Altisource Portfolio Solutions (NASDAQ:ASPS) Q4 2021 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by and welcome to the Altisource 4th Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your speaker, Michelle Esterman, Chief Financial Officer. Please go ahead.

0:35 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.althysource.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 Althysource. 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.

1:27 We undertake no obligation to update these 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'll now turn the call over to Bill.

2:05 Thanks, Michelle. Good morning and thank you for joining today's call. I'll begin on slide three. Altasource 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 PointList. 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 2021 beginning in the third quarter.

2:54 The growth reflects the anticipated tailwinds in 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 the expected revenue growth, and benefit of our prior cost reduction initiatives, we anticipate we'll 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. 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.

3:42 Fourth quarter net income of $70.6 million benefited from the gain on sale of Pointalyst. On December 1st, we completed the sale of our equity interest in Pointalyst 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 a majority to be received in December. This sale was a big win for Altasource, 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 tailwinds from the expiration of the foreclosure moratoriums and temporary loss mitigation measures.

4:56 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 mid-sized banks, credit unions and independent mortgage bankers that are members of the LendersOne Cooperative improve their profitability and better compete. We believe this mission strongly resonates with our LendersOne 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 LendersOne 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 ordered during the loan manufacturing process.

5:44 We also launched the LendersOne loan automation technology, which we refer to as Lola, following a successful beta launch. Lola makes it easier for LendersOne 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 for growth of the number of LendersOne members, should support full-year double-digit revenue growth in the origination business, despite the MBA's 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. Keep in mind that the LendersOne 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.

6:51 Turning to Slide 7 and our default business. Since early 2000, this business has been severely impacted by the pandemic, as temporary foreclosure moratoriums and loss mitigation measures significantly reduced referrals to AltaSource despite higher delinquency rates. Recently, however, we believe that the default market is entering the early innings of a recovery. The federal government's pandemic-related foreclosure moratorium 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 in several of our default businesses.

7:43 HUBZU referrals in the fourth quarter were 158% higher than the same quarter in 2020 and ending HUBZU inventory of over 6,300 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, pre-foreclosure title, and HUBZoo referrals, with these businesses growing referrals by 57%, 22%, and 217%, respectively, over the same two months last year. The growth in HUBZoo 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 expiration 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.

8:40 We also have insight into which of our solutions should begin to grow earlier in the recovery process and which should take longer. Slides 8 and 9 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 REO referrals, we typically first generate field services revenue and at the home sale generate title insurance, real estate brokerage, and auction fees.

9:27 Because REO inventory was depleted during the pandemic and the sale of REO is the last step in the default process, we anticipate that it will take time for our REO inventory levels to return to a normal operating level. We currently estimate that we'll be in a normal post-pandemic operating environment by the middle of 2023. A driving factor of revenue in our default business is delinquency levels. December 2021 90-plus day delinquency rates were 2%, a 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.

10:16 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 businesses, we forecast Altasource 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.

11:01 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 interests 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.

11:47 In addition to market tailwinds in 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 Altasource's 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'll now open up the call for questions. Operator? Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question will come from Mike Grondle with Northland Securities.

12:32 Please go ahead.

12:36 Yeah, good morning, guys. First question 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, maybe ahead, maybe a little bit behind? What should our takeaway from January and February be?

13:05 So I think in those three businesses, foreclosure, auction referrals, trustee, and valuation, it was in line with or slightly better than we were expecting for those first two months. Again, the first, when the foreclosures get restarted or new foreclosures are initiated, these are the first services that you would expect to receive, and that's what we planned for in our budget for this year. and the numbers were better than we budgeted but roughly in line with our expectations.

13:47 Over the past couple of years, you've right-sized the cost structure. Would you now say that the cost structure you have in place is pretty much where you need to be and you're just kind of waiting for the recovery in the volume of the business. Is there anything to call out on the cost structure? And then kind of related to that, let me just ask part two. So what are you thinking about from a cash generation or a cash usage in 22, kind of related to that cost structure question?

14:34 Yeah. So on the cost structure, I think, as I said in the prepared remarks, we've took our sort of 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's some modest improvement in our plan on those numbers this year, Mike, but I wouldn't say it's very significant. It's really all about growing the top line, improving the gross profit margins, and 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'll turn the corner and generate positive cash in the fourth quarter. and what you'll typically see at Altasource is the first quarter is a bigger cash consumer for a couple of reasons.

