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spk05: 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.
spk02: 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.
spk01: 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?
spk05: Thank you, we will now conduct the question and answer session as a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced to withdraw your question, please press star one one again, please stand by while we compile the Q amp a roster. Our first call question comes from Mike grundle of Northland securities Mike your line is open.
spk04: Hey, guys, thanks. Hey, Bill, first question, just on HUBZoo inventory levels, when would you think that's going to inflect higher?
spk01: Yeah, so, Mike, I don't think our view has changed. You know, I think as these new foreclosures work through the system, you know, it starts to stabilize the middle of next year. Right now, our inventory is holding relatively – flat because most of our business is REO related. As those new foreclosures work through that inventory, we would expect to see – sorry, work through that process, we would expect to see it grow.
spk04: Got it. So if HUBZoo inventory is sort of inflecting middle of next year, what Is it fair to assume sort of your revenue inflects middle of next year also? Is that the right way to think about it?
spk01: Yeah, I mean, I would say, Mike, look, we're very focused on the revenue side on new sales in addition to the market recovering. And so, you know, while we anticipate the market's going to recover, we want to make sure we're out there selling as hard as we can and winning new business in the meantime. And based upon that, Revenue growth that we anticipate will take place throughout the rest of this year and revenue growth into next year. From our core business and our new sales wins, we think we can continue to improve our earnings quite significantly. In terms of the new foreclosures, clearly, HUBZoo is our most profitable business. And as those foreclosure initiations work through the process and become REO, that represents more growth for us.
spk04: Great. Hey, that client, the asset management client, I think representing $12.8 million, looked like a big win in July, and it's going to drive, I think you said, $3 to $5 million of annualized EBITDA. Are there more out there like that? I mean, is that something you can replicate and kind of run with a little bit?
spk01: Yeah, so, Mike, first of all, we're really excited about that opportunity. We're working very hard with this customer to get launched hopefully in September is our plan. In terms of other opportunities, we're working on some other opportunities as we speak that look like they would be next year launch dates, not this year, should we be successful in winning those opportunities. So we do have a couple of opportunities we think that could represent more growth for HUBZoo and some of our related services in a manner similar to this opportunity. But of course, until you win the deals, it's not done. But we're pretty excited.
spk04: And then just lastly, the July cost reduction with the $13.5 million of annual savings. I guess talk about that for a moment. Is that kind of to set you up for 24 and just kind of, you know, pushing that margin and profitability, kind of guaranteeing it in 24? I guess help me understand the July cost reduction.
spk01: Yeah, sure. So a couple things. One is I think we'll roughly be at a million dollars a month of savings beginning, Michelle, in the month of September. Is that right?
spk02: That's right.
spk01: And in terms of, look, I think, Mike, we were at one point, pre-pandemic, a much larger company, and we need to make sure that our costs reflect the size of the company today. And we also want to make sure we have very significant operating leverage as the market comes back. And I think by taking these actions today, we help ensure we have stronger operating leverage going forward. And You know, depending on the timing of the market, you know, depending upon the timing of the market, we have more flexibility. For when it recovers, we have more flexibility. And so we thought it was an important step to take and proud of the work the team has done to help us identify those cost savings and get those implemented quickly.
spk04: Got it. Okay. Hey, thank you.
spk01: Thanks, Mike.
spk05: Thank you very much. One moment for our next question. Our next question comes from Raj Sharma of B. Riley Financial. Raj, your line is open.
spk03: Yeah, thank you. Thank you for taking my questions. You know, Michelle, I just wanted to understand the foreclosure holds and the impact on the 2Q revenues. Can you give us some more color on that? When did they come off? Do you... Are they, you know, were they done entirely in 2Q and no impact in 3Q? And if there are any such similar holds in other states?
spk01: Sure. So, good morning, Raj. One of our customers agreed with the state of California in the second quarter to put their pending foreclosures in that state on hold. for roughly 60 days, but it didn't all start at once. So it was primarily a second quarter event that impacted primarily two of our businesses, our foreclosure trustee business and our title business that are both very high margin services for us. We saw those holds start to come off at the end of June. And now we believe they're fully off and we're back in business in California. That revenue was largely the 500,000 I referred to of EBITDA is largely deferred. We think we'll come back in the third and fourth quarter this year.
spk03: Great. Thank you. And any other such holds or commentary in other states?
spk01: No, we're not aware of anything at this point in time. I mean, the only thing I would say, no, no, we're not aware, Raj, of any any impact from our customers in other states today.
spk03: Got it. And then just secondly, just touching upon the cost reductions one more time, these are in addition to several cost cuts that were done, you know, the last two years. What areas are these cost reductions in?
spk01: Yeah, I'd say the vast majority, and Michelle, correct me if I'm wrong, are coming from comp and benefits. with some coming from a much smaller amount coming from technology and insurance costs, things like that. Michelle, is that correct? That's right. Yeah.
spk03: Right. So because our impression was that the fixed costs, the cost cuts that were done in the last two years are largely fixed costs. This is more variable?
spk01: No, I would say, look, we're still... Yeah, I'd say, Raj, we're still addressing sort of fixed cost infrastructure, both inside the corporate department and inside the business units. And then to a lesser degree, variable costs. Great.
spk03: And then, you know, congratulations on the big asset management win. Wanted to understand or maybe get your thoughts take on growth opportunities that are inorganic, that are maybe more tuck-in possibilities? Do you see, in the environment out there, potential to acquire or tuck in?
spk01: Yeah, I mean, if you listen to, you know, the large, you know, the loan servicers that have reported their earnings already this quarter, and all those servicers that reported their earnings in their last quarter's earnings, first quarter earnings calls. Everyone is talking about the very large amount of portfolios that are available in the market for sale. And some of those portfolios and platforms include fee-based businesses inside of them. And so we think there are some opportunities should our customer or partners be successful in acquiring those portfolios for us to potentially benefit and or participate? And so, it seems like there's a lot of activity short of the short answer, and we'll wait and see how successful our customers are.
spk03: Great. Other than the acquisition of servicing rights from the servicers and the flow through business to you, are there other opportunities that could potentially be taking care through acquisitions in the default services market?
spk01: Yeah, we always keep our eyes open. We're very focused, of course, on organically growing our revenue, being very aggressive in terms of managing our expenses, benefiting from the market to come back. But sure, we will absolutely keep our eyes open for acquisitions. other opportunities if they make sense for the company.
spk03: Great. Thank you for answering my questions. I'll take it offline. Thank you.
spk01: Great. Thanks, Rush.
spk05: Thank you. As a reminder, to ask a question, please press star 11 on your telephone. At this time, I'm showing no further questions. I would now like to turn the conference back to Bill Shapiro for closing remarks.
spk01: Great. Thank you, operator, and thanks for joining the call, and we appreciate everyone's support. Take care.
spk05: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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