Altisource Portfolio Solutions S.A. (NASDAQ:ASPS) Q1 2024 Earnings Call Transcript

Altisource Portfolio Solutions S.A. (NASDAQ:ASPS) Q1 2024 Earnings Call Transcript April 25, 2024

Altisource Portfolio Solutions S.A. beats earnings expectations. Reported EPS is $-0.2, expectations were $-0.26. Altisource Portfolio Solutions S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the Altisource Portfolio Solutions First Quarter 2024 Earnings Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Michelle Esterman, Chief Financial Officer.

Michelle Esterman: 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.altisource.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. Financial projections and scenarios are expressly qualified as forward-looking statements and as with other forward-looking statements should not be unduly relied upon. In addition to the usual uncertainty associated with forward-looking statements, the continuing impacts of government and servicer responses to the COVID-19 pandemic, government of fiscal policies, and current economic conditions make it extremely difficult to predict the future state of the economy and the industry in which we operate as well as the potential impact on Altisource.

Please review the forward-looking statements sections in the company’s earnings release and quarterly slides as well as the risk factors contained in our 2023 Form 10-K describing some factors that may lead to different results. We undertake no obligation to update statements, financial scenarios, and projections previously provided or 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 Shepro, our Chairman and Chief Executive Officer.

I will now turn the call over to Bill.

Bill Shepro: Thanks, Michelle, and good morning. I’ll begin on Slide 4. I’m very pleased with our first quarter performance. We generated $4.6 million of adjusted EBITDA, marking our best quarterly performance since the third quarter of 2020 on $36.9 million of service revenue. We believe our financial results and sales wins demonstrate that we are not waiting for the default market to return to normal or for delinquency rates to rise to achieve growth. We improved adjusted EBITDA by more than $30 million over the last two calendar years in an incredibly difficult environment of low origination volume coupled with close to historically low mortgage delinquency rates. For 2024, in what continues to be a difficult environment, we forecast that we will grow revenue by 23% and adjusted EBITDA by $21 million compared to last year at the mid-point of our guidance.

If achieved, this represents an adjusted EBITDA improvement of approximately $52 million over the three-year period. For the balance of this year, we anticipate quarter-over-quarter service revenue and adjusted EBITDA growth compared to the same quarters in 2023, as we continue to ramp sales wins and win new business on a lower cost base. And as the default market returns to normal and origination volumes increase, Altisource should benefit even more. In our Servicer and Real Estate segment, we are winning market share. Of the three exciting Servicer and Real Estate pipeline opportunities, I discussed with you last month, we entered into agreements with two, one in March, and one this month. We anticipate signing a third agreement this quarter.

In our Origination segment, we are increasing adoption of our solutions that help originators save money. During the quarter, we signed another 13 agreements for our tri-merge credit product and related reseller services. We are already seeing the benefit of our growth initiatives and believe this will be reflected in our financial results as the year progresses. I’ll discuss our sales progress and pipeline in more detail in a few minutes. Slide 5 provides additional information on our financial performance and trends. Total company service revenue grew 15% compared to the fourth quarter of 2023, with 11% growth in the Servicer and Real Estate segment and 30% in the Origination segment. Compared to the first quarter of 2023, total company service revenue was almost flat, driven by growth in the Origination segment offset by a decline in the Servicer and Real Estate segment from an estimated $1 million of one-time revenue in March 2023.

Company-wide adjusted EBITDA of $4.6 million, was $4.4 million higher than the fourth quarter and $3.2 million higher than the first quarter 2023 and represents 23% of the mid-point of our 2024 guidance we provided on our fourth quarter call. Adjusted EBITDA margins expanded to 12.6% in the first quarter of 2024, compared to 0.7% in the fourth quarter of 2023 and 4% in the first quarter of 2023. First quarter 2024 total company adjusted EBITDA included an estimated $600,000 in non-recurring net benefits and first quarter last year included an estimated $2.1 million in non-recurring net benefits. Total company improvement was driven by margin expansion in both of our segments and lower corporate costs. Over the last couple of years, we have provided you with a run rate scenario to demonstrate what Altisource’s run rate revenue and adjusted EBITDA could look like in a normal pre-pandemic default operating environment while holding the Origination segment constant.

While we believe that our 2024 guidance takes a conservative approach to the recovery of the default market, we also believe the market will return to a more normal environment in time. Loans originated over the last couple of years after a massive increase in home values, generally don’t have the same level of home equity compared to loans originated before then. In addition, FHA loans are typically originated with only 3% down, providing a much lower equity cushion even with home price appreciation over the last several years. Of course, we are not waiting for the market to recover to seek to grow our business. We have a strong suite of solutions that we believe support both the Servicer and Origination markets and are winning new business.

To help you understand the magnitude of the revenue and earnings opportunity from our sales wins in both segments, we are providing a financial scenario on Slide 6. The scenario annualizes and adjusts our first quarter performance to exclude non-recurring items and adds estimated fully ramped service revenue and adjusted EBITDA related to business we have already won, net of an assumed level of churn. As you can see on the slide, ramping estimated revenue from existing sales wins at estimated EBITDA margins could increase first quarter 2024 annualized service revenue from $147 million to $219 million and adjusted EBITDA from $16 million to $35 million. This doesn’t assume any further wins from our current sales pipeline, a normal default operating environment, revenue from the launch of new Lenders One solutions, an increase in delinquency rates nor a return to a higher level of Origination volume.

