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| ASPS > SEC Filings for ASPS > Form 10-Q on 26-Apr-2012 | All Recent SEC Filings |
26-Apr-2012
Quarterly Report
When we refer to "we", "our", "the Company" or "Altisource", we mean Altisource Portfolio Solutions S.A. and its consolidated subsidiaries.
Management's discussion and analysis of financial condition and results of operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of management on our businesses, current developments, financial condition, results of operations and liquidity. Our MD&A should be read in conjunction with the 2011 Annual Report on Form 10-K. Significant sections of the MD&A are as follows:
Overview.This section, beginning on page 18, provides a description of recent developments we believe are important in understanding the results of operations and financial condition or in understanding anticipated future trends, and it also provides a brief description of significant transactions and events that affect the comparability of results being analyzed. In addition, we describe our plans for growth.
Consolidated Results of Operations. This section, beginning on page 22, provides an analysis of our consolidated results of operations for the three months ended March 31, 2012 and 2011.
Segment Results of Operations. This section, beginning on page 23, provides an analysis of each business segment for the three months ended March 31, 2012 and 2011. In addition, we discuss significant transactions, events and trends that may affect the comparability of the results being analyzed.
Liquidity and Capital Resources. This section, beginning on page 30, provides an analysis of our cash flows for the three months ended March 31, 2012 and 2011. We also discuss restrictions on cash movements, future commitments and capital resources.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q regarding anticipated financial outcomes, business and market conditions, outlook and other similar statements related to Altisource's future financial and operational performance, are "forward looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements may be identified by the use of terminology such as "may," "will," "should," "expect," "intend," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue" or the negative of these terms and other comparable terminology. Forward-looking statements are not guarantees of future performance and involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially. The following are examples of such items and is not intended to be an all-inclusive list:
• assumptions related to the sources of liquidity and the adequacy of financial resources;
• assumptions about our ability to grow our business;
• assumptions about our ability to improve margins;
• expectations regarding collection rates and placements in our Financial Services segment;
• assumptions regarding the impact of seasonality;
• estimates regarding the calculation of our effective tax rate; and
• estimates regarding our reserves and valuations.
Important factors that could cause actual results to differ materially from those suggested by the forward-looking statements include, but are not limited to, the risks discussed in the "Risk Factors" section of our Form 10-K for the year ended December 31, 2011 and include the following:
• our ability to retain and expand our existing customers and attract new customers;
• technology failures;
• our business is dependent on the trend towards outsourcing; and
• governmental regulations, taxes and policies.
We caution you not to place undue reliance on these forward-looking statements which reflect our view only as of the date of this report. We are under no obligation (and expressly disclaim any obligation) to update or alter any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any such statement is based.
OVERVIEW
Our business
We are a provider of services focused on high-value, technology-enabled, knowledge-based solutions principally related to mortgage and real estate portfolio management, asset recovery and customer relationship management.
We classify our business into the following three reportable segments:
Mortgage Services: Provides services that span the mortgage lifecycle and are typically outsourced by loan servicers and originators. We provide these services primarily for loan portfolios serviced by Ocwen. We also have longstanding relationships with some of the leading capital markets firms, commercial banks, hedge funds and insurance companies. Within the Mortgage Services segment, we provide the following services:
Asset management - Asset management services principally include property preservation, property inspection, real estate owned ("REO") asset management, our consumer real estate portal and REO brokerage operations. We plan to provide asset management services for REO rental properties in the future.
Residential property valuation - Residential property valuation services principally includes traditional appraisal products through our licensed appraisal management company and alternative valuation products primarily through our network of real estate professionals. We generally provide these services for loan servicers and mortgage bankers.
Closing and insurance services - Closing and insurance services principally includes an array of title search, closing and title agency services including document preparation, pre-foreclosure and REO title searches, escrow and title insurance, and other insurance related services applicable to residential loan servicers. We plan to provide closing and title agency services on newly originated loans in the future.
Default management services - Default management services principally provides foreclosure trustee services for loan servicers and non-legal processing and related services for and under the supervision of foreclosure, bankruptcy and eviction attorneys.
