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Altisource Portfolio Solutions SAÂ (ASPS 10.00%)
Q1Â 2020 Earnings Call
Apr 30, 2020, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to the Altisource First Quarter 2020 Earnings Conference Call. [Operator Instructions]
I would now like to hand the conference over to your host, Michelle Esterman, Chief Financial Officer. Please go ahead.
Michelle D. 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. In addition to the usual uncertainty associated with forward-looking statements, the current COVID-19 pandemic and its potential impact makes it extremely difficult to predict the future state of the economy and its impact on Altisource. 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 2019 Form 10-K and first quarter of Form 10-Q, which describe factors that may lead to different results. We undertake no obligation to update these statements as a result of 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 would now like to turn the call over to Bill.
William B. Shepro -- Chairman and Chief Executive Officer
Thank you, Michelle. Good morning and thank you for joining today's call. COVID-19 is having an unprecedented impact on human life, the economy and the industries in which we operate. Given this environment, today I will provide a brief summary of our first quarter performance, discuss the virus-related disruptions in the real estate mortgage and servicing industry and describe the actions we are taking to address the short to medium-term impact and the potential longer-term opportunities from the crisis.
Our first quarter financial performance was lower than the same period last year. From the 2019 disposition of certain businesses, the run-off of the Ocwen's service portfolios and the impact that COVID-19-related governmental restrictions and changing vendor and consumer behavior pattern our default-related businesses. This was partially offset by stronger performance from our customers other than Ocwen, NRZ and RESI in both our default and origination-related businesses.
As you can see on Slide 5, in the first quarter, we generated $0.17 of adjusted diluted earnings per share, $4.4 million of adjusted pre-tax income, and $13.2 million of adjusted EBITDA, $113.2 million of service revenue.
Across our three core businesses, as shown on Slide 6, first quarter 2020 service revenue from customers other than OCwen, NRZ and RESI grew by 36% compared to the first quarter of 2019 and was modestly higher than the fourth quarter despite COVID-19 headwinds. This year-over-year increase is primarily due to the growth in our customer base, market share expansion and for our origination-related services lower interest rates. We anticipate that the pandemic will have a short to medium-term negative impact on default-related revenue from these customers but in the longer-term should support strong growth. For a more detailed description of our first quarter financial performance compared to prior periods, please refer to today's press release and 10-Q.
Turning to the business environment and the impact coronavirus is having on the real estate mortgage and servicing industry and Altisource. Today, much of the country is operating under shelter-in-place and social distancing restrictions, and non-essential businesses are closed or operating in a work-from-home environment. At the same time, the Federal Reserve lowered interest rates in early March. Despite assistance programs from the Federal government, the pandemic has had an unfortunate and large negative impact on the economy with a tremendous number of employee furloughs and terminations across the country.
Over the last several weeks, 26.5 million people filed unemployment claims, and the Mortgage Bankers Association estimates that 7% of borrowers were in forbearance as of April 19th, up from 0.25% in early March. The Congressional Budget Office estimates that the unemployment rate will be 16% in the third quarter and greater than 10% for 2021. These factors have led to a disruption in the real estate mortgage and servicing markets and greater borrower demand to refinance their mortgages.
While it's too early to estimate the duration of the pandemic, Slide 7 summarizes certain COVID-19 programs and what we believe the impact could be for Altisource. We anticipate that the short to medium-term revenue impact to Altisource will largely be driven by two factors. First, with most of the country confined to their homes and growing unemployment, we expect that home buying activity will be significantly lower. This should largely impact our Hubzu and settlement services businesses. Second, with governmental foreclosure and eviction moratoriums, and other borrower relief, along with shelter-in-place and social distancing restrictions, we expect that foreclosure and eviction referrals will also be substantially lower. We anticipate that this will negatively impact our Equator, title, foreclosure trustee, valuation and field service businesses. At the same time, we anticipate that the low interest rate environment will support strong growth in our origination-related services.
