Q1 2022 Altisource Portfolio Solutions SA Earnings Call
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We anticipate <unk> will resume its revenue growth from our third quarter and continue to grow into 2023 as the market stabilizes.
We believe the servicer in real estate segment will be much larger in the coming years to understand this we think it would be helpful to explain the impact the pandemic related borrower relief measures pattern, our default business and how we think the market and our default business will recover.
Turning to slide five.
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 continue to sell existing Oreo 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.
Bandwidth at December 31st exploration of a 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 payoff others will go through foreclosure.
Does that go through foreclosure some will sell to a third party of the foreclosure auction and some will become our Oreo and ultimately sold.
Depending on the state and other factors this process could take approximately six months to several years.
Based on this default process <unk>, 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 <unk> will experience tremendous revenue and earnings growth.
To illustrate this please refer to slide six which shows Moody analytics historical and forecasted REO acquisitions and <unk> historical revenue.
As you can see national Oreo acquisitions, and <unk> revenue are closely correlated with both declining from the first quarter of 2019 during the fourth quarter of 2021.
Beginning in the first quarter of 2022, Moody's analytics forecast that Oreo 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 hub Xu generated $32 million of revenue.
If <unk> revenue maintains its strong correlation to Moody's forecasted our REO acquisitions.
<unk> 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 our REO acquisition growth revenue growth typically lags by a couple of quarters, reflecting the average time to market and sell Oreo.
In addition to benefiting from tailwind and 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 a 31% to $39 million in annual revenue on a stabilized basis based upon our forecasted probability of closing.
Turning to slide seven and our origination business. This business experienced strong growth over the last couple of years from higher origination volume in a low interest rate environment.
The origination market now faces challenges with the NBA 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 and 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 bring 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% to $23 million in.
<unk> 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 be declared sorry will decline by 36%.
We have moderated our expectations to reflect our recent experience with longer than anticipated customer onboarding and revenue stabilization timelines 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.
And we will be a significant contributor to health resources revenue and earnings.
To conclude we are pleased with our first quarter results and are executing well on our strategic plan and 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 tailwind and our strong sales pipeline as.
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 will now open up the call for questions operator.
Thank you we will now begin the question and answer session.
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Once again, if you have a question. Please press <unk> one on your Touchtone phone.
We have a question from Mike Grondahl from Northland Securities. Please go ahead.
Yeah, Hey, Bill and Michele sorry, I got on a couple of minutes late at 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 till we see a.
Similar increase in sort of our REO referrals, how do you think about.
Should we think about that lag.
Yes, so good morning, Mike So we got to.
When when the when the government allowed servicers to recommence sort of 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 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 and Rio until we think the middle of 2023, when it stabilizes because all of those new foreclosures that are <unk>.
Starting now.
Foreclosure could take anywhere from six months to a couple of years. Some of those homes will then sell at the foreclosure auction and those that become Mario It could take you start selling homes three months later to as long as 910 11 12 months later, depending on the status of that Oreo. So.
If you think about where we were just a couple of years ago I was looking at our Oreo inventory back back in the.
First quarter of 2020, Mike.
Yes, it was roughly 6500, REO give or take a little bit today, our Oreo inventory stands at roughly 2500, 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 in the first quarter I think of 2020, we generated Michelle correct me, if I'm wrong, something like 2830 $2 million of revenue in <unk> alone.
And then compare that to our first quarter of this year, where we did around $8 million $8 $5 million of revenue and <unk>. So there is our highest margin business is going to be the last business to recover from a from a revenue perspective, but when it recovers we think it can mean.
Tremendous amount of revenue and earnings for Alpha source. The other thing that's interesting is.
We now are growing our foreclosure auction portfolio and not all of those.
Foreclosure auctions that are in our inventory will ultimately generate revenue, but thats up quite significantly as the foreclosures restart that inventory is growing quite dramatically and so thats another sort of leading indicator that the <unk> business should be able to grow as as those foreclosures reach sale and then if they don't sell.
The auction as they as they become Mario and get sold.
Okay.
On average what do you make per unit on a foreclosure sale versus an REO sale.
Yes.
We're not going to go into all the specifics, but generally speaking our foreclosure auction, new probably keep anywhere from 2% to 5%.
The proceeds.
And in a <unk>.
Oreo auction.
It really depends in some cases, we're getting a buyer's premium that could be a couple percent to 5% and in some cases. We also earned were acting as the real estate agents and we can earn anywhere from probably 50 basis points to a couple of percent.
Got it that's helpful. That's helpful.
Can you remind us.
Is there a rule of thumb.
Let's say you've got 100 for <unk>.
Closures.
Roughly how many would end up at our REO sale is there a way to think about that waterfall, yes, I mean I can give you at really every customer sort of different in terms of at what point in the cycle. They give us therefore closures. So I'm going to talk very generally generally and customer mix can really impact this but let's say, it's probably around 25.
