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Altisource Portfolio Solutions SA  (NASDAQ:ASPS)
Q3 2019 Earnings Call
Oct. 24, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Altisource Third Quarter 2019 Earnings Conference Call. At this time, all participants' lines are in a 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 [Operator Instructions]

I would now like to hand the conference over to your speaker today, Ms. Michelle Esterman, Chief Financial Officer. Thank you. Please go ahead ma'am.

Michelle Esterman -- Chief Financial Officer

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. Please review the forward-looking statements section in the company's earnings release, quarterly slides and Form 10-Q as well as the risk factors contained in our 2018 Form 10-K, which describe factors that may lead to different results.

We undertake no obligation to update these statements as a result of new information or feature events. During this call, we will present both GAAP and non-GAAP financial measures. In our earnings release and quarterly slides, you'll 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, Altisource's Chairman and Chief Executive Officer. I would now like to turn the call over to Bill.

William B. Shepro -- Chief Executive Officer

Good morning and thank you for joining today's call. During the third quarter, we made good progress with our core businesses, while continuing to streamline the company. Were it not for the temporary financial impact, we continued to experience from Ocwen's transition to a new servicing system, the third quarter would have been business as usual.

This morning I'll discuss our financial performance, ongoing focus on streamlining Altisource and progress we are making on growing our core businesses. As you can see on slide 5, we generated $0.25 of adjusted diluted earnings per share and $4.4 million of adjusted pre-tax income on $133.8 million of service revenue. Service revenue was lower than the second quarter for three primary reasons. We sold the majority of the Buy-Renovate sell assets in the second quarter and the financial services business on July 1. REALservicing license fees declined as a result of Ocwen servicing system migration and Ocwen servicing system migration continued to have a temporary negative impact on default related referral volume and REO inventory conversion rates.

We estimate that the lower REO inventory conversion rates reduce third quarter revenue by approximately $7.8 million. Pretax earnings were negatively impacted by a similar amount since our cost structure would have supported this anticipated revenue. Absent this impact, we estimate that our third quarter adjusted operating income margin would have been greater than 11%. We believe the lower conversion rates are a timing item and anticipate returning to normal conversion rates over the course of the next couple of quarters.

We use cash from the sale of financial services business and the sale of RESI shares to repay $39 million of debt during the quarter. We also used $6.7 million to repurchase Altisource shares and a nominal $270,000 for capex. We anticipate that our capex requirements will remain low and we plan to continue to reduce debt and repurchase shares. We estimate that cash from operations would have been $27 million higher if it were not for the temporary revenue and receivables impact Ocwen servicing system migration had on us.

We ended the quarter with $107 million of cash and marketable securities and net debt, less marketable securities of $187 million. Our earnings released in 10-Q provide a detailed discussion of our operating results compared to last year.

Turning to slide 6 in our scenarios. Adjusted earnings per share for the first three quarters of the year at 63% of the midpoint of our scenarios. We currently anticipate that we will end the year at the low end of the range of our EPS scenarios due to the timing of the recovery from the impact of Ocwen servicing system migration that I just discussed.

With our strategic focus and progress we are making on streamlining Altisource and diversifying and growing our revenue base, we believe we will have a concentrated group of very attractive businesses that operate in large markets. Slide 8 highlights the progress we've made in streamlining Altisource. Since July of last year, we sold our rental property management business, financial Services business, BRS inventory and a portion of the RESI stock. We used proceeds from these sales to repay $110 million of debt. We also created a separate Pointillist entity, which we anticipate will position it to raise equity capital and in October began winding down in closing the Owners.com business.

During the first three quarters of 2019, Owners.com and Pointillist generated a combined $19 million of losses and we invested an additional $8.5 million of cash into Pointillist when we moved into a separate entity. With the closing of Owners.com and the separation of Pointillist, we are eliminating the cash burn associated with these earlier stage businesses.