Altisource, like other companies in our industry, is adapting to this rapidly changing environment. We have three areas of focus. First, maintaining the health and safety of our employees. Second, adjusting our operations to mitigate some of the impact to our customers and business, while complying with governmental orders and guidance. Third, addressing our cost structure and preserving liquidity to prepare for what could be a period of lower revenue than planned.
To help maintain the health of our employees and comply with governmental orders, over a month-and-a-half ago, we began implementing our business continuity plans and enabling work-from-home capabilities where possible across the organization. Our employees were able to rapidly adjust to this new environment with minimal operational disruption. The majority of our global workforce is working remotely with a small number of employees continuing to perform essential functions at our facilities where permitted. For these employees, we have implemented heightened hygiene protocols.
We're also seeking to minimize operational disruptions and deliver for our customers as best we can despite the impact from COVID-19. Our customers rely upon Altisource to perform critical functions for their loan origination and servicing operations. Our customer relationship management, sales and operations teams are in regular contact with our customers, and we are working diligently to manage what is in our control and pivoting our operations to address business-related challenges and opportunities.
Finally, we are preparing the firm for what could be a period of lower-than-planned revenue due to the effects of COVID-19. We believe our current financial position, along with changes we are making to our cost structure, will help preserve liquidity and benefit from what we believe could be a longer-term opportunity in a rising delinquency and lower interest rate environment.
Turning to Slide 8. From a liquidity perspective, we believe that Altisource is well positioned with $79 million in cash and equivalents, $294 million of debt and $173 million of net debt less marketable securities. Our marketable securities include 3.5 million RESI shares that we anticipate will be sold for $43 million in cash if the previously announced sale of RESI closes. Our debt is covenant-light and doesn't mature until April 2020.
In addition to cost reduction activities planned prior to the pandemic, we have taken several measures to further reduce our 2020 expenses to address the anticipated impact from COVID-19. Unfortunately, as part of these measures, we have to make the difficult decision to furlough and terminate certain employees and temporarily reduce director, executive and employee compensation. Based on these and other cost reduction measures, we anticipate reducing our 2020 cash expenses by an estimated $45 million to $50 million compared to the fourth quarter 2019 annual run rate. This is in addition to the savings and outside goods and services that generally declined proportionately with fewer service referrals.
As we are operating in unchartered waters and the impact on Altisource remains fluid, we plan to continue to evaluate our cost structure and intend to make adjustments as circumstances may warrant. We're also seeking to maintain capacity for anticipated growth in our origination-related services, continued to innovate across our businesses and prepare for what we believe will be strong medium to longer-term demand for our default-related services from growing loan delinquencies. In time, we anticipate homebuyers will return to the market, and we will sell our Hubzu inventory. We further believe the unprecedented level of foreclosure and eviction relief will subside and, if unemployment rates remain elevated, delinquency levels are likely to be higher than they were before the pandemic began.
To give you a sense of the potential impact of delinquency rates from this crisis, Black Knight recently estimated that at a 15% unemployment rate, mortgage delinquency rates could rise from approximately 3.7% to 10.3%. While we believe the tremendous governmental relief efforts will help mitigate the horrific impact that this pandemic is having on consumers and the broader economy, delinquency rates were at historical lows prior to the crisis and are likely to stabilize at a higher rate post-crisis.
As a leading national provider of services to support residential loan originators and servicers, we believe Altisource is in a strong position to support the industry and capture a sizable share of the business opportunity that a low interest rate and rising delinquency environment would present. We conservatively estimate that every 1% increase in mortgage delinquencies increases the addressable market for our default-related services by over $700 million from what was a total addressable market of roughly $4 billion pre-crisis.
I'd like to conclude by thanking our employees who quickly adjusted to our new operating environment and remain incredibly focused on serving our customers. Our performance for our customers will allow us to emerge from this challenging situation positioned for long-term success with new opportunities.
