Altisource Portfolio Solutions SA
NASDAQ:ASPS
Earnings Call Analysis
Q4-2023 Analysis
Altisource Portfolio Solutions SA
The company kicked off 2024 on an optimistic note after navigating through tough market conditions in 2023. Despite serious industry headwinds, the company managed to deliver a relatively stable performance. Service revenue in the Servicer and Real Estate segment reduced only marginally by 4%, demonstrating resilience. More impressively, in the Origination segment, the company outperformed the market, with its service revenue declining by only 11% compared to a 36% nosedive in industry-wide residential origination volume. The total company adjusted EBITDA improved significantly, evidencing both product mix benefits and strategic cost reductions.
Looking forward, the company's 2024 forecast is bullish, promising significant growth. There's an anticipation of service revenue jumping to $155 million to $180 million and adjusted EBITDA ranging from $17.5 million to $22.5 million. This represents a 13% to 32% increase in service revenue and an $18.4 million to $23.4 million enhancement in adjusted EBITDA compared to 2023. The expected growth is attributed to new sales wins and enhanced margins resulting from prior cost-saving initiatives and decreased corporate expenditures.
To continue on its growth trajectory, the company has established four strategic initiatives for 2024. These initiatives focus on accelerating business development in high-performing and high-margin sectors, driving operational efficiencies and cost management, fortifying customer relationships and increasing their spend with cross-selling strategies, and finally, launching new, profitable offerings for members of Lenders One to support their financial performance.
The company's service revenue saw a slight decline due to the exit from a low-margin business and reduced referrals in field services. However, the adjusted EBITDA and margins in the Servicer and Real Estate segment both saw improvements. Notably, 2023 sales wins are projected to substantially elevate annual revenue to $58.4 million on a stabilized basis over the following years. The Servicer and Real Estate segment is expected to see considerable improvements in both service revenue and adjusted EBITDA for 2024, buoyed by new sales, anticipated price increases, and the full-year benefit of cost savings and efficiency initiatives from 2023.
The macroeconomic scene showcases early signs of consumer financial stress, with decreased savings, rising debt, and escalating early-stage delinquency rates, which may be harbingers of a future uptick in mortgage delinquency rates. Home affordability in 2023 stood at a near 10-year low, a situation that could lead to more strains and possibly increased service demand for the company.
The Originations segment handled a challenging market remarkably during 2023, staying ahead with only a modest drop in revenue and substantial progress in adjusted EBITDA. The segment benefitted from Lenders One business growth, offsetting declines from other origination businesses. Into 2024, the Origination segment is anticipated to outdo the forecasted 17% growth in industry-wide origination volume and witness considerable improvement in both service revenue and adjusted EBITDA.
The company has weathered a 'perfect storm' over recent years, with the default market not fully recovering since 2020 and a rise in interest rates that has pressured mortgage origination volumes. These challenges, however, have not deterred the company from improving adjusted EBITDA by over $30 million in the last two years, winning new business, and establishing a strong sales pipeline projected to support growth from 2024 onward. With a normalized default market and declining interest rates, the company expects to reap stronger revenue and adjusted EBITDA growth, along with reduced corporate interest expenses.
In the first quarter, March is anticipated to present a tough comparison for revenue. However, the provided guidance for 2024, which predicts a rise in foreclosure activity, remains generally conservative and back-half loaded. This caution reflects the current state of the market and a prudent approach to forecasting company performance amid ongoing market recovery.
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Hello and thank you for standing by. Welcome to Altisource Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Michelle Esterman, Chief Financial Officer. You may begin.
Thank you, operator. We first want to remind you that the earnings release, Form 10-K 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 impacts of government and servicer responses to the COVID-19 pandemic, government of fiscal policies and current economic conditions make it extremely difficult to predict the future state of the economy and the industry 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 will now turn the call over to Bill.
Thanks, Michelle, and good morning. I'll begin on Slides 4 and 5. We're pleased with our performance in 2023 as we continue to strengthen our financial position and win new business, which has not fully ramped.
In the face of serious market headwinds for both business segments, service revenue in the Servicer and Real Estate segment was only 4% lower than 2022, and service revenue in the Origination segment outperformed the overall market with a decline of 11% compared to a 36% decline in industry-wide residential origination volume. We improved total company adjusted EBITDA by $15.7 million compared to 2022 and by $30.8 million compared to 2021. Our 2023 total company adjusted EBITDA improvement is largely from product mix, higher margins in our businesses and lower corporate operating costs. The 2023 adjusted EBITDA margins in the business segments improved by 680 basis points to 25.1% and the Corporate segment's adjusted EBITDA loss declined by 18.4% to $35.1 million. Company-wide, we generated positive adjusted EBITDA for 5 of the last 6 months of 2023, including $520,000 in December. We're off to a good start in 2024, generating $900,000 of adjusted EBITDA in January. During 2023, we won new business, strengthen our sales pipeline and took steps to improve our balance sheet. I'll discuss our wins and sales pipeline in greater detail in a few minutes.
