Raj I think what we expecting to see is as you know in the.

Early stage you are getting a lot of the services related to a foreclosure initiation title valuation, we're getting referrals of foreclosure auction work, but they won't generate revenue until you get to the foreclosure sale.

Our REO referrals are picking up to some degree because if you recall.

Foreclosures that were in process.

Have restarted so those in process foreclosures.

Coming Oreo, it's growing but not growing tremendously because really where that growth is going to come from the new foreclosure initiations that are taking place now probably over the first quarter or two of this year that will ultimately become some of which will ultimately become REO and we don't think that stabilizes until the middle of 2023.

Even what we're hearing sort of anecdotally some servicers are starting up faster than others. So in January we have seen.

A meaningful increase in referrals, but we also understand that.

The machinery going for some of the other.

For some of the Servicers is taking time and Servicers are being.

Very thoughtful before they're starting a foreclosure action and so we think that pipeline will continue to build.

As the year progresses.

So if I understand that correctly, the field services and marketplaces with hubs.

They are.

We're $108 million in 2021, Theyre looking to more than double at it.

At.

And the midpoint stabilization yes.

This year this is Joe.

Point of <unk>.

That's the midpoint of 2023, the middle of 2020 guidance when we reach that equalization.

And where do you expect the originations business how much do you expect that to grow.

So I think we're just in our prepared remarks Raj, we're saying we anticipate the double digit.

<unk> over last year in a market, that's going to be down, 34% and I thought just.

Just to give you some sense we launched.

Tri merge credit product.

We really went live with our first customer in the first quarter.

We've got a pipeline that if you include both.

Signed contracts as well as customers that have committed to signing and those where we're negotiating terms that pipeline on an annual basis is $14 $7 million.

And I am excluding any customer that said, we haven't gotten an outright now we've got some customers that said it is not our top priority right now so I'm, excluding those and then if you include those that are in the evaluation stage. So these are customers that have been qualified and now moved down the sales funnel to evaluation.

That's another $12 7 million. So we're getting close to $30 million of annual revenue that's either been committed contract signed committed or at the point, where they are evaluating and so we're pretty excited about our progress, it's taking us a little bit longer.

To onboard signed customers. There's a lot of paperwork that has to be done and completed and integrations in order to get a customer live but we're very very pleased with the progress, we're making with not only the credit product, but all of our new white label products.

And Thats whats I don't know if a low ROE in a market that is declining.

Got it and then when we look at the market overall, we see the mortgage numbers foreclosure starts January was was up seven times from December .

How do we translate that into your results.

And the lag could you talk about.

When do how do we look at your business relative to the market in terms of the market share your market share is still.

Stable.

And could you give some color on that.

Yes, I mean, I think the best way to think about our revenue growth in the default business are those slides that we've included in the presentation. It's on page.

Page 10.

And it's all just a matter of.

Timing before we get to the stabilized rate of $214 million. If you go to pre pandemic delinquency rates I think thats, the best way to think about it Raj.

Right and so is when you look at the foreclosure starts apparently half of those.

Starts off from.

It's far from serious delinquencies prior to the pandemic with the other half.

From March 2020 onwards is your business representative of that ratio.

On the foreclosure starts.

Raj I don't.

I can only tell you what I think anecdotally because I don't have that information at my fingertips.

What I can tell you is.

No.

The restarts.

Began.

And I would say, probably the though even though they could have restarted in the third quarter, a lot of Servicers where super.

A careful and making sure they've exhausted all sort of options even for customers that were delinquent pre pandemic before restarting. So we saw some of that in the fourth quarter with the restarts and Thats why I think we saw a decent amount of of hubs you referrals, both Oreo and foreclosure referrals and then the increase we saw in the first.

<unk> on those statistics I quoted most of that is coming from new foreclosure initiations.

Got it.

Alright, Thank you for that arena questions.

Alright. Thank you alright, thank you for answering my questions I'll take it offline. Thanks.

Great. Thank you.

And speakers I'm showing no further questions in the queue. At this time I would now like to turn the call back to Bill CFO for any closing remarks.