We are optimistic that Pointillist will raise equity capital from others in 2020 and provide an attractive exit for Altisource in the future. The company has an option, but no ongoing obligation to participate in Pointillist future funding rounds. We also made very good progress on boarding customers and growing revenue from customers other than Ocwen and NRZ in our core businesses, which are field services, marketplace and mortgage and real estate solutions.

As you can see on slide 9, third quarter revenue was 16.5% higher than the second quarter and 12.3% higher than the same quarter last year. We anticipate this trend on the seasonally adjusted basis to continue. Slide 10 highlights progress with select customers. We had a strong quarter of client program launches and have a solid pipeline of new business scheduled to launch later this year and the first quarter of next year.

During the quarter, we began receiving Field Service referrals in 10 states from a top 5 servicer. We believe we are one of the few vendors engaged by this customer in these states. We began receiving REO auction referrals from a top tier, non-bank specialty servicer, in the third quarter. We expanded our REO field services engagement with the bank servicer to also include pre-foreclosure field services, referrals. In the fourth quarter, we anticipate launching pre and post foreclosure field services for a portion of the portfolio of an existing customer, which is one of the largest institutional real estate and mortgage investors in the US. In the first quarter of 2020, we expect to begin receiving FHA foreclosure auction and field service referrals from the existing top 25 servicer client. Several of these program launches are with existing customers and demonstrate our ability to expand relationships based upon performance and our scalable suite of services. With a longer term benefits, we anticipate from streamlining the company and the diversification and growth of our revenue base, we believe that Altisource represents an attractive entry point for investors interested in countercyclical businesses.

We are one of the largest providers of residential field services, one of the largest online residential real estate auction providers and the manager of the lenders One Cooperative, whose members collectively represent more than 15% of the residential loan origination market. In a declining delinquency environment, we're winning the fault-related business and continuing to develop a very attractive and growing customer base with some of the largest servicers and a GSE. We also have a large customer base of middle market residential loan originators, which includes members of the lenders one cooperative.

We believe with our market position and scale, we are in a strong position to grow both our default and origination related businesses and convert our attractive pipeline of opportunities to wins. When delinquencies rise, we should also benefit from more volume from our attractive customer base.

Before opening the call for questions, I would like to recognize a founding member of Altisource's leadership team. As you may have seen from our recent 8-K filing, Kevin Wilcox, our Chief Administration and Risk Officer is leaving the company following a transition period. Kevin will always be a friend of the firm and I'd like to thank him for his leadership, commitment and many contributions to Altisource. Kevin built a very strong bench of talent in his organization and I'm confident this team will continue to build on the work Kevin has done.

I'd now like to open up the call for questions. Operator?

Operator

[Operator Instructions] Our first question comes from Lee Cooperman with Omega Family Office. Your line is now open.

Lee Cooperman -- Omega Advisors -- Analyst

Just want to get, I could not locate your a supplement, but what is the earnings guidance that you put into the supplement?

William B. Shepro -- Chief Executive Officer

So, in the -- hi, Lee. Good morning. On page -- page six is our scenarios. And what we said is we anticipate given the impact from Ocwen servicing system migration, Lee, that will be on the lower end of the adjusted EPS on page six.

Lee Cooperman -- Omega Advisors -- Analyst

Which is what, I can't find the supplement?

Michelle Esterman -- Chief Financial Officer

Looking, give me a second. $1.59.

Lee Cooperman -- Omega Advisors -- Analyst

$1.59, any comment about 2020.

William B. Shepro -- Chief Executive Officer

Yes. So, when we think about 2020, I'd like, there's some puts and takes, we've closed some businesses, we've sold some businesses, but at the same time we're also going to get some savings from moving to the cloud about $8 million to $10 million moving our data center to the cloud. We've eliminated or eliminating the earlier stage -- the losses in the earlier stage businesses, which was a pretty large number of this past year. And we think we're going to keep growing Ocwen and NRZ. So with the puts and the takes, we're still finalizing a lead numbers for next year. So, this is very preliminary. We think we can largely offset a lot of the -- those declines with the savings and new business.