Origination management services - Origination management services principally includes the MPA operations, a business we acquired in February 2010, our contract underwriting business and our developing loan fulfillment business. MPA serves as the manager of Lenders One, a national alliance of independent mortgage bankers that provides its members with education and training along with revenue enhancing, cost reducing and market share expanding opportunities. We provide other origination related services in the residential property valuation business. In addition, some of the origination related reseller businesses, including the flood certification business, are included in the Technology Services REALSuite business.
Financial Services: Provides collection and customer relationship management services primarily to debt originators and servicers (e.g., credit card, auto lending, retail credit, mortgages) and the utility and insurance industry. Within the Financial Services segment, we provide the following services:
Asset recovery management - Asset recovery management principally provides post-charge-off consumer debt collection services on a contingency basis.
Customer relationship management - Customer relationship management provides customer care and early stage collections services. In addition, customer relationship management provides insurance and claims processing, call center services and analytical support.
Technology Services: Comprises our REALSuite TM of applications as well as our IT infrastructure services. We only intend to provide our IT infrastructure services to Ocwen, Home Loan Servicing Solutions ("HLSS TM"), Correspondent One and ourselves. The REALSuite platform provides a fully integrated set of software applications and technologies that manage the end-to-end lifecycle for residential and commercial mortgage loan servicing including the automated management and payment of a distributed network of vendors. A brief description of the key REALSuite software products is below:
REALServicing® - an enterprise residential mortgage loan servicing product that offers an efficient and effective platform for loan servicing including default administration. This technology solution features automated workflows, a dialogue engine and robust reporting capabilities. The solution spans the loan servicing lifecycle from loan boarding to satisfaction including all collections, payment processing and reporting. We also offer REALSynergy®, an enterprise commercial loan servicing system.
REALTrans® - a patented electronic business-to-business exchange that automates and simplifies the ordering, tracking and fulfilling of vendor provided services principally related to mortgages. This technology solution, whether web-based or integrated into a servicing system, connects multiple service providers through a single platform and forms an efficient method for managing a large scale network of vendors.
REALRemit® - a patented electronic invoicing and payment system that provides vendors with the ability to submit invoices electronically for payment and to have invoice payments deposited directly to their respective bank accounts.
With the deployment, beginning in the third quarter of 2012 and continuing through 2013, of our next generation technologies to support our mortgage services businesses, we will be more cost effective and efficient at not only providing higher quality mortgage related services for Ocwen, but for other customers as well. Once fully deployed, it will also enable the Financial Services business to gain market share in its very large markets. The tools applicable to our Financial Services segment include our optimal resolution model and our vendor, business process management, dialogue and invoice payment and presentment technologies. Through the use of these tools and technologies, we believe we can improve our customers' profitability, reduce our hiring, training and compliance costs, scale our operations faster and, at the same time, create stickier customer relationships across higher valued services.
Corporate Items and Eliminations: Includes costs related to corporate support functions including executive, finance, legal, human resources, vendor management, risk and six sigma and also includes eliminations of transactions between the reporting segments.
We classify revenue in three categories: service revenue, revenue from reimbursable expenses and non-controlling interests. In evaluating our performance, we focus on service revenue which consists of amounts attributable to our fee based services. Reimbursable expenses and non-controlling interests are pass-through items for which we earn no margin. Reimbursable expenses consist of amounts that we incur on behalf of our customers in performing our fee based services, but we pass such costs directly on to our customers without any additional markup. Non-controlling interests are the earnings of Lenders One, a consolidated entity that is not owned by Altisource. It is included in revenue and reduced from net income to arrive at net income attributable to Altisource.
Stock repurchase plan
In May 2010, our shareholders authorized us to purchase up to 15% of our outstanding share capital, or 3.8 million shares of common stock, in the open market. From authorization through March 31, 2012, we have purchased 2.5 million shares of common stock on the open market at an average price of $37.49 per share (with 0.3 million shares of common stock purchased during the first quarter ended March 31, 2012 at an average price of $63.25 per share) leaving 1.2 million shares available for purchase under the program. On March 9, 2012, our Board of Directors approved a new share repurchase plan which will be presented for approval to our shareholders at the Annual Shareholder Meeting scheduled for May 16, 2012. If our shareholders approve that plan, shares will be eligible for purchase at a minimum price of $1.00 per share and a maximum price of $125.00 per share; and the maximum number of shares authorized to be repurchased will be up to 15% of shares outstanding as of the date of the shareholder approval.
