Altisource Portfolio Solutions S.A.

Good day and thank you for standing by. Welcome to the Altisource Portfolio Solutions second quarter 2024 earnings 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 is being recorded. I would now like to hand the conference over to your first 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.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. Financial projections and scenarios are expressly qualified as forward-looking statements, and as with other forward-looking statements, should not be unduly relied upon. In addition to the usual uncertainty associated with forward-looking statements, the continuing impacts of government and servicer responses to the COVID-19 pandemic, governmental fiscal policies, and current economic conditions 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 Altisource. Please review the forward-looking statements sections in the company's earnings release and quarterly slides, as well as the risk factors contained in our 2023 Form 10-K, describing some 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 slides. 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. We had a strong second quarter and believe we were on track to achieve our 2024 guidance of 13 to 32% service revenue growth over 2023 and adjusted EBITDA between $17.5 million and $22.5 million in 2024. For the quarter, we generated $36.9 million in service revenue and $4.4 million of adjusted EBITDA and modestly increased cash to $29.7 million. We also went live and began to receive referrals from a renovation business customer and three foreclosure trustee customers. Our financial results reflect our strong sales wins, price increases, referral volume growth, and lower cost base in what continues to be an incredibly difficult environment of close to historically low mortgage delinquency rates and low origination volume. Service revenue in our servicer and real estate segment grew by 16% compared to the same quarter in 2023 in a market that had approximately 7% fewer foreclosure starts, and 13% fewer foreclosure sales. Service revenue in our origination segment declined by 5% compared to the same quarter in 2023, outperforming the 13% decline in total market mortgage origination volume. Slide five provides additional information on our total company financial performance. As you can see, the trends are positive. Service revenue was 11% higher and adjusted EBITDA was $7.9 million better than the second quarter of last year. Adjusted EBITDA margins improved to 11.9% in the second quarter of 2024 compared to negative 10.5% in the second quarter of 23. The improvement in service revenue, adjusted EBITDA, and adjusted EBITDA margins compared to last year was driven by sales wins, price increases for certain services, stronger default referrals, business segment margin expansion, and lower corporate costs. Adjusted EBITDA and adjusted EBITDA margins declined modestly compared to the first quarter due to approximately $600,000 of first quarter net non-recurring benefits comprised of $1.2 million of benefits in the corporate segment and $600,000 of costs in the servicer and real estate segment. Excluding these net non-recurring first quarter benefits, second quarter adjusted EBITDA and adjusted EBITDA margins improved compared to the first quarter. For the third and fourth quarters, we anticipate strong service revenue and adjusted EBITDA growth over 2023 as we ramp sales wins and are more efficient and lower cost base. Slide 6 provides additional information on our servicer and real estate segment. Second quarter 2024 service revenue in this segment was 16% higher than the second quarter of 2023 and flat to last quarter. We continue to experience growth in certain higher margin businesses that support the earlier stage of the default process. Adjusted EBITDA of $11.1 million, was 50% higher than the second quarter of 2023 and 6% higher than the first quarter of this year. Adjusted EBITDA margins were 38.1% in the second quarter of 24 compared to 29.5% in the second quarter of 2023 and 35.8% last quarter. The improvement compared to the second quarter of last year reflects revenue growth and efficiency initiatives. The improvement compared to the first quarter of this year reflects business unit efficiency initiatives, as well as the $600,000 of non-recurring expenses in the first quarter that I just discussed. Slide 7 provides a summary of our servicer and real estate sales wins and pipeline. For the quarter, we won new business that we estimate will generate $15.3 million in annual revenue, once fully ramped over the next couple of years. In the second quarter, we signed three agreements to provide foreclosure trustee services. This is in addition to the market share expansion of trustee business with a customer that we won in the first quarter. We completed the onboarding process of these three trustee customers and are ramping referrals. We anticipate that these wins will support service revenue and EBITDA growth. We also made progress ramping our renovation services for one of the largest owners of REO assets in the US. Since