Lee Cooperman -- Omega Advisors -- Analyst

We do expect to have a better year or worst year or about a flat year?

William B. Shepro -- Chief Executive Officer

So, look, we're still, it's very preliminary. We haven't finalized our numbers for last year as you can imagine. We've made a lot of changes at Altisource including over the last couple of months. So, we're still finalizing next year. But look, when I look at a preliminary, we think we can do something similar even after selling off some of those businesses.

Lee Cooperman -- Omega Advisors -- Analyst

Okay. The second question on this Pointillist, which I don't really know much about. You're looking to raise equity capital. Why are we doing that? You're buying stock back every quarter. So miss me, we have excess capital. Why are we taking capital from the outside, rather than using our own money? I assume the capital coming on from the outside would probably be more expensive than your own capital.

William B. Shepro -- Chief Executive Officer

Yeah. So, Lee the way we think Pointillist is a sort of a fintech SaaS business model and we think it would benefit -- it would benefit quite a bit from bringing in seasoned venture firms that have an expertise in this type of product. They could help us in that.

Lee Cooperman -- Omega Advisors -- Analyst

So, not so much looking for their money, you are looking for their expertise.

William B. Shepro -- Chief Executive Officer

Yes. They can help us develop business, they can help us grow the business.

Lee Cooperman -- Omega Advisors -- Analyst

Okay. Okay. I get that. Okay. And then lastly, you guys had been a persistent buyer of your own stock and the results have continued to disappoint. What do you think you're buying back when you buy your shares? As you step back in the Board room and your Board goes along with this buy back, forget about what we did at over $100 a share, but in the last few years, the results are consistently disappointed and you persistently continue to buy back stock. So what do you think you're buying back when you buy back stock? I think you owe an explanation to shareholders. You've chosen not to pay a dividend and you keep buying back stock. What's the value of the company in your view that you are buying back?

William B. Shepro -- Chief Executive Officer

Yes. We believe we've got a set of really attractive businesses. The three businesses we're in Lee and we believe they have strong growth prospects. And if you look at, we're starting to get to see the benefit from our sales efforts and the new customers we brought on this quarter with very attractive growth in all three of our core businesses, both sequentially and year-over-year. And we think it's going to continue next quarter and into next year. So we're creating three businesses that are very attractive. We've got a strong relationship with Ocwen and a long-term agreement that goes out till August, 2025 and, and the same with the CBA with NRZ that could bring in a tremendous amount of cash flow. And we think the company is undervalued.

Lee Cooperman -- Omega Advisors -- Analyst

We're going to talk later. So I'll resist to ask no more questions. Thank you.

William B. Shepro -- Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from Mike Grondahl with Northland Securities. Your line is now open.

Mike Grondahl -- Northland securities -- Analyst

Yes. Good morning, Bill and Michelle. With the delay in referrals, do you believe that's all just Ocwen getting on this new servicing system? Is that what caused the delay just kind of an update there?

William B. Shepro -- Chief Executive Officer

Sure. So, good morning, Mike. So what we did was we just said, if we had converted the beginning of the inventory -- the inventory balance at the beginning of the quarter and roll that forward through the quarter and if we had sold at the same percentage, the same percentage of beginning inventory as we have historically in the same season, in the prior years, our conversion rates, absent the servicing system migration would have been higher to the tune of about $7.8 million in the third quarter. We started feeling the impact in June, it continued in the third quarter. And so we have the inventory, we just didn't convert the percentage of beginning inventory at the same pace as we have historically. And we believe that's largely related to Ocwen servicing system migration. And because we have the cost basis, the cost-based in place that $7.8 million would have all fallen to pre-tax.

