Altisource Portfolio Solutions S.A.

Good day, ladies and gentlemen, and welcome to the Altasource First Quarter 2020 Earnings Conference Call. At this time, our participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to hand it over Conference, over to your host, Ms. Michelle Esterman, Chief Financial Officer. Please go ahead.

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.altsource.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 AlciSource. Please review the forward-looking statement section in the company's earnings release, quarterly slides and form 10Q as well as the risk factors contained in our 2019 Form 10-K and first quarter 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 Gap to Non-Gap 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.

Thanks, 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 runoff of the Auckland service portfolios, and the impact that COVID-19 related governmental restrictions and changing vendor and consumer behavior had on our default related businesses. This was partially offset by stronger performance from our customers other than Aquin, NRZ and Resy in both our default and origination related businesses. As you can see on slide five, in the first quarter we generated 17 cents of adjusted diluted earnings per share $4.4 million of adjusted pre-tax income and $13.2 million of adjusted EBITDA on $113.2 million of service revenue. Across our three core businesses, as shown on slide six, first quarter 2020 service revenue from customers other than Aquin, NRZ, and Resy 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 10Q. Turning to the business environment and the impact coronavirus is having on the real estate mortgage and servicing industry and Altasource. Today, much of the country is operating under shelter-in-place and social distancing restrictions, and nonessential 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 a quarter of a percent in early March. The Congressional Budget Office estimates that the unemployment rate will be 16 percent in the third quarter and greater than 10 percent 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 seven summarizes certain COVID-19 programs and what we believe the impact could be for Altasource. We anticipate that the short to medium term revenue impact to Altasource 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 HUBZO 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. Altasource, 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 and a number of other employees 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 Altasource to perform critical functions for their loan origination and servicing operations. Our customer relationship management, 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 eight, from a liquidity perspective, we believe that Altasource 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 2024. 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 to $50 million compared to the fourth quarter 2019 annual run rate. This is in addition to the savings in outside goods and services that generally declined proportionately with fewer service referrals. As we are operating in unchartered waters and the impact on AltaSource remains fluid, we plan to continue to evaluate our cost structure and intend to make adjustments as circumstances may warrant. We are also seeking to maintain capacity for anticipated growth in our origination-related services, continue 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 HUBZoo 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 Altasource 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?