the program went live in late April, we have received over 35 renovation referrals, which we estimate will generate average revenue of close to $100,000 per property. We anticipate referral volume, revenue, and earnings from this customer will ramp as the year progresses. We ended the quarter with a segment weighted average sales pipeline of $20.3 million of annual revenue on a stabilized basis, most of which we forecast will impact 2025 and beyond. The decline in the sales pipeline compared to last quarter primarily reflects the significant sales wins I just discussed and the addition of earlier stage opportunities to the pipeline, which have a lower assigned win probability. Turning to the macroeconomic environment in slide 8, as we have discussed in the past, there continues to be early signs of consumer financial stress. Consumer savings has declined, credit card debt is near a record high, and early-stage delinquencies are rising. Additionally, home affordability, which is highly correlated to home prices, remains low. Despite this significant increase in interest rates in the last two years, We believe home prices remain high largely because the inventory of homes for sale is very low. This appears to be changing. According to the National Association of Realtors, the inventory of existing homes for sale in May 2024 was 18.5% higher than May of last year, and seasonally adjusted existing home sales were 2.8% lower. As inventory grows, home prices in certain markets may decline as the supply-demand dynamics normalize. Should this happen, stressed consumers that have low down payment mortgages or loans that were originated over the last couple of years may no longer have equity in their homes and will therefore have fewer options to address loan defaults. This could increase foreclosure initiations and drive foreclosure conversion rates to more normal levels. Moving to our origination segment in slide nine. We are pleased that adjusted EBITDA improved by $1.8 million compared to the second quarter of last year, despite a 5% decline in service revenue and a 13% decline in industry-wide residential origination volume for the same period. Adjusted EBITDA was flat to the first quarter on similar service revenue. Adjusted EBITDA improved over last year from cost savings and efficiency initiatives. As you can see on the slide, the origination segments gross profit, gross profit margins, adjusted EBITDA, and adjusted EBITDA margins all improved relative to prior year. Slide 10 provides a summary of our origination segment sales wins and pipeline. On an annualized stabilized basis, we won an estimated $1.5 million in new business in the second quarter. Our weighted average sales pipeline at the end of the quarter was $14.7 million. We continue to focus on rolling out new solutions to help our LendersOne members make more money. We believe the regular launch of new solutions to LendersOne members, combined with greater adoption of our existing solutions, will strengthen our value proposition for LendersOne members and support further revenue and earnings growth in our origination segment. During the second quarter, we signed agreements with our first homeowners insurance customer and have a pipeline of 35 member prospects. We believe that the homeowners insurance program can improve the loan closing process for our members and their borrowers and establish an attractive revenue annuity for AltaSource as policies are issued, the majority of which we believe will be renewed. Turning to our corporate segment in slide 11, we are maintaining strong cost discipline. Second quarter corporate adjusted EBITDA loss of $7.2 million was $2.4 million or 25% better than the second quarter of 2023 and $900,000 worse than the first quarter of this year. The first quarter 2024 results included an estimated $1.2 million of net non-recurring benefits. Absent these benefits, second quarter 2024 adjusted EBITDA loss in corporate modestly improved compared to the first quarter 2024. The lower adjusted EBITDA loss compared to last year reflects our cost savings and efficiency initiatives. Moving to slide 12. In summary, I'm pleased with our second quarter and first half of the year performance and believe we are on track to achieve our 2024 guidance of 13% to 32% service revenue growth over 2023 and adjusted EBITDA between $17.5 and $22.5 million in 2024. We continue to win new business and are making good progress ramping sales wins on a much lower cost base in a historically difficult market. As a result, service revenue for the first six months of this year is $3.5 million, or 5% higher than the same period last year, and adjusted EBITDA is $11 million higher despite the decline in foreclosure starts, foreclosure sales, and mortgage origination volume over the same period. If we achieve the midpoint of our adjusted EBITDA guidance, we will have grown adjusted EBITDA by approximately $52 million over three years. As we ramp new business, we are cautiously optimistic that we will exit the year at a $30 million plus adjusted EBITDA run rate. I'll now open up the call for questions. Operator?