Great. Thank you operator, and thank you for listening today's call. We really appreciate your interest in and out the source.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

Okay.

Yes.

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Okay.

Yes.

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Ladies and gentlemen, thank you for standing by and welcome to the Altice one for <unk>.

<unk> 2021 earnings conference call at this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

I'll ask a question during the session you will need to press star one on your telephone.

Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker Michel estimate Chief Financial Officer. Please go ahead.

Thank you operator.

We first want to remind you that the earnings release Form 10-K , and quarterly slides are available on our website at www Dot <unk> Dot 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 Ltvs yours. Please.

We undertake no obligation to update these statements financial scenarios and projections previously provided will provide each year and as a result of.

They change in circumstances, new information or future events.

Joining me for today's call is Bill <unk>, our chairman and Chief Executive Officer, I'll now turn the call over to Bill.

Thanks, Michele good morning, and thank you for joining today's call.

We strengthened our balance sheet with a fourth quarter sale of point West. We ended 2021 with $98 1 million in cash and $149 1 million of net debt, representing a 68% increase in cash and a 21% reduction in net debt compared to 2020.

We believe we are poised to return to revenue growth in 2022 with quarterly year over year revenue forecasted to grow over the same period in 2001, beginning in the third quarter.

With the expected revenue growth and benefit of our prior cost reduction initiatives. We anticipate we will generate positive adjusted EBITDA for the second half of 2022.

This morning, I will briefly discuss our fourth quarter results and our core origination and default businesses in greater detail.

Fourth quarter net income of $70 6 million benefited from the gain on sale of point in west.

On December one we completed the sale of our equity interest in point of list and received approximately $102 million in cash significantly strengthening our balance sheet and generating an $80 million post tax gain.

We used $20 million of the proceeds to repay the outstanding balance on our revolver.

Assuming no adjustments, we expect to receive an additional $3 8 million in 2022 with the majority to be received in December .

This sale was a big win for Alta source and we believe demonstrates that we have developed an attractive collection of valuable businesses.

Turning to slide five and our strategic priorities for 2022, we have two primary areas of focus.

First continuing to build out and grow our origination business through new solutions customer wins and greater product adoption.

Slide six provides additional information on how we intend to continue to develop and grow our origination business.

We believe this mission strongly resonates with our lenders one members and prospects. They are looking for a competitive edge, particularly in this challenging origination market.

We also launched the lenders one loan automation technology, which we refer to as Lola following a successful beta launch.

So it makes it easier for lenders one members to order and receive our solutions through a single platform and automates loan manufacturing processes to improve their operational efficiency.

The launch of these offerings and increased adoption of our existing solutions along with the growth in plan growth for.

We anticipate the year over year quarterly growth in the origination business to begin with the third quarter Keith.

Keep in mind that the lenders one members are well positioned to gain market share in a rising interest rate environment as our typical branch office model favors purchase as opposed to refinance mortgage originations and the purchase market is forecasted to grow by 8% over last year.

Turning to slide seven and our default business.

Recently, however, we believe that the default market is entering the early innings of a recovery.

The federal government's pandemic related foreclosure moratorium expand expired at the end of July and the Cfpb's temporary loss mitigation measures expired at the end of last year.

As a result, servicers have begun to restart and initiate new foreclosures.

We are beginning to see some of the leading indicators that support our growth expectations and are experiencing an increase in referrals and several of our default businesses.

Hubs you referrals in the fourth quarter were 158% higher than the same quarter in 2020, and ending hub do inventory of over 6300 homes marks our third consecutive quarter of inventory growth.

For the first two months of this year, we have also experienced a significant increase in trustee <unk>.

Foreclosure title and hubs you referrals with these businesses growing referrals by 57%, 22% and 217% respectively over the same two months last year.

The growth in hubs you referrals was largely driven by higher foreclosure auction referrals, a portion of which will result in future revenue.

We also have insight into which of our solutions should begin to grow earlier in the recovery process and which should take longer.