Altisource Portfolio Solutions S.A.

Ladies and gentlemen, thank you for standing by and welcome to the Altisource Second Quarter 2022 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1-1 on your telephone. I would now like to turn the call over to your host, Michelle Esterman, Chief Financial Officer. You may begin.

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 continuing COVID-19 pandemic and current economic environment makes it extremely difficult to predict the future state of the economy and its potential impact on healthy sources. 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. and 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.

Thanks, Michelle. Good morning and thank you for joining today's call. I'm pleased with our second quarter results and performance. Beginning with slide four, Our servicer and real estate segment is benefiting from the restart to the default business with both sequential and year-over-year revenue and adjusted EBITDA growth. Our origination segment's year-over-year revenue decline was largely in line with the market-wide decline in origination volume. Despite the market decline, we grew our average weighted sales pipeline in the origination business to $32 million, a 54% increase since last quarter as our LendersOne members are increasingly focused on buying our solutions, which are designed to help them reduce their costs. We also continue to maintain cost discipline in corporate with costs down by 28% over the second quarter of 2021 from cost savings initiatives and the sale of the pointless business, partially offset by the assignment of sales and marketing employees to the business segments. This performance puts us on a path to generate positive EBITDA and cash flow in 2023. We ended the quarter with $71 million in cash. As expected, we significantly reduced our cash burn compared to the first quarter. We believe our cash burn will further decline as the year progresses and anticipate ending the year with between $60 and $65 million of cash, with the estimate fluctuating up or down based on working capital and other factors. Our cash estimate includes the anticipated refund of approximately $5.8 million in U.S. taxes and receipt of 3.5 million in escrow funds from the pointless sale. Turning to slides five and six in our service earned real estate segment. As you can see on slide five, compared to both the second quarter of 2021 and the first quarter of this year, we grew service revenue and adjusted EBITDA and improved our adjusted EBITDA margins. Our revenue growth reflects the continuing recovery of the default market following the September 2021 restart of foreclosures on pre-pandemic delinquencies, and the December 31st expiration of most of the remaining pandemic-related borrower relief measures. Adjusted EBITDA and margin improvements reflect our greater scale, product mix, and cost savings initiatives. There are two items you should keep in mind. First, even though the default market is beginning to recover, second quarter foreclosure initiations are still 47% below the same pre-COVID 2019 period, Second, based on the typical timelines to complete a foreclosure and sell REO, we anticipate that our higher margin foreclosure and REO auction business will not fully benefit from the recovery of the default market until the middle of 2023. In addition to benefiting from tailwinds from the restart of the default market, we are focused on growing our sales pipeline and are making good progress. During the second quarter, we won and are in various stages of onboarding new business with an estimated $8.4 million of annualized revenue on a stabilized basis. In addition, our average weighted sales pipeline is currently $33 million on an annualized and stabilized basis. Looking out longer term, we believe our countercyclical default business could benefit from a deteriorating economic environment. Today, mortgage delinquency rates are at near historical lows. With rising interest rates and inflationary risks, delinquency rates may rise driving more business to our servicer and real estate segment. We estimate that for every 1% increase in 30-day delinquency rates, the addressable market for our default services increases by $700 million. Turning to slides seven and eight in our origination segment. Following strong growth over the last couple of years, the origination market now faces challenges with the latest MBA forecast for 2022 reflecting origination volume to decline by 41%. Our origination segment was not immune to the market impact with our second quarter year-over-year revenue decline largely in line with the origination market decline. Diving a little deeper into our second quarter results, the LendersOne business outperformed the market as we gained traction with our solutions that are designed to help members save money. This performance was offset by greater than overall market declines in some of our other origination businesses as customers transitioned work in-house to retain their employees, and a greater percentage of revenue in some of these businesses was derived from refinance transactions, which declined faster than the market. There is a silver lining. Over the last couple of years, it has been very difficult for us to get originators to focus on our cost-saving solutions, given their unprecedented origination volume and profitability. With a decline in origination volume and margins, originators have turned their attention to reducing costs and are increasingly looking to purchase LendersOne solutions that help them do so. As a result, we had a very strong quarter from a sales perspective. We won and are in various stages of onboarding an estimated $8.7 million a year in new business on a stabilized basis and anticipate that we will begin to generate revenue from these wins in the third quarter. We also increased our annualized weighted average weighted sales pipeline by 54% to $32 million on a stabilized basis. Based on our sales progress, new product launches, and increasing product adoption, we believe that we will outperform the forecasted 41% decline in origination volume. We continue to gain greater insight into how the sales pipeline and sales wins for our newer solutions translate into revenue and are developing programs to help accelerate these timelines. We believe our origination business is well positioned for long-term growth and to be a significant contributor to Altasource's revenue and earnings. To conclude, we continue to execute on our strategic plan and are pleased with our second quarter results. In our servicer and real estate business, we should benefit from the market tailwinds and our strong sales pipeline. In our origination business, we believe we are building an exciting and innovative business that we anticipate will benefit from sales wins, new product launches and our prospects increased focus on cost savings. 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 stakeholders. I'll now open up the call for questions. Operator?