I'll now open up the call for questions. Operator?
Questions and Answers:
Operator
[Operator Instructions] And your first question comes from Mike Grondahl with Northland Securities.
Mike Grondahl -- Northland Securities -- Analyst
Hey. Good morning, Bill and Michelle. The roughly $90 million of Ocwen-related revenues, how did that compare to kind of your forecast or kind of internal budget?
William B. Shepro -- Chairman and Chief Executive Officer
Yeah. Mike, we were largely on track to achieve our plan in the first quarter until March. And then in March, we started to see a disruption from the pandemic. So we actually were not that far off a plan, I'd say, probably in total, a couple of million dollars off of plan from an EBITDA or adjusted EBITDA or adjusted pre-tax perspective.
Mike Grondahl -- Northland Securities -- Analyst
Got it. And Ocwen moving to that new servicing platform, is there any catch-up happening there or does that sort of delay still exist?
William B. Shepro -- Chairman and Chief Executive Officer
No. So, if you remember, in the fourth quarter, our conversion rate for REO sales improved quite substantially over prior periods. In the first quarter, again, we are largely on track to convert where we expected for REO sales, and then March hit, and you had delays in REO closings, higher cancellations, all are a result of the the pandemic.
Mike Grondahl -- Northland Securities -- Analyst
Got it. So...
William B. Shepro -- Chairman and Chief Executive Officer
Yeah.
Mike Grondahl -- Northland Securities -- Analyst
...really the first quarter on a adjusted EBITDA basis, just a couple of million kind of spread between COVID and some of the other things you've mentioned.
William B. Shepro -- Chairman and Chief Executive Officer
Got it. That's right.
Mike Grondahl -- Northland Securities -- Analyst
And the incremental $45 million to $50 million that you're pulling out of the business or streamlining the business, any rough thought how much of that is cost of goods sold, how much of that might be SG&A savings?
William B. Shepro -- Chairman and Chief Executive Officer
Sure. So, Mike, think about all of that as everything -- all cash expenses other than cost of goods sold. In addition to the $45 million to $50 million, our cost of goods sold will largely come down in line with lower referrals. So, if we receive, for example, fewer field services referrals or fewer inspections and we don't order an inspection from someone in the field, and so those costs will also come down. And so, what's largely -- directly within our control and not necessarily tied to referrals, we've reduced by $45 million to $50 million. It amounts to roughly a 15% reduction in our expense base, again, excluding outside goods and services from our fourth quarter run rate.
Mike Grondahl -- Northland Securities -- Analyst
Got it. So, I guess, I'm still trying to understand the breakdown between cost of goods sold and SG&A. Is most of it cost of goods sold then?
William B. Shepro -- Chairman and Chief Executive Officer
So, when I say cost of goods sold, certainly employee cost inside of cost of goods sold. So when I say, I should really separate, you have employee costs and cost of goods sold, and then you have outside goods and services. Outside goods and services will decline based on receiving fewer referrals.
Mike Grondahl -- Northland Securities -- Analyst
Volume?
William B. Shepro -- Chairman and Chief Executive Officer
Yeah, that's not included -- outside goods and services is not included in the $45 million to $50 million, but we expect that to come down with the decline in referrals. Comp and benefits and other costs inside cost of goods sold and inside of SG&A, we anticipate will come down by about $45 million to $50 million on top of outside goods and services.
Mike Grondahl -- Northland Securities -- Analyst
Got it. And the line you guys break out in the P&L for SG&A, in the first quarter, it was $28 million not inside cost of goods sold. That's going to come down meaningfully then over the course of the year?
William B. Shepro -- Chairman and Chief Executive Officer
Yeah. I think you're going to see reductions and, Michelle, you could jump in here both in cost of goods sold as well as in SG&A.
Michelle D. Esterman -- Chief Financial Officer
That's exactly right. You'll see it in both places, Mike.
