Q2 2023 Altisource Portfolio Solutions SA Earnings Call
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Good day and thank you for standing by welcome to the Ultra source second quarter 2023 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.
To ask a question during the session you will need to press star one one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference call is being recorded I would now like to hand, the conference call over to your speaker today, Michelle estrogen Chief financial.
Officer. Please go ahead.
Thank you operator, we first want to remind you that the earnings release Form 10-Q, and quarterly slides are available on our website at www Dot Alpha search dot com.
These provide additional information investors may find useful.
<unk> today include forward looking statements, which involve a number of risks and uncertainties that could cause actual results to differ in.
In addition to the to the usual uncertainty associated with forward looking statements. The continuing impact of government in service or in response to the COVID-19 pandemic together with the current economic environment make it extremely difficult to predict the future state of the economy and the industries in which we operate as well as the potential impact on <unk>.
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Please review the forward looking statements section in the company's earnings release.
Quarterly slides as well as the risk factors contained in our 2022 Form 10-K, which describe factors that may lead to different results. We undertake no obligation to update statements financial scenarios and projections previously provided or provided here and as a result of a change in circumstances, new information or future.
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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 Shepherd, our chairman and Chief Executive Officer, I'll now turn the call over to Bill.
Thanks, Michelle and good morning, I'll begin on slide four.
Our adjusted EBITDA performance continues to improve over 2022.
Second quarter, adjusted EBITDA was 47% better than the same period in 2022 and year to date, adjusted EBITDA was 81% better or $8 7 million.
Based on our current forecast, we anticipate roughly breakeven adjusted EBITDA for the third quarter and positive adjusted EBITDA for the fourth quarter and full year.
For our second quarter adjusted EBITDA was impacted by an estimated $900000 from certain unexpected nonrecurring items. We remain ahead of our adjusted EBITDA plan for the first half of the year.
Despite improving second quarter adjusted EBITDA compared to the same period in 2020 to interest expense from the higher interest rate environment and our amended term loan contributed to the greater second quarter 2023, adjusted net loss.
Second quarter service revenue was lower than the same quarter last year, primarily from the exit of low margin customer care business in the fourth quarter of 2022.
The decline in our customers' propensity to order services in two of our lower margin default related businesses and unexpected temporary delays in certain California foreclosures.
We believe those temporary foreclosure holds are now behind us and that the associated revenue is largely deferred and not lost.
We continue to position <unk> to take advantage of what we see as significant potential opportunities in the residential mortgage default market over the coming years as the market continues to normalize and consumers face financial stress.
As you can see on slide five our sales pipeline and wins in both of our segments remains strong and we continue to aggressively manage our expenses.
Our consolidated weighted average pipeline at the end of the second quarter.
Excuse me our consolidated weighted average sales pipeline at the end of the second quarter was an estimated $63 million of annual revenue on a stabilized basis, representing 47% of our annualized second quarter 2023 revenue.
We are also winning new business since last quarter. We've won business that we estimate will generate $18 $6 million of annual revenue on a stabilized basis.
The July went up $12 8 million reflects a new asset management client that we estimate will generate $3 million to $5 million per year in adjusted EBITDA across <unk> and most of our other default solutions.
During the quarter, we continue to onboard and grow sales wins from 2022, and 2023, which combined are now at $13 million of annualized revenue run rate.
Finally from a cost perspective in July we began to implement a company wide cost reduction plan that we estimate will reduce annual cash operating expenses by $13 $5 million once complete.
Turning to slide six in our servicer in real estate segment.
Second quarter, adjusted EBITDA was $200000 or 2% lower than the same quarter in 2022.
We estimate that the unexpected temporary delays in certain California, foreclosures deferred $500000 in adjusted EBITDA to subsequent quarters.
Despite this impact second quarter, adjusted EBITDA margins improved to 30% from 26% compared to the second quarter of last year.
The margin improvement reflects product mix and cost reduction measures, partially offset by the revenue impact from those delays.