Plans for growth
We separated from Ocwen in August 2009. Since the separation, we believe we have demonstrated that substantial shareholder value can be created through a spin-off. We believe our growth and shareholder value has been primarily built around: (1) the development and subsequent roll-out to Ocwen of new services across the United States and (2) Ocwen's servicing portfolio growth. As we demonstrate our value to Ocwen's leadership team through the effective and efficient provisioning of services, we are able to expand existing services and develop new services that we provide to Ocwen.
We continue to believe that the market opportunity for default related services will remain strong for the next three to five years. However, in order to meet our longer term earnings growth objective, we need to diversify our revenue and customer base. In this regard, we spend meaningful time and resources designing and developing a complementary pipeline of businesses to extend Altisource's earnings growth. Our core capabilities and technologies are the foundation of each newly developed business opportunity we pursue. Our blueprint for the future continues to include providing high quality mortgage servicing related services, significantly expanding our mortgage origination related services for the members of Lenders One and growing our Financial Services and Technology Services segments.
The following provides further information on our growth plans in mortgage origination related services and an opportunity we are pursuing in the residential asset related market.
Mortgage origination related services - To expand our mortgage origination related services, we acquired MPA in February 2010. MPA is the for-profit management company of Lenders One. The acquisition of MPA presents an opportunity to develop, in a manner similar to what we did for Ocwen, a suite of end-to-end mortgage origination related services for the Lenders One members. In 2011, the 214 Lenders One members originated approximately $106 billion dollars in residential loan mortgages, approximately 8% of the residential origination market. We estimate that in excess of $1.5 billion dollars in services were provided to support the loans originated by the members in 2011, a portion of which is influenced by the mortgage originator. Many of the origination related services ordered by the members from others are similar to the servicing and default related services that we provide today.
To further complement our MPA acquisition, and consistent with our plan to expand our originations related services, we acquired an equity interest in Correspondent One in July 2011. Its mission is to acquire, and subsequently sell, high quality, closed loans from Lenders One members. Correspondent One has seen significant, positive environmental changes in the correspondent lending market. There has been a contraction in correspondent lending and the price paid for agency mortgage servicing rights has significantly declined. At the reduced price, Correspondent One believes it is attractive to retain servicing on the closed loans that it acquires and to sell its acquired loans through to the agencies as opposed to only the larger commercial banks (who in-turn sell to the agencies). Correspondent One has started the application process to become an approved seller to one of the GSEs, and it is optimistic that it will be approved. Once approved, Correspondent One believes its competitive position to attractively buy loans from the Lenders One members should improve. This should also help grow Lenders One membership.
Residential Asset businesses - We are establishing residential asset related businesses to support the growing residential single family rental market as we believe there is a significant opportunity that leverages our existing infrastructure and competencies. The single family residential rental market in the United States is a $3 trillion industry, accounting for 52% of all residential rental units. With the continued displacement of homeowners, we believe the demand for single family rentals will significantly increase. Some studies estimate that over four million distressed loans and REO will be converted to rental homes by 2015. Despite the size of the single family rental market, it has received very little attention as most people have historically viewed the industry as extremely fragmented, localized and decentralized. We believe, on the other hand, that there are significant opportunities to consolidate the market by leveraging purchasing, technology and centralized operations and management. We know firsthand, through our ability to establish Altisource as one of the few nationwide single family REO management and property inspection and preservation companies in the United States, that property management can be executed on a national scale. Unlike most property management firms, we are not constrained by the location of the home. We have existing nationwide single family asset management, property inspection and preservation, real estate brokerage and settlement services operations, primarily performed from centralized lower cost locations.
Entering the residential rental market is a complementary extension of our existing service offerings, leveraging our significant economies of scale. As a result, we believe our per unit operating costs are substantially lower than others in the industry. With our operating cost advantage, we believe that we can manage a single family home at a cost similar to an apartment unit managed by a multi-family REIT.