Mike Grondahl -- Northland Securities -- Analyst
Okay, great. And then, lastly, just -- if you look at 2020, what's your sort of best guess on sort of cash flow or cash-cash usage this year?
William B. Shepro -- Chairman and Chief Executive Officer
Look, Mike, there's a lot of uncertainty around the impact that COVID is going to have on our business. We're only a month or so, a month-and-a-half into this. So based on our best guess, what we're trying to do with our cost reduction plan is to try to stay as close to the cash position we had at the beginning of the year -- at the end of this year. So we're looking to try to maintain, I expect it will be down, but pretty close to where we started the year at the end of the year. That's how we've targeted our cost reduction plan. Of course, there is a lot of unknowns related to the pandemic and the impact it's going to have on our various businesses. So we'll see. But that's basically how we did our planning is to basically preserve liquidity.
Mike Grondahl -- Northland Securities -- Analyst
Got it. Maybe just lastly, it looks like you had a couple or several nice wins in the first quarter. Any one to call out there, a couple of them looked to be large on your slide?
William B. Shepro -- Chairman and Chief Executive Officer
Yeah, let me just pull the slide. Give me a second.
Mike Grondahl -- Northland Securities -- Analyst
9.
William B. Shepro -- Chairman and Chief Executive Officer
Yeah, we had a couple of good wins. I think one that's worth pointing out is Verification Services, this channel partner agreement, we see as a large opportunity. We're basically reselling all sorts of Verification Services. And based on the initial feedback we're getting from the Lenders One members, we believe we can save our members, a very meaningful amount of money and make a decent margin still on that product. And we anticipate that we'll ramp throughout the year. And as we generate more referrals, our cost of goods actually goes down from the vendor we're buying the product from to anticipate the revenue to grow and the margins to continue to improve as the year progresses on that product.
Let's see if there's anything else worth noting. We did just launch a week or so ago a field services opportunity with a very large servicer -- non-bank servicer that launched a week or two ago. And we're now working to launch with the same customer Hubzu, and this is on their FHA portfolio. So we're excited about that opportunity.
And then, in Trelix, which is our loan fulfillment business, we do underwriting, processing and closings as well as QC. We're getting a lot of traction in that business. Frankly it's about getting enough people hired and trained. There is a lot of demand for that service, and we're first working for -- providing some capacity to our existing clients that are good customers, but we have a couple of very promising prospects that could be quite large in that business as well.
Mike Grondahl -- Northland Securities -- Analyst
Got it. Great. Thank you.
William B. Shepro -- Chairman and Chief Executive Officer
Thanks, Mike.
Operator
[Operator Instructions] Your next question comes from Rajiv Sharma with B. Riley FBR.
Rajiv Sharma -- B. Riley FBR -- Analyst
Hi. Good morning. My question is, what do you think Bill or Michelle, what do you think is going to be the impact of the moratorium on the current flow of business in the sense that when do you sort of expect the moratorium? How long do you expect that to last? And also -- and how many months do you expect that to last? And also the other related question is the advances, the advances and payments that servicers are facing and all the related issues about the help that's different agencies that are providing. How does that impact their ability to not advance support advance and the help that you're going to get, how does that impact your referral business in flow?
William B. Shepro -- Chairman and Chief Executive Officer
Sure. So, first on -- hey, Raj. First on the moratorium, so I think there's two things that are taking place right now. One is, the federal government and several states have put a moratorium on foreclosures and evictions. And so that essentially halts any of that activity and so that would reduce our inflows into REO. It would reduce referrals potentially related to those businesses. So, and the moratorium at the federal level, my recollection is that 60 days some of the state moratoriums for foreclosure and eviction, make a while a little bit longer.
The second component of what's taking place are the forbearance plans. And so the governments -- on both government loans and GSE loans has put out a program that allows consumers to obtain a forbearance plan initially for up to six months and then for up to an additional six months. And under that forbearance plan, the borrowers can essentially -- if they been impacted directly or indirectly they can participate in the program, and stop essentially making their mortgage payments for six months and then again, that could be extended for up to a year.
