Altisource Portfolio Solutions S.A.

Welcome to the Altisource first quarter 2022 earnings call. My name is Cheryl and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press 01 on your touch-tone phone. As a reminder, the conference is being recorded. I will now turn the call over to Michelle Esterman, Chief Financial Officer. You may begin.

Thank you. We first want to remind you that the earnings release, form 10Q, 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 Altisource. 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. 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 will now turn the call over to Bill.

Thank you, Michelle. Good morning, and thank you for joining today's call. Beginning with slide three, I am pleased with our first quarter financial results. We generated service revenue of $37.8 million, marking the first quarter of sequential revenue growth in 11 quarters. Our first quarter adjusted EBITDA loss of $4.1 million represents a $4.7 million improvement over the fourth quarter of 2021. We benefited from revenue growth as the default market begins to recover, a favorable revenue mix, a lower cost base, and approximately $1 million of non-recurring items. We currently have a $155 million unweighted annualized sales pipeline that, based upon our forecasted probability of closing, could translate into $50 to $62 million in revenue on a stabilized basis. What's exciting about our probability-adjusted sales pipeline is that it represents 33% to 41% of our annualized first quarter revenue. Keep in mind that our sales pipeline only includes new business and excludes revenue growth from existing customers on existing products. We ended the quarter with $80 million in cash. We typically use more cash in the first quarter than each of the remaining quarters of the year. During the first quarter, we used approximately $10.6 million for items that we don't expect to pay for in the remaining quarters of 2022. These items include previously accrued taxes related to a large-time repatriation of cash from certain of our subsidiaries, annual bonuses, and certain prepaid expenses that relate to the entire year. We believe our cash burn will significantly decline as the year progresses and anticipate ending the year with between $65 and $70 million of cash, but this could fluctuate up or down based on working capital. This estimate includes the anticipated refund of approximately $5.8 million in uses and the anticipated distribution of $3.5 million in escrow funds from the point of sale. We have two core businesses, Servicer and Real Estate and Origination. As you will see in our 10Q, we are now reporting these two businesses as segments and are separately reporting corporate and other. We believe this new segment structure will provide additional visibility into the performance of each of our core businesses. This morning I will discuss these businesses in detail. Turning first to slide four in our service earned real estate segment, which is our largest business. This segment has faced environmental issues for the last couple of years as pandemic related borrower relief measures significantly reduced revenue. With the expiration of these relief measures at the end of 2021, This business now has strong tailwinds. Compared to the fourth quarter of 2021, service revenue for this segment grew by 18% and adjusted EBITDA grew by 54%. The strength in our first quarter primarily reflects higher HUBZU revenue from the September 21 restart of foreclosures from pre-pandemic delinquencies and higher revenue in the other default businesses from the December 31st expiration of the Temporary Loss Mitigation Measures. For the rest of the year, we expect total segment revenue to continue to grow sequentially. In the second quarter, we expect flat to a modest decline in HUBZU revenue, impacting our second quarter margins, giving the lag between referrals and sales. We anticipate HUBZU will resume its revenue growth in the third quarter and continue to grow into 2023 as the market stabilizes. We believe the servicer and real estate segment will be much larger in the coming years. To understand this, we think it would be helpful to explain the impact that pandemic-related borrower relief measures had on our default business and how we think the market and our default business will recover. Turning to slide five, during the pandemic, nearly all foreclosures came to a halt. This reduced referrals to our default-related businesses by more than 80%. During this time, we continued to sell existing REO, depleting our inventory. With the restart of foreclosures on pre-pandemic delinquencies in the early fall, we began to rebuild our auction and REO inventory. Then with the December 31st expiration of the temporary loss mitigation measures, we are continuing to rebuild our foreclosure auction inventory and grow referrals for our other default businesses that support earlier stage delinquencies. For those loans that are just entering foreclosure, it takes time to work through the process. Some of these delinquent loans will re-perform or pay off, others will go through foreclosure. Of those that go through foreclosure, some will sell to a third party at the foreclosure auction, and some will become REO and ultimately sold. Depending on the state and other factors, this process could take approximately six months to several years. Based on this default process, Hubzu, one of our higher margin businesses, will likely be our last business to fully benefit from the recovery of the default market. As the foreclosure auction and REO market fully works, we anticipate Hubzu will experience tremendous revenue and earnings growth. To illustrate this, please refer to slide six, which shows Moody's Analytics historical and forecasted REO acquisitions and Hubzu's historical revenue. As you can see, national REO acquisitions and HUBZoo's revenue are closely correlated, with both declining from the first quarter of 2019 through the fourth quarter of 2021. Beginning in the first quarter of 2022, Moody's Analytics forecasts that REO acquisitions will begin to grow, reaching a high in the fourth quarter of 2025 that is more than 70% higher than the first quarter of 2019. a quarter in which HubZoo generated $32 million of revenue. If HubZoo's revenue maintains its strong correlation to Moody's forecasted REO acquisitions, HubZoo's revenue would grow from $8 million in the first quarter of the year to over $50 million per quarter when fourth quarter 2025 REO acquisitions become sales. In periods of REO acquisition growth, Revenue growth typically lags by a couple of quarters, reflecting the average time to market and sell the property. In addition to benefiting from tailwinds in the servicer and real estate business, we're also focused on adding new customers and are making good progress. Our unweighted annualized sales is currently $90 million on a stabilized basis. We estimate this could translate into $31 to $39 million in annual revenue on a stabilized basis based upon our forecasted probability of closing. Turning to slide seven in our origination business. This business experienced strong growth over the last couple of years from high origination volume in a low interest rate environment, customer growth, and new product launches. The origination market now faces challenges with the MBA forecasting 2022 market origination volume to decline by 36%. We anticipate stronger than market performance for our origination business because we believe we can offset the impact of the market declines with newer product launches and higher product adoption. As expected, service revenue in our origination business declined compared to the fourth quarter, but at a much lower rate overall market decline. This reflects flat sequential revenue in our LendersOne business and revenue declines in our origination title, LendersOne demonstrated resiliency in a very difficult origination market, as market declines were offset by member adoption of our newer product launches. The revenue declines in our other origination businesses reflect lower market origination volumes, as well as customers bringing certain services in to retain their employees. From a sales perspective, our unweighted annualized pipeline is currently over $65 million on a stabilized basis. This represents $18 to $23 million in anticipated annual revenue based upon our forecasted probability of closing. In a very difficult origination market, our LendersOne members are focusing on reducing costs and are looking to us to help them improve their profitability and competition. We believe our solutions are well suited to achieve their objectives. Based on our progress in launching new products and increasing product adoption, we believe that our 2022 origination revenue will be roughly flat compared to 2021 in a market that the MBA forecasts will decline by 36%. We have moderated our expectations to reflect our recent experience with longer than anticipated customer onboarding, Stabilization Timelines for our newer solutions, as well as for some of our other origination businesses, the change in customer behavior to move work in-house to retain their staff. We continue to believe the origination business is well-positioned for long-term growth and will be a significant contributor to Altasource's revenue and earnings. To conclude, we are pleased with our first quarter results and are executing well on our strategic plans. We believe we are building an exciting and innovative business that we anticipate will benefit from new product launches, membership growth, and a strong sales pipeline. In our servicer and real estate business, we should benefit from the market tailwinds and our strong sales pipeline. As we continue to execute on our plan and win more business, we anticipate we will return to a growth company and create substantial value for our customers and shareholders. I'll now open up the call for questions. Operator?