<unk> ultimately result in a foreclosure auction that generates.
Revenue some customers who gave us at the foreclosure of later in the process the percentages could be much higher.
Got it got it and then.
Your hub inventory has grown four quarters in a row 6900 units.
What's the average duration do those does that sell in a quarter or two.
Are you seeing anything faster in this housing market.
So today I think Mike from a sales perspective via our timelines 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 arent perfect numbers roughly 2500 of our.
6800, or so 6900.
Assets and.
Inventory our Oreo.
Got it got.
Got it.
It just takes when you look at.
As we get back to a normal market, where there's over 40000 foreclosure starts industrywide a month.
<unk> time for those foreclosure starts to work through the process. Some some of those borrowers will work out the loan that will either sell their home more or modify the loan or re perform and percentage of those will ultimately get to a sale and some will become RVO.
Got it got it.
Maybe two more on the financials.
Do you still.
Still working towards year over year revenue growth in the second half.
Is that still sort of roughly how youre seeing the year kind of shape up in the back half, yes, we do we do expect.
The 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.
Got it with growth in the second half still.
Yes, roughly about 15% to $20 million of cash.
Cash usage.
<unk> was pretty.
Yes.
10, five but you kind of spelled out why the year roughly still 15% to 20 is that fair or closed yet. So 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.
$15 million to $20 million, we're going to use.
Got it got it yes, okay.
Thanks.
That's what I had I appreciate it.
Good luck the rest of the year great.
Great. Thanks, Mike.
Thank you as a reminder, if you have a question please press star.
One on your Touchtone phone. The next question comes from Raj Sharma from B Riley.
Hi.
Thank you for taking my question.
So I just did.
Wanted to talk about the <unk> slide six that Youre talking about on the <unk> acquisitions.
Track in line.
I know you said it could go from.
8 million in revenues to over 50% by the end of 2025.
What about this year, there seems to be a nice projection.
Are you at National argue acquisitions to the fourth quarter of this year.
That shows about $30 million is that would that be.
Do you still expect to $8 million, a quarter and hubs to actually start ramping by the end of the year or yes. So I've talked about in the prepared remarks rose 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 theres going to be a lag that could be a couple of probably a couple of quarters.
As you grow your inventory.
So the reverse happens from from what took place as the inventory.
Client.
So we do expect the second quarter I think I said on the prepared remarks to be roughly flat or down a little bit in <unk>, which is going to sort of impact on our revenue mix.
To some degree in the second quarter, but we anticipate that <unk> 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 Rio.
For the faster foreclosure states as some of those homes become become Mario and get sold to a lesser degree.
Got it got it thank you.
And then I know you introduced a new sort of metric of this.
Pipeline, the sales pipeline and your probability of closing.
So these are the new accounts that you.
Are looking hoping to sign on.
That would give us additional revenues of $31 million to $39 million.
Right.
That's right visa accounts, we what we did is we gave you the total pipeline and then we broke it out between the servicer in real estate segment in 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 they exclude so any of that that pipeline would.
Exclude any any revenue growth, we anticipate on our existing products with our existing customers as a result of a tailwind for example on the default side.
Alright.
Alright.
Okay and is the timeline of when that would close within.
Within a year.
Yes, so we put together sort of a weighted average.
The timing for when it's going to close is that a little bit harder to predict and then of course, what we're sharing with you is 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 will 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 are turning on it are 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 todays 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 turnaround our pricing proposals faster because the demand for those products is really really strong.
Got it.
And then just lastly.
Could you touch upon I know you don't.
Great.
Gross margins are the gross profitability.
Could you touch upon what that.
Means for <unk> for example.
Hubs in business I know that you said, that's higher margin that comes to the end and then the origination business I know, it's going to be flat to last year can you talk a little bit about is it on a divisional basis is it losing money is it.
<unk> lost a little bit of EBITDA in the first quarter you can take a look at the Q. My recollection is that just lost a little bit but.
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.
But I think that business could.
<unk>, 2025% margin business owner on a normalized basis as you know as we grow it.
The next couple of years.
And thats, the EBITDA, 25% EBIT margin.
Okay, well, thank you for answering my questions I'll take it offline.
Thanks Raj.
Yes.
Thank you we have a follow up question from Mr. Mike Grondahl from Northland Securities. Please go ahead.
Hey, Bill.
Just to repeat if you said anything in your prepared remarks about <unk> I think I understand the back half of the year, but.
Because <unk> was a little slower in <unk> and maybe the origination business.
With rising rates is <unk> sort of flattish.
<unk> is that what you were saying or even down a little bit.
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.
Business is going to impact the margins and we got some onetime benefits.
And then we think that will wipe any turnaround in the third and fourth quarters.
Got it okay. Thank you.
Thank you.
Thank you and at this moment I'm showing no further questions do you have any other remarks.
Thank you operator, and thank you for joining the call and we appreciate everyones support take care.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Okay.
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