Mike Grondahl -- Northland securities -- Analyst

Got it. So you're still getting all the inventory you anticipated getting, it's not like you're losing out on anything.

William B. Shepro -- Chief Executive Officer

So from a referral basis, we believe there were some foreclosure holds when you switch servicing systems and we didn't anticipate this and you changed the name of the servicer, my understanding is the servicers are obligated to do a de-boarding letter and an onboarding letter and they have to put a foreclosure actions on hold. So, that had an impact and continues to have an impact on referrals. So, we're seeing that. We're also seeing, we think, we're not sure an early indication that may be a greater percentage of some of the homes are being sold at the foreclosure sale, but we're not certain what the impact is from that. We know there was an impact from on referral volumes into REO from the foreclosure holds. We're less sure what the impact was from potentially more homes being sold at the foreclosure.

Mike Grondahl -- Northland securities -- Analyst

And just to expand on that a little bit, I think NRZ, a quarter or so ago announced kind of -- they were working with auction.com to do foreclosure sales. So do we need to kind of think through that and say if they're able to sell it at foreclosure, the loan, then you might get less REO sales? What are you seeing there?

William B. Shepro -- Chief Executive Officer

Yes. We're paying attention to that. We've typically model our expected inflow based on the historical percentage of foreclosures that could sold at the REO sale and what comes into REO. And that's how we estimate and put together our scenarios. So, we have to pay close attention. If it turns out a greater percentage of the loans are sold at the foreclosure sale that could reduce our inflow. We have had conversations with NRZ about performing that work for them, but at this point we're not doing that.

Mike Grondahl -- Northland securities -- Analyst

Got it. Okay. Clearly that's something to watch closely. And then, could you just comment owners.com maybe a little bit of surprised? I don't know that people are arguing with you for kind of shutting that down, but what if the growth just wasn't happening or wasn't happening fast enough?

William B. Shepro -- Chief Executive Officer

Yes. Michael, here's the way we look at it. We were transitioning the business model from a using a 1099 real estate or independent contractors to real estate agents that were employees. And we had seen very positive results from our testing of that, but that was going to require us to make a much longer investment in the business before we were going to be able to ultimately bring in other equity capital. And as a result, we made the strategic decision in consultation with the Board that we're better off leveraging the owner's technology where we can at Hubzu and bring some benefits there, but reduce or eliminate the cash burn associated with the business. And so we're going to leverage some of the technology from owners.com and in inside of a Hubzu. But at the same time, we're working to eliminate the cash burn associated with that business.

Mike Grondahl -- Northland securities -- Analyst

Sure. Okay. And then, any other non-core businesses besides Pointillist that could be monetized? What's left kind of as you continue streamlining ASPS?

William B. Shepro -- Chief Executive Officer

Yes. All right. And there's a slide we put in the deck. We're very focused on two objectives -- strategically on two objectives, one is streamlining the organization and aligning our operating infrastructure to the smaller organization, Mike. And the second is growing the revenue base with a non-Ocwen and non-NRZ customers. And we've talked about in the prepared remarks, we think we're making very good progress on both fronts. There are not many other -- outside of the three core businesses at this point, there's a few very small businesses that exist that we could evaluate. But we're really focused in now on those three businesses and there's not much else to sell. But look, having said that, if we believe we can add additional shareholder value through the strategic seller, one or more of our businesses, we would consider it.

But, right now, we're very focused on the growth of those three businesses. And then, the other thing I'd point out Mike is with Ocwen moving off of REALservicing, we're going to essentially mothball that system. And once that's complete, along with moving the buyer of our NCI business. Also while we're providing some transition services, including a leading edge technology on -- in our data center for a period of time. Once those two activities are complete, that will allow us to move to the cloud and we estimate that will save us and we hope by the third quarter of next year, we'll start getting the run rate savings of about $8 million to $10 million a year. So, that's an important initiative for us as well.