With respect to the balance sheet, we reduced the principal balance of our term loan by $23.1 million or 9.4% and extended the maturity date of our term loan and revolver to April 2025 with the option to extend both by another year, subject to meeting certain conditions.
Turning to Slide 6 and our 2024 forecast. We believe our sales wins, enhanced margins and lower corporate costs position us for strong revenue and adjusted EBITDA growth. Based upon our current expectations for the market in which we operate, which assumes only a modest benefit for post COVID increase in closure starts, and 17% growth in industry-wide origination volume, we are forecasting $155 million to $180 million in service revenue and $17.5 million to $22.5 million in adjusted EBITDA. This represents 13% to 32% service revenue growth and an $18.4 million to $23.4 million improvement in adjusted EBITDA over 2023. We are forecasting that the service revenue growth will be driven by the continued ramping of our 2023 sales wins, 2024 sales wins and price increases for certain services.
We anticipate that the 2024 adjusted EBITDA improvement will be driven by: one, revenue growth; two, higher business unit margins, primarily from the full year benefit of 2023 cost savings and efficiency initiatives, price increases and scale; and three, lower corporate operating costs from the full year benefit of 2023 cost savings and efficiency initiatives. While it is still early in the year, we're off to a good start in January with adjusted EBITDA of $900,000. As we look beyond 2024, we anticipate that our businesses will also benefit from the ramp of sales wins, continued recovery of the default market and normalized origination volumes.
Slide 7 provides a summary of our 2024 strategic initiatives. As you can see, we established 4 initiatives to support long-term growth. First, accelerate business development efforts on solutions where we believe Altisource is a strong performer, generates high margins and where we forecast market tailwinds. Several of our businesses generate strong margins, and we believe are in high demand as servicers prepare for a rise in delinquencies and originators look to improve their profitability. We plan to focus our business development efforts on these offerings; second, deliver strong operational efficiency and manage costs to drive higher gross profit and adjusted EBITDA margins. We plan to continue to evaluate and implement processes to streamline operations and reduce costs in those businesses and corporate departments that we believe will generate the greatest impact on profitability and performance. Third, strengthen customer relationships and cross-sell other solutions to existing customers to gain wallet share. We have hundreds of revenue-generating customers. We believe that there is a significant opportunity to grow business with our existing customer base through strong performance and cross-selling other solutions. Fourth, launch new offerings intended to help Lenders One members improve their profitability. We believe that there is a significant opportunity to improve Lenders One members profitability and grow our revenue and earnings by launching new solutions that leverage the Lenders One members collective buying power.
Moving to Slide 8 and our countercyclical Servicer and Real Estate segment. For 2023, service revenue declined by 4%, which reflects growth in certain higher-margin businesses that support the earlier stage of the default process, offset by modestly lower service revenue from the fourth quarter 2022 exit of a low-margin employee outsourced business and fewer referrals in our lower margin field services business. We improved the Servicer and Real Estate segment's adjusted EBITDA and adjusted EBITDA margins. 2023 adjusted EBITDA of $37.1 million was $5.9 million or 18.8% higher than 2022, and adjusted EBITDA margins improved to 34.4% from 27.9%. Adjusted EBITDA growth and margin improvement reflect product mix and benefits from cost reduction and efficiency initiatives partially offset by modestly lower service revenue.
Slide 9 provides a summary of our Servicer and Real Estate sales wins and pipeline. For the year, we won new business that we estimate will generate $58.4 million in annual revenue on a stabilized basis over the next couple of years. We had a couple of significant sales wins in the fourth quarter. The first was signing agreements to provide renovation services for one of the larger owners of REO assets. We anticipate that we will start to receive the first renovation referrals toward the end of the first quarter and ramp as the year progresses. The second win was an expansion of wallet share with an existing customer in our higher-margin trustee business. We started to receive an increase in referrals in January and anticipate referral volumes to grow steadily through the summer. We ended the year with a total weighted average sales pipeline of $30.1 million of annual revenue on a stabilized basis, most of which will impact 2025 and beyond. There are a few larger late-stage opportunities in the pipeline worth noting. We are currently negotiating an agreement to provide REO auction services for a loan servicer and their real estate agents. We are also discussing market share expansion with one of our REO asset management customers. And finally, we are negotiating agreements to provide trustee services for a couple of nonbank loan servicers. We hope to have more to report on these exciting opportunities with our first quarter earnings call. For 2024, we anticipate that our Servicer and Real Estate segment service revenue and adjusted EBITDA will improve considerably compared to 2023 from the continued ramp of 2023 sales wins, conversion of sales wins to revenue, price increases for certain services and the full year benefit of 2023 cost savings and efficiency initiatives. Our Hubzu and later-stage REO offerings forecast assumes only a modest benefit from the post-COVID increase in foreclosure starts.