So what we anticipate is going to happen, is that, as these moratoriums come to an end, we will see a pickup of referrals both foreclosure-related referral, scenario related referrals. But in terms of a large increase from where we might have otherwise have been this year, I don't think we'll start seeing that impact until you get into maybe the fourth quarter and into the first quarter of next year, when those forbearance period start to expire. And then I think a lot's going to depend on where unemployment is. If unemployment is relatively low, people should be able to -- and there are people are still working, they should be able to modify their loans, tackle on those past due payments potentially to the end of the mortgage or increase their amortization period. If unemployment is higher those consumers may not be able to pay their mortgage, and that the fault process will begin.
So the way, we've approached our business Rajiv, look in the short term, we want to make sure we very quickly adjust our cost base to be able to manage through it -- we believe will be a temporary decline in referrals. We also want to make sure we keep capacity for what's going to be a growing origination business. We anticipate that interest rates are going to remain low for the foreseeable future. And we also want to make sure we're getting ready for what we believe could be a large increase in delinquencies as you go into next year and so we want to be able to continue to innovate across our products and make sure we've got the capacity to support that anticipated growth.
Rajiv Sharma -- B. Riley FBR -- Analyst
And then about the servicers and their ability to advance payments, how does that impact you? If they are not -- if certain servicers really find a hard to advance payments and there is help or there is no help. I just want to understand how that impacts to Altisource?
William B. Shepro -- Chairman and Chief Executive Officer
Yeah. So I think, the environment is changing fairly rapidly, but the government has put in place programs that cap servicers advances at four months. So if the loan goes under a forbearance plan, the servicer has to advance for four months. It's still unclear at what point that servicer is going to get repaid that advance, but there are advancing obligations would stop on those loans with our -- under forbearance after four months. So I think that is a, was a good first step to help support both bank and non-bank servicers with our advancing obligations. And so, I don't think Rajiv it's going to have necessarily a direct impact on Altisource, of course, it's still to be seen, because the government programs don't cover private label securities. So that's still an open question how those advances will be handled, but I think historically, I know Ocwen [Phonetic] has historically manage their advancing obligations very well. And so we don't anticipate that necessarily has a direct impact on Altisource.
Rajiv Sharma -- B. Riley FBR -- Analyst
Got it. Thank you. I just have one last question. You just mentioned how your addressable market goes up with every percentage point increase in delinquency rates. And so I just wanted to clarify to it goes up, and you said by $700 million and prior to COVID, it was a $4 billion addressable market. So up 17%, 18% and the increase in the addressable market for every 1 percentage point increase in delinquency rates. Is that the right way? Am I looking at the right?
William B. Shepro -- Chairman and Chief Executive Officer
Yes. And what we did was we looked at both for GSE loans, FHA loans and private label or whole loans. And basically, a 1% increase across each of those products would result in roughly $700 million increase to be addressable market for us, right.
Rajiv Sharma -- B. Riley FBR -- Analyst
And then you expect that to start -- depending, of course, on things the way they turn out, you expect the volume starts to increase fourth quarter or first quarter, that's the flow that increase... [Speech Overlap]
William B. Shepro -- Chairman and Chief Executive Officer
Yeah, Rajiv. Altisource we're assuming the second and third quarters will be the hardest hit from the impact from COVID-19. We will start to recover, but we won't fully recover in the fourth quarter and then depending on what happens with unemployment and delinquency rates going into next year, we could start to see an increase in delinquency rates and meaningful improvement in revenue. And then on the origination side, we're seeing it now given the sustained low interest rates, the origination volumes are continuing to grow across all the services we provide to loan originators.
Rajiv Sharma -- B. Riley FBR -- Analyst
Got it. Thank you so much. Thank you for answering, I'll get offline. Thanks.