We’ve made tremendous progress winning new business and improving our operational efficiency in a tough market. We believe this scenario illustrates the bright future ahead for Altisource as we ramp our sales wins with additional growth potential. Slide 7 provides additional information on our Servicer and Real Estate segment. First quarter 2024 service revenue in this segment was 11% higher than the fourth quarter of 2023 and 2% lower than the first quarter of 2023. If you exclude the estimated $1 million of non-recurring revenue from the first quarter of last year, revenue for the first quarter of this year would have been modestly higher than the first quarter of last year. We continue to experience growth in certain higher margin businesses that support the earlier stage of the default process.

Adjusted EBITDA of $10.4 million was 21% higher than the fourth quarter of 2023 and 6% lower than the first quarter of last year. Adjusted EBITDA margins were 35.8% in the first quarter of 2024 compared to 32.9% in the fourth quarter of 2023 and 37.4% in the same period last year. The improvement compared to last quarter reflects our efficiency initiatives, partially offset by an estimated $600,000 in net non-recurring expenses in the first quarter of this year. First quarter 2023 margins were modestly higher from an estimated $1 million of prior year non-recurring revenue, the majority of which increased adjusted EBITDA and the estimated $600,000 of current year net non-recurring expenses I just discussed. Slide 8 provides a summary of our Servicer and Real Estate sales wins and pipeline.

For the quarter, we won new business that we estimate will generate $6.3 million in annual revenue on a stabilized basis over the next couple of years. Last quarter, I highlighted three larger late stage opportunities in the pipeline. Toward the end of the first quarter, we signed the agreement to provide REO auction services for a loan servicer. In April, we signed an agreement to provide foreclosure trustees services for a loan servicer and anticipate signing the second trustee agreement this quarter. We have completed the onboarding process for both wins and began receiving referrals this month. These wins represent an expansion of services that we provide to existing customers. We also made progress ramping sales wins from 2023. In the fourth quarter of 2023, we signed agreements to provide REO renovation services for one of the larger owners of REO assets.

We received our first renovation referrals last week. We anticipate referral volume from this customer will ramp as the year progresses. Another fourth quarter win was an expansion of wallet share with an existing customer in our higher margin trustee business. We started to receive an increase in referrals in January, which continued to grow through the quarter. We anticipate these referral volumes to ramp through the summer and stabilize thereafter. We ended the quarter with a total weighted average sales pipeline of $26.7 million of annual revenue on a stabilized basis, most of which we forecast will impact 2025 and beyond. The decline in the sales pipeline compared to last quarter primarily reflects our sales wins. Turning to the macroeconomic environment in Slide 9.

As we discussed on our call in March, we continue to believe that there are early signs of consumer financial stress and that these could be precursors to a rise in mortgage delinquency rates. Moving to our Origination segment in Slide 10. Our Origination segment performed very well, despite the 6% decline in industry-wide residential origination volume in the first quarter compared to the fourth quarter of 2023, the Origination segment outperformed the market with service revenue growth of 30% and an adjusted EBITDA improvement of $900,000 to $500,000. We also grew service revenue by 7% and adjusted EBITDA by $1.2 million compared to last year. Revenue growth was driven by customer wins from our newer solutions and price increases in the Lenders One business.

Adjusted EBITDA improved from revenue growth and cost savings and efficiency initiatives. As you can see on the slide, the Origination segment’s gross profit, gross profit margins, adjusted EBITDA, and adjusted EBITDA margins all improved relative to prior quarters. Slide 11 provides a summary of our Origination segment sales wins and pipeline. We continue to focus on helping our Lenders One members save money and better compete. This is driving substantial interest in our solutions. On an annualized stabilized basis, we won an estimated $4.2 million in new business in the first quarter. Our weighted average sales pipeline at the end of the quarter was $13.9 million. We are excited about our progress in the Origination segment. During difficult times, lenders are more diligently examining their costs and we are winning a lot of new business as a result.

With sustained low origination volumes, we have been provided an attractive window of opportunity. We expect to benefit from this growth both today and even more when origination volumes return to more normal levels. Additionally, we continue to focus on rolling out new solutions to help our Lenders One members make more money. We believe the regular launch of new solutions to Lenders One members combined with greater adoption of our existing solutions will strengthen our value proposition for Lenders One members and support further revenue and earnings growth in our Origination segment. Turning to our Corporate segment in Slide 12. We continue to bring down our operating costs. First quarter 2024 corporate adjusted EBITDA loss of $6.3 million was $1.8 million, or 22% better than the fourth quarter of 2023 and $2.7 million, or 30% better than the first quarter of 2023.

The first quarter 2024 results included an estimated $1.2 million of net non-recurring benefits and the first quarter of 2023 included an estimated $1.3 million of non-recurring benefits. Absent these benefits, first quarter 2024 adjusted EBITDA loss in corporate was 4% better than the fourth quarter 2023 and 25% better than the first quarter 2023. The lower adjusted EBITDA loss also reflects our cost savings and efficiency initiatives. Moving to Slide 13. In summary, I’m pleased with our first quarter performance. We continue to win meaningful new business and are making good progress ramping 2023 sales wins in a historically difficult market. As a result, we anticipate that we will generate quarterly year-over-year service revenue and adjusted EBITDA growth compared to the same quarters in 2023 for the balance of the year.

We believe we are also on track to achieve 13% to 32% service revenue growth over 2023 and adjusted EBITDA of between $17.5 million and $22.5 million in 2024. If achieved, this represents an adjusted EBITDA improvement of approximately $52 million over a three year period. I’ll now open up the call for questions. Operator?

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