Altisource Portfolio Solutions S.A.

Good day, and thank you for standing by. Welcome to the Altasource second quarter 2023 earnings conference call. At this time, all participants are in 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 will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference call is being recorded. I would now like to hand the conference call over to your speaker today, 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.alzysource.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 impacts of government and servicer responses to the COVID-19 pandemic, together with the current economic environment, make it extremely difficult to predict the future state of the economy and the industries in which we operate, as well as the potential impact on Alpsource. Please review the forward-looking statement section in the company's earnings release and quarterly slides, as well as the risk factors contained in our 2022 Form 10-K, which describe factors that may lead to different results. We undertake no obligation to update 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 slide. Joining me for today's call is Bill Shepro, our Chairman and Chief Executive Officer. I'll now turn the call over to Bill.

Thanks, Michelle, and good morning. I'll begin on slide four. Our adjusted EBITDA performance continues to improve over 2022. Second quarter adjusted EBITDA was 47% better than the same period in 2022, and year-to-date adjusted EBITDA was 81% better, or $8.7 million. Based on our current forecast, we anticipate roughly break-even adjusted EBITDA for the third quarter and positive adjusted EBITDA for the fourth quarter and full year. For our second quarter adjusted EBITDA was impacted by an estimated $900,000 from certain unexpected non-recurring items, we remain ahead of our adjusted EBITDA plan for the first half of the year. Despite improving second quarter adjusted EBITDA compared to the same period in 2022, interest expense from the higher interest rate environment and our amended term loan contributed to the greater second quarter 2023 adjusted net loss. Second quarter service revenue was lower than the same quarter last year, primarily from the exit of a low margin customer care business in the fourth quarter of 2022 the decline in a customer's propensity to order services in two of our lower margin default related businesses, and unexpected temporary delays in certain California foreclosures. We believe those temporary foreclosure holds are now behind us and that the associated revenue is largely deferred and not lost. We continue to position Altasource to take advantage of what we see as significant potential opportunities in the residential mortgage default market over the coming years as the market continues to normalize and consumers face financial stress. As you can see on slide five, our sales pipeline and wins in both of our segments remain strong and we continue to aggressively manage our expenses. Our consolidated weighted average pipeline at the end of the second quarter, excuse me, our consolidated weighted average sales pipeline at the end of the second quarter was an estimated $63 million of annual revenue on a stabilized basis, representing 47% of our annualized second quarter 2023 revenue. We are also winning new business. Since last quarter, we've won business that we estimate will generate $18.6 million of annual revenue on a stabilized basis. The July win of $12.8 million reflects a new asset management client that we estimate will generate $3 to $5 million per year in adjusted EBITDA across HUBZoo and most of our other default solutions. During the quarter, we continue to onboard and grow sales wins from 2022 and 2023, which combined are now at $13 million of annualized revenue run rate. Finally, from a cost perspective, in July, we began to implement a company-wide cost reduction plan that we estimate will reduce annual cash operating expenses by $13.5 million once complete. Turning to slide six in our servicer and real estate segment. Second quarter adjusted EBITDA was $200,000 or 2% lower than the same quarter in 2022. We estimate that the unexpected temporary delays in certain California foreclosures deferred $500,000 in adjusted EBITDA to subsequent quarters. Despite this impact, second quarter adjusted EBITDA margins improved to 30% from 26% compared to the second quarter of last year. The margin improvement reflects product mix and cost reduction measures, partially offset by the revenue impact from those delays. We experienced a decline in service revenue, primarily from the exit of a low-margin customer care business in the fourth quarter of 2022, the decline in a customer's propensity to order services in two of our lower-margin, default-related businesses, and the temporary foreclosure holds. We believe the foreclosure holds are now behind us and that the associated revenue is largely deferred and not lost. For 2023, we anticipate that our countercyclical servicer and real estate segment will have higher adjusted EBITDA compared to 2022, driven by revenue mix and efficiency initiatives. Moving to slide seven in our servicer and real estate sales pipeline and wins. While we wait for the default market to recover, we continue to build our pipeline and are winning new business. At the end of the second quarter, our