15:31 In many cases, you're prepaying some of your contracts for the year in the first quarter. You've got bonuses in the first quarter and our EBITDA 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 anticipate it will be modestly better than the fourth quarter, but it still is too early to tell with only our books closed for the first month of the year. Got it.

16:17 Overall for the year, you'll use a little bit of cash? Is that the way to think about it?

16:23 We're still anticipating that we're going to use cash, Mike. I think you'll see we'll 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 come down. Michelle, correct me if I'm wrong. Again, it's tricky to forecast because we're still waiting to see how everything comes out of the pandemic. and growing at the end of the year as well.

17:03 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 a million and a half Did that represent Pointless before you sold it, or is there another earlier stage business that's generating those small losses?

17:30 That was Pointless.

17:32 Pointless. Okay, great.

17:34 Hey, thanks a lot. Thanks, Mike. Thank you. As a reminder, if you would like to ask a question, please press stars and one. We do have a question from Raj Sharma with B. Riley. Please go ahead.

17:50 Thank you. Yeah, so could you comment on how – I know on slide 10 here you've given the range of service revenues in 214 to 237. Could you quantify a little bit how field services and HUBZoo and origination business is going to break out this sort of same sort of Do you expect a pickup in HubZoo's second half of the year? Could you give some more color on that?

18:30 Sure. Just with respect to HubZoo, we are seeing a pickup in the first quarter because the inflows were strong in the fourth quarter and the inventory is strong. So we are seeing a pickup in the first quarter on HUBZoo 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-perform, 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, you know, as you look out a year or so, I don't have that in front of me.

19:19 I don't know if you have any color you could add there.

19:23 Yeah, I think so what's included here, you mentioned field services and HUBZoo. Those are part of the default businesses. And then the origination business is not included in here. This is just default.

19:38 But in terms of, Raj, I think what we're expecting to see is as In the early stage, you're 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. REO referrals are picking up to some degree because, if you recall, foreclosures that were in process have restarted. So those in-process foreclosures are becoming REO. it's growing but not growing tremendously because really where that growth is going to come are 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.

20:33 Even what we're hearing sort of anecdotally you know some servicers are starting up faster than others so in January we have seen a A meaningful increase in referrals, but we also understand that getting the machinery going 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.

21:04 So if I understand that correctly, the field services and marketplace, which is HUBZoo, They were 108 million in 2021. They're looking to more than double in the midpoint. Stabilization.

21:21 Yes. This year. That's the midpoint of 2023. The middle of 2023 is when we reach the stabilization.

21:34 And where do you expect the originations business? How much do you expect that to grow?

21:38 So I think we're just in our prepared remarks, Raj. We're saying we anticipate the double-digit growth over last year in a market that's going to be down 34%.

21:47 And I thought just to give you some sense, we launched a TriMerge credit product.

21:55 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'm excluding any customer that said we haven't gotten an outright no. We've gotten some customers that said it's 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 have now moved down the sales funnel to evaluation, that's another $12.7 million. We're getting close to $30 million of annual revenue that's either been committed, contract signed, committed, or at the point where they're evaluating.

22:46 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.

23:08 And that's what's going to help us grow when the market is declining. Got it. And then, you know, when we look at the market overall, we see, you know, the mortgage numbers foreclosure starts January was up seven times from December. How do we translate that into your results and the lag? Could you talk about, you know, when do, how do we Look at your business relative to the market in terms of the market share. Is your market share still stable? And could you give some color on that?

23:53 Yeah, 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 10. It's all just a matter of timing before we get to the stabilized rate of that $214 million if you go to pre-pandemic delinquency rates. I think that's the best way to think about it, Raj.

24:21 Right. When you look at the foreclosure starts, apparently half of those are from serious delinquencies prior to the pandemic, and the other half are from March 2020 onwards. Is your business representative of that ratio, too, on the foreclosure starts?

24:47 Raj, 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 we – The restarts began in, I would say, probably even though they could have restarted in the third quarter, a lot of servicers were super 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 that's why I think we saw a decent amount of HUBZoo referrals, both REO and foreclosure referrals. and then the increase we saw in the first quarter on those statistics I quoted, most of that is coming from new foreclosure initiations.

25:37 All right. Thank you for answering my questions. Thank you for asking my questions to get 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 Mr. Bill Shepro for any closing remarks.

25:59 Great. Thank you, Operator, and thank you for listening to today's call. We really appreciate your interest in Altasource. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Thank you.