Because of the different capital considerations and the operating metrics associated with owning and renting single family homes, we believe this business is best suited to operate as a separate stand-alone company. In this regard, we have established development-stage residential asset related entities within our Mortgage Services segment, modeled after the Kinder Morgan structure, to own and manage single family rental homes and other related residential asset classes. Altisource will enter into long-term service agreements to provide construction, property management and brokerage services to the new entities.
We believe our lower cost operating structure will allow us to attractively price our services to the residential asset businesses to improve their competitive position in investing in single family rental assets. This in-turn should generate more construction, property management and brokerage business for Altisource. In time, we believe other related residential asset classes could be complementary additions to the residential asset businesses' portfolio. With our Board of Director's support, we have begun the process of spinning off these businesses by establishing separate legal entities and preparing the separation documents to be filed with the SEC. As a stand-alone company, we believe these businesses will generate a stable and attractive return for its investors.
Consumer real estate portal - We are also continuing to develop our consumer real estate portal as we believe there are opportunities to benefit from a shifting consumer preference for on-line transacting. The consumer real estate portal provides an automated, transparent and integrated on-line solution for buying and selling real estate and related services. Like the residential rental business, the market for this business is immense. The 2012 forecast for home sales in the United States is approximately $780 billion. These sales will generate over $40 billion in brokerage commissions annually. The industry is beginning to see a shift in consumer behavior and attitudes toward on-line transacting for homes. In 2011, we sold approximately 20,000 homes through our consumer real estate portal and our revenue has grown to $10.7 million in the first quarter of 2012, compared to $5.2 million in the first quarter of 2011 (the consumer real estate portal is part of our Mortgage Services segment).
Unlike some of the other public and private real estate related websites, our portal is not based on a marketing, informational model. Rather, we are centered on executing real estate transactions. Our objective is to become the premier end-to-end real estate transaction marketplace that seamlessly and efficiently connects home buyers, sellers and real estate service providers for distressed and non-distressed homes. We believe the real estate purchasing and sales market is underserved and consumers will welcome a new product offering transparency, simplicity and lower transaction costs. Using Altisource's next generation technologies, the consumer real estate portal will transform the way real estate services are delivered by providing a unique transaction processing platform that offers an automated, transparent and integrated solution to buy and sell homes and purchase the related services as part of a home buying experience. We will continue to grow this business (leveraging the asset management business and Ocwen's growth, our unique platform and the approximate one million average monthly visitors to our website in the first quarter 2012) to provide transaction support for a growing portion of the in excess of 4 million homes that are typically sold in the United States in a year.
In the medium to longer term, we also intend to explore the possibility of distributing our ownership interest in this business, creating a new public company. The consumer real estate portal has many of the same characteristics as some of the other publically traded real estate related technology companies. Similar to these companies, we believe that we can create greater shareholder value with the portal operating as a separate stand-alone business. As a stand-alone company, the portal would have a singularly focused management team and the performance of the business would be easier to compare with like companies.
With regard to the residential asset businesses and the consumer real estate portal, there is no certainty at this time that the separations will actually occur. Further, the consummation of any spin-off or similar transactions will be subject to our reaching satisfactory conclusions with our financial, tax and legal advisors on all applicable issues and the receipt of any necessary approvals.
Factors Affecting Comparability
The following additional items may impact the comparability of our results:
• On average, Ocwen serviced 0.7 million loans for the three months ended March 31, 2012 compared to 0.5 million loans for the three months ended March 31, 2011.
• In April 2011, we acquired Springhouse, an appraisal management company that utilizes a nationwide panel of appraisers to provide real estate appraisals principally to mortgage originators, including the members of Lenders One, and real estate asset managers.
• In July 2011, we acquired the assembled workforce of a sub-contractor in India that performed asset recovery services.
• Throughout 2011, we repurchased 1.6 million shares of our common stock under our stock repurchase program, and during three months ended March 31, 2012, we purchased 0.3 million shares of our common stock under the program.
• In the first quarter of 2012, we increased our employee levels in anticipation of loans to be boarded by Ocwen. The boarding is expected to occur throughout the second quarter of 2012.
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