William B. Shepro -- Chairman and Chief Executive Officer
Thanks, Rajiv.
Operator
Okay. And your next question comes from Ramin Kamali with Credit Suisse.
Ramin Kamali -- Credit Suisse -- Analyst
Hi, Bill. Hi, Michelle. Thanks for taking my call. Hope you're doing well. I'm trying to understand what the business really looks like today. I guess month April has wrapped up, but just to get a sense by segment. I assume Field Services should remain relatively active, whereas the other two segments are probably a bit more compromise. Could you give me a sense of Front environment like percentage of the segment, operating percentage wise? And then at the current run rate, like what's the kind the monthly burn or how should I think in the back some of the monthly fixed cost base in the current environment?
William B. Shepro -- Chairman and Chief Executive Officer
All right. So Ramin, let's break down the three businesses, so in marketplace which is Hubzu and Equator. That's the business that's probably being impacted the most right now from foreclosure moratoriums and stay at home orders and inability to close the sale of homes. So we're anticipating that that business. I think we're estimating it to be down. Michelle, correct me, if I'm wrong about 75% at least in Hubzu for the next couple of quarters and then starting to improve. And again keep in mind, I mean, it truly is unchartered waters here. And so these are just our best guests.
And then on Field Services, the impact we're definitely going to be lower -- we believe we're going to be lower than planned, but it's not as bad as we originally thought it was going to be at least based on April. And so Field Services we think is, is holding up reasonably well down from our plans, but holding up reasonably well. And then MRES [Phonetic] mortgage and real estate solutions, there's a lot of origination related businesses in there Ramin, that are going to perform well, and potentially better than we expected. And then our default title, our trustee business, default valuation inside of that business unit will be impacted.
I think when you net the whole impact, Ramin, we are basically did our planning to essentially remain roughly, slightly down from a cash perspective at the end of the year, so where we were at the beginning of the year. And so, when you want to think about sort of cash, we're targeting to try to remain slightly down from where we were at the beginning of the year. Again, keeping in mind, this is unchartered water and we're going to adjust our operations based on what we see happening over the next couple of months.
Ramin Kamali -- Credit Suisse -- Analyst
But does that flat cash assume that the current state of what happened in April continues for the duration of the year or do you expect business to gradually ramp up from April to December?
William B. Shepro -- Chairman and Chief Executive Officer
So we're not forecasting a ramp up in the second or third quarter, beginning in the fourth quarter, we're forecasting that there is some pickup in Hubzu and in Field Services and that makes sense because some of the foreclosure moratoriums will be -- have expired.
Ramin Kamali -- Credit Suisse -- Analyst
So if I have to think about the segments, so marketplace is down about 75%, particularly related to Hubzu, Field Service is down, let's say 10% from capacity and then Mortgage Real Estate Solutions, I guess the lift from origination offset to declines in other parts of the business are relatively flat. Is that how to think about it?
William B. Shepro -- Chairman and Chief Executive Officer
Give me one second, let me -- yeah, I think the mortgage and real estate solutions will be down, but not nearly as much, but and then we'll benefit from growing origination business. Hubzu will have the largest percentage wise increase -- decrease for the year and then Field Services will be down, but not down as much percentage basis.
Ramin Kamali -- Credit Suisse -- Analyst
All right. Thanks guys. Stay safe.
Operator
I'm showing no further questions at this time, I would now like to turn the conference back to Bill Shepro.
William B. Shepro -- Chairman and Chief Executive Officer
Thanks for joining the call. Thanks for your support. Please stay safe and healthy. Thank you very much.
Operator
[Operator Closing Remarks]
Duration: 34 minutes
Call participants:
Michelle D. Esterman -- Chief Financial Officer
William B. Shepro -- Chairman and Chief Executive Officer
Mike Grondahl -- Northland Securities -- Analyst
Rajiv Sharma -- B. Riley FBR -- Analyst
Ramin Kamali -- Credit Suisse -- Analyst