We experienced a decline in service revenue primarily from the exit of low margin customer care business in the fourth quarter of 2022.
The decline in our customers' propensity to order services in two of our lower margin default related businesses and the temporary foreclosure holds.
We believe the foreclosure holds are now behind us and that the associated revenue is largely deferred and not lost.
For 2023, we anticipate that our countercyclical servicer in real estate segment will have higher adjusted EBITDA compared to 2022, driven by revenue mix and efficiency initiatives.
Moving to slide seven and our servicer and real estate sales pipeline and wins.
While we wait for the default market to recover we continue to build our pipeline and are winning new business at.
At the end of the second quarter, our weighted average pipeline totaled $38 $6 million of annual revenue on a stabilized basis in April through July we won business that we estimate will generate $15 7 million in.
In annualized revenue when stabilized.
One of the more notable wins that I mentioned earlier was the July signing of a master services agreement to provide REO asset management brokerage auction valuation and field services on a portion of the Servicers are REO portfolio.
On a stabilized basis, we estimate that this new business represents $12 $8 million in annual revenue in $3 million to $5 million per year in adjusted EBITDA. We.
We anticipate that we will begin to receive referrals in the third quarter and reach revenue and earnings stabilization by the middle of 2024, if not sooner.
Turning to the macroeconomic environment in slide eight.
Several indicators that consumers are financially stressed which could be precursors to a rise in mortgage delinquency rates.
Inflation, which reached a 40 year high in June 2022 has eroded the American consumers purchasing power as you can see on the graphs auto and credit card delinquencies continued to rise and 30 year fixed interest mortgage rates remained more than double from pandemic lows, reducing home affordability.
Average personal savings rates, which were at 26% in March of 'twenty, one have declined to four 6% in May 2023.
Additionally, in 2022, and 2023, 37% of workers have taken a loan early withdrawal and our hardship withdrawal from their 401, K or similar plan or IRA with both years, marking an all time high.
While 30, plus day mortgage delinquencies are close to historical lows. We believe that there are early signs of stress.
In June the number of U S mortgages that are delinquent by one payment increased by two 2% and those that are behind by two payments increased by one 7% from may.
Should borrowers remain under financial stress or the economy enter a recession, we anticipate that mortgage delinquency rates will rise.
Turning to slide nine and our origination segment and.
In a difficult origination environment, we perform well with second quarter adjusted EBITDA, 44% better than the same period in 2022, despite the $400000 negative impact from the settlement of a nonrecurring litigation matter.
Second quarter service revenue was 13% higher than the first quarter and 1% higher compared to the second quarter last year.
Service revenue growth reflects the progress we are making in onboarding customer wins from our newer lenders one products as you can see on the bottom left of the slide our second quarter revenue growth compared to the same quarter in 2022 reflects significantly better than market performance from the lenders one business as we gained.
<unk> with our solutions that are designed to help our members save money.
Our performance was partially offset by our other origination businesses, which performed largely in line with the refi market.
We anticipate the origination segments performance to improve as the year progresses from sales momentum efficiency initiatives and product maturity for our newer reseller offerings.
For the full year, we anticipate the origination segment to generate flat to modest year over year revenue growth and.
And adjusted EBITDA improvement, despite the Mba's forecast at 22% annual decline in 2023 origination volume.
Slide 10 provides a summary of our origination segment sales pipeline and wins.
Our weighted average sales pipeline as of June 30 is strong at $24 $6 million of annual revenue on a stabilized basis.
This includes $9 million and weighted revenue opportunities related to pricing proposals to lenders, one members and prospects for our newer reseller business.
We closed $2 $9 million in estimated sales wins during the quarter.
From our 2022 and first half of the year of 23 sales wins, we recognized approximately $2 $9 million in revenue in the second quarter or.
Or $11 5 million of revenue on an annualized basis.
This is significantly up from the $9 $4 million on an annualized basis as of the first quarter.