Mike Grondahl -- Northland securities -- Analyst

Got it. And just following up on the $8 million to 10 million, is that sort of the last piece of project catalyst that you have left to implement and kind of ring the savings out from, or is there more still in process with project catalyst?

William B. Shepro -- Chief Executive Officer

Yes. I think when you look at the sales and the closing of some of these businesses, Mike, we still have work to do to align the organization to the businesses we have in place. So we do anticipate there'll be some more streamlining of the company. And of course a very large savings will come from that data center migration to the cloud.

Mike Grondahl -- Northland securities -- Analyst

Got it. That's a big chunk that's left. And then, just a couple more. So, I think you clarified it, but the midpoint of your guidance had sort of spoken to a robust for Q even up year-over-year, but you're kind of saying with the Ocwen migration still happening focused on the low-end. So, kind of still a little bit down year-over-year, but did I catch that right?

William B. Shepro -- Chief Executive Officer

That's right. We're anticipating because of the impact in the conversion rate of REO, absent that impact, we think we would have been right in line. And by the way, look, we always try to beat ourselves up when we don't get our scenarios right. And servicing transition is something that probably takes place every couple of decades and we just didn't fully understand or grasp, I guess the impact that that transition was going to have on the earnings. But the good news is, it's largely a timing question. It's not about whether you'll make the money, it's when.

Mike Grondahl -- Northland securities -- Analyst

Okay. And then, investments spend back in '17 was roughly $60 million, last year it was like $45 million. At one point it was going to be $30 million this year. What's it on pace to be this year and any initial read on 2020?

William B. Shepro -- Chief Executive Officer

Yes. So Mike, well that's closing the earlier stage owners.com and winding it down and we look at the Pointillist now as being a completely, we're going to account for it from an accounting perspective and it's on the balance sheets still, but we aren't planning on funding that any further and it's going to raise equity in the future. So, the investment spend is going to come down almost to zero.

Mike Grondahl -- Northland securities -- Analyst

In 2020. Okay. That's fine. I felt like that was the direction it was going. Okay.

William B. Shepro -- Chief Executive Officer

And I mean, just to be clear, we are making in the normal course investments in the businesses that will show up in the business level P&Ls.

Mike Grondahl -- Northland securities -- Analyst

Okay. And then, lastly as you guys are adding these non-Ocwen, non-NRZ kind of Hubzu customers, if you will, is the margin profile the same better or a little bit worse for the non-Ocwen, non-NRZ Hubzu sales.

William B. Shepro -- Chief Executive Officer

So, first I think if you look at the slides, Michelle, what page is that? If you look on page 16, you'll see were up close to 100% in sort of number of sales for non-Ocwen and non-NRZ REO year-to-date this year compared to last year and probably double what it was in 2017. And our inventory also continued to grow on the non-Ocwen.

So Mike, in terms of the fees were paid, for like services we've paid the same or more money for other customers. So then the question really becomes what's the average size of the -- what's the sales price? And right now I think the sales price is lower on average than what the average sales price is on the Ocwen and NRZ portfolio. But in terms of the fees we generate the fees are the same or better. And it's a very, very high margin business and we're pretty pleased with our success in growing that business.

Mike Grondahl -- Northland securities -- Analyst

Great. Okay. Hey, thanks a lot.

Operator

[Operator Instructions]

William B. Shepro -- Chief Executive Officer

So operator, just one thing I want to clarify. I think in response to Lee's question, I said we anticipate growing Ocwen and NRZ, I intended to say we anticipate the grow non-Ocwen and non-NRZ business. Sorry, just to clarify that. If there's no other questions, thank you for attending the call and we look forward to speaking with you.

Operator

[Operator Closing Remarks]

Duration: 25 minutes

Call participants:

Michelle Esterman -- Chief Financial Officer

William B. Shepro -- Chief Executive Officer

Lee Cooperman -- Omega Advisors -- Analyst

Mike Grondahl -- Northland securities -- Analyst

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