weighted average pipeline totaled $38.6 million of annual revenue on a stabilized basis. In April through July, we won business that we estimate will generate $15.7 million in annualized revenue once stabilized. One of the more notable wins that I mentioned earlier was the July signing of a master services agreement to provide REO asset management, brokerage, auction, valuation, and field services on a portion of the servicer's REO portfolio. On a stabilized basis, we estimate that this new business represents $12.8 million in annual revenue and $3 to $5 million per year in adjusted EBITDA. We anticipate that we will begin to receive referrals in the third quarter and reach revenue and earnings stabilization by the middle of 2024, if not sooner. Turning to the macroeconomic environment in slide 8. There are several indicators that consumers are financially stressed, which could be precursors to a rise in mortgage delinquency rates. Inflation, which reached a 40-year high in June 2022, has eroded the American consumer's purchasing power. As you can see on the graphs, auto and credit card delinquencies continue to rise, and 30-year fixed interest mortgage rates remain more than double from pandemic lows, reducing home affordability. average personal savings rates, which were at 26% in March of 21, have declined to 4.6% in May 2023. Additionally, in 2022 and 2023, 37% of workers have taken a loan, early withdrawal, and or hardship withdrawal from their 401k or similar plan or IRA, with both years marking an all-time high. While 30 plus days mortgage delinquencies are close to historical lows, we believe that there are early signs of stress. In June, the number of U.S. mortgages that are delinquent by one payment increased by 2.2%, and those that are behind by two payments increased by 1.7% from May. Should borrowers remain under financial stress or the economy enter a recession, we anticipate that mortgage delinquency rates will rise. Turning to slide nine in our origination segment. In a difficult origination environment, we perform well with second quarter adjusted EBITDA 44% better than the same period in 2022, despite the $400,000 negative impact from the settlement of a non-recurring litigation matter. Second quarter service revenue was 13% higher than the first quarter and 1% higher compared to the second quarter last year. Service revenue growth reflects the progress we are making in onboarding customer wins from our newer LendersOne products. As you can see on the bottom left of the slide, our second quarter revenue growth compared to the same quarter in 2022 reflects significantly better than market performance from the LendersOne business as we gain traction with our solutions that are designed to help our members save money. Our performance was partially offset by our other origination businesses which perform largely in line with the refi market. We anticipate the origination segment's performance to improve as the year progresses from sales momentum, efficiency initiatives, and product maturity for our newer reseller offerings. For the full year, we anticipate the origination segment to generate flat to modest year-over-year revenue growth and adjusted EBITDA improvement despite the MBA's forecasted 22% annual decline in 2023 origination volume. Slide 10 provides a summary of our origination segment sales pipeline and wins. Our weighted average sales pipeline as of June 30 is strong at $24.6 million of annual revenue on a stabilized basis. This includes $9 million in weighted revenue opportunities related to pricing proposals to LendersOne members and prospects for our newer reseller business. We closed $2.9 million in estimated sales wins during the quarter. From our 2022 and first half of the year 23 sales wins, we recognized approximately $2.9 million in revenue in the second quarter, or $11.5 million of revenue on an annualized basis. This is significantly up from the $9.4 million on an annualized basis as of the first quarter. Moving to our corporate segment. We continue to maintain cost discipline. Second quarter adjusted EBITDA loss in the corporate segment was $2.3 million, or 19% better than the same quarter in 2022. For the year, we anticipate corporate costs, excluding interest expense and one-time debt amendment costs, to be lower compared to 2022. This reflects the additional cost cutting initiatives that we began implementing in July. To conclude, Our second quarter adjusted EBITDA was 47% better than the same period in 2022, despite the estimated $900,000 impact from the temporary foreclosure holds and non-recurring litigation settlement. Our sales pipeline and wins remain strong, and we continue to aggressively manage our expenses. We believe we will begin to recover from the California foreclosure holds in the third quarter and are well positioned in 23 to return to year-over-year revenue growth and generate positive adjusted EBITDA. We anticipate roughly break-even adjusted EBITDA for the third quarter and positive adjusted EBITDA for the fourth quarter and full year, positioning the company for significantly stronger performance in 2024 with potential revenue and adjusted EBITDA upside from the significant number of servicing portfolios reported to be in the market for sale if acquired by our customers. I'll now open up the call for questions. Operator?