Moving to our corporate segment, we continue to maintain cost discipline second quarter adjusted EBITDA loss in the corporate segment was $2 3 million or.
Our 19% better than the same quarter in 2022.
For the year, we anticipate corporate costs.
Excluding interest expense and onetime debt amendment costs to be lower compared to 2022.
This reflects the additional cost cutting initiatives that we began implementing in July .
To conclude our second quarter adjusted EBITDA was 47% better than the same period in 2022, despite the estimated $900000 impact from the temporary foreclosure holds and nonrecurring litigation settlement our.
Our sales pipeline and wins remained strong and we continue to aggressively manage our expenses.
We believe we will begin to recover from the California foreclosure holds in the third quarter and are well positioned in 'twenty three to return to year over year over year revenue growth and generate positive adjusted EBITDA.
We anticipate roughly breakeven adjusted EBITDA for the third quarter and positive adjusted EBITDA for the fourth quarter and full year positioning the company for a significantly stronger performance in 2024.
With potential revenue and adjusted EBITDA upside from the significant number of servicing portfolios reported to be in the market for sale if required by our customers.
I will now open up the call for questions operator.
Thank you we will now conduct a question and answer session. As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please stand by while we compile the Q&A roster.
Our first call question comes from Mike Grondahl of Northland Securities. Mike Your line is open.
Hey, guys. Thanks.
Hey, Bill first question just on a hub.
Inventory levels.
What do you think that's going to inflect higher.
Yes, so Mike I don't think our view has changed.
I think <unk>.
As these new foreclosures worked through the system.
It starts to stabilize the middle of next year right.
Right now our inventory is holding relatively.
Flat because most of our businesses Rio.
REO related.
As those new foreclosures worked through that inventory, we would expect to see yes, sorry worked through that process, we would expect to see it grow.
Yes.
Got it so.
Yes.
Inventory is sort of inflicting.
Middle of next year.
Is it fair to assume so sort of your revenue inflect middle of next year also is that the right way to think about it.
Yes, I would say Mike look we're very focused on the revenue side on new sales. In addition to the market recovery and secure.
We anticipate the market is going to recover we want to make sure we're out there selling as hard as we can and winning new business.
In the meantime, and based upon.
Revenue growth that we anticipate will take place throughout the rest of this year.
And revenue growth into next year.
From our core business and our new sales wins, we think we can continue to improve our earnings quite significantly.
In terms of the new foreclosures clearly.
<unk> was our most profitable business and as those.
Foreclosure initiations worked through the process and become REO that represents more growth for us.
Great.
That that client asset management clients, I think representing $12 8 million.
It looked like a big win in July and it's going to drive I think you said $3 million to $5 million of annualized EBITDA.
There are more out there like that.
Is that something you can replicate and.
And kind of run with a little bit.
Yes, so Mike first of all we're really excited about that that opportunity.
We're working very hard with this customer to get the get launched.
And September is our plan.
In terms of other opportunities we're working on.
On some other opportunities as we speak.
Well that looked like they would be next year launch dates not this year should we be successful in winning those opportunities. So we do have a couple of.
Of opportunities, we think that could be represent more growth for <unk> and some of our related services in a manner similar to this opportunity.
But of course until you win the deals it's not done, but we're pretty excited there.
And then just lastly.
The July <unk>.
Cost reduction.
With the $13 5 million of annual savings.
I guess talk about that for a moment is that kind of.
Set you up for 24, and just kind of.
Pushing that margin and profitability kind of guaranteeing it in 'twenty four I guess help me understand the July cost reduction.
Yes, sure. So a couple of things one is I think we will roughly be at $1 million a month of savings beginning Michelle in the month of September is that right.
Sure.
And in terms of look I think Mike we need.
At one point.
Pandemic, a much larger company and we need to make sure that our costs reflect the size of the company today and we also want to make sure. We have very significant operating leverage as the market comes back and I think by taking these actions today.
We help ensure we have stronger.
Operating leverage going forward and depending on the timing of the market.
Depending upon the timing of the market, we have more flexibility for when it recovers we have more flexibility and so we thought it was an important step to take and.
I'm proud of the work the team has done to help us identify those cost savings and get those implemented quickly.
Got it Okay, hey, thank you.
Thanks, Mike.
Thank you very much one moment for our next question.
Our next question comes from Raj Sharma of B Riley financial Raj Your line is open.
Yes. Thank you.
Thank you for taking my questions.
Michele just wanted to understand the full closure of homes.
And the impact on <unk> revenues.
Can you give us some more color on that.
When did they come off.
On the wood, they've done entirely in <unk> and LOE impact in <unk>.
And if there are any such similar holds in other states.
Sure. So good morning Raj.
One of our customers agreed.
With the state of California in the second quarter.
To put their pending.
Foreclosures and that stayed on hold.
For roughly 60 days, but it didn't all start at one so it was primarily a second quarter event that impacted primarily two of our businesses our foreclosure trustee business in our title business that are both.
At a very high margin.
Services for us.
We saw those hold start to come off at the end of June .
And now we believe theyre fully off and we're back in business.
In California that revenue was largely.
The 500000 I referred of EBITDA is largely deferred we think will come back in the third and fourth quarter. This year.
Great. Thank you and any other such holds a commentary in other states.
No we're not aware of.
Or anything at this point in time, I mean, the only thing I would say.
No no we're not aware raj of any.
Any impact from our customers in other states today.
Got it and then just secondly, just touching upon the cost reductions one more time.
These are in addition to several cost cuts that were done.
Last two years.
What areas of these cost reductions in.
Yes, I would say the vast majority.
And Michelle correct me, if I'm wrong are coming from comp and benefits.
With.
Some coming from.
A much smaller amount coming from technology and insurance costs things like that.
Michelle is that correct.
Yes.
Okay, so because our impression was that the fixed costs.
The cost cuts that we've done in the last two years are largely fixed cost versus more variable.
No I would say look we're still.
Yes, I'd say Raj, we are still addressing sort of fixed cost infrastructure, both inside the corporate department and inside the business units.
And then.
Sure.
To a lesser degree.
Variable costs.
Great and then.
Congratulations on the big asset management.
<unk>.
I wanted to understand.
Or maybe get your.
Take on growth opportunities that are.
Inorganic that are maybe more tuck in possibilities do you see.
And the environment out there potential too.
<unk>.
Wire or.
Tuck in.
Yes.
The settlements.
Yes, I mean, if you listen to.
Yes.
The loan Servicers that have reported their earnings already this quarter and those all of those servicers that reported their earnings last quarter and their last quarters earnings first quarter earnings calls.
Everyone is talking about the very large amount of portfolios that are available in the market.
For sale.
And some of those some of those portfolios and platforms include our fee based businesses.
Side of them and so we think there are some opportunities.
Our customer.
Our partners be successful in acquiring those portfolios for us to potentially benefit <unk> participate.
And so it seems like Theres a lot of activity short is the short answer.
Now, we'll wait and see how successful our customers are.
Great.
Other than the acquisition of servicing rights from the Servicers.
And the flow through business to you.
Other opportunities that could potentially be taking share to acquisitions.
Yes, I mean look default services market.
Yes, we always keep our eyes open we're very focused of course on on.
Organically growing our revenue being very aggressive in terms of managing our expenses benefiting from the market to come back, but sure like we will absolutely keep our eyes open for other opportunities if they make sense and.
For the company.
Great great.
Thanks for answering my questions I'll take it offline. Thank you alright, thanks Raj.
Thank you as a reminder to ask a question. Please press star one on your telephone.
At this time I'm showing no further questions I would now like to turn the conference back to Bill ship ROE for closing remarks.
Great. Thank you operator, and thanks for joining the call and we appreciate everyone's support take care.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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