Turning to the macroeconomic environment on Slide 10. There are early signs of consumer financial stress, which could be precursors to a rise in 90-plus day mortgage delinquency rates. Consumer savings have declined, debt is growing early-stage delinquency rates are rising and home affordability into 2023 at a near 10-year low. Credit card debt is at record high, balances on home equity lines of credit have grown for 7 consecutive quarters. 401(k) hardship withdrawals continue to grow and early-stage auto and credit card delinquencies continue to rise. According to the Federal Reserve Bank of New York, credit card and auto loans that are becoming delinquent are rising above pre-pandemic levels, signaling increased financial stress. Early-stage mortgage delinquency rates are also rising, comparing December '23 to December '22, 15% more mortgages are delinquent by one payment and 16% more mortgages are behind by two payments.
Moving to our origination segment on Slide 11. Our Originations segment performed well in a difficult origination environment. despite the 36% decline in industry-wide residential origination volumes in 2023 compared to 2022, the origination segment outperformed the market with a revenue decline of only 11% and an adjusted EBITDA improvement of $1.9 million. This reflects revenue growth in the Lenders One business from customer wins from our newer solutions, partially offset by revenue declines in our other origination businesses that were impacted to a greater degree by lower origination volumes. Adjusted EBITDA improved from cost savings and efficiency initiatives. For 2023, the Origination segment's gross profit, gross profit margins, adjusted EBITDA and adjusted EBITDA margins, all improved relative to 2022.
Slide 12 provides a summary of our origination segment sales wins and pipeline. During a very difficult origination market, our focus on helping our Lenders One members save money and better compete drove substantial interest in our solutions. On an annualized stabilized basis, we won an estimated $10.3 million in new business for the year. Our weighted average sales pipeline at the end of 2023 was $18 million, with $4 million of the $18 million in the contracting stage. For 2024, we anticipate our Origination segment service revenue to outperform the forecasted 17% increase in industry-wide origination volume, and adjusted EBITDA to improve considerably compared to 2023. This is from sales momentum in our Lenders One business, the full year benefit of 2023 cost savings and efficiency initiatives January '24 price increases for certain of our services and the launch of new solutions that help Lenders One members improve their profitability. On the new solution front, we are planning a soft launch of Lenders One homeowners insurance in the first quarter. Through this program, we will work with an insurance technology partner and over 40 insurance carriers across 50 states to provide Lenders One members, borrowers with access to competitively priced homeowners insurance. We believe the regular launch of new solutions to Lenders One members, combined with greater adoption of our existing solutions, will strengthen our value proposition for Lenders One members and support further revenue and earnings growth in our Origination segment.
Turning to our Corporate segment on Slide 13. We continue to bring down our operating costs. 2023 adjusted EBITDA loss of $35.1 million was $7.9 million or 18% better than 2022. The lower adjusted EBITDA loss reflects our cost savings and efficiency initiatives. For 2024, we anticipate adjusted EBITDA loss to improve compared to 2023 from the full year benefit of 2023 cost savings and efficiency initiatives.
Moving to Slide 14. The environment over the last few years created a perfect storm for Altisource. The default market was virtually shut down in 2020 and is still not fully recovered. More recently, there has been a dramatic increase in interest rates, significantly reducing mortgage origination volumes and increasing our corporate interest expense. While these events negatively impacted service revenue in both our business segments, the Servicer and Real Estate segments businesses that primarily support earlier-stage foreclosure activities grew and the Origination segment outperformed the 36% decline in origination volume. Even still, we improved adjusted EBITDA by more than $30 million over the last 2 years.
Additionally, we've won meaningful new business that should continue to ramp in 2024 and have a strong sales pipeline to support growth in 2025 and beyond. As a result, we believe we are positioned to achieve 13% to 32% service revenue growth and adjusted EBITDA of between $17.5 million and $22.5 million in 2024. When the default market returns to normal and interest rates decline, we should benefit from stronger revenue and adjusted EBITDA growth and lower corporate interest expense.
I'll now open up the call for questions. Operator?
[Operator Instructions] Our first question comes from the line of Raj Sharma with B. Riley.
Yes. And great on providing guidance for the first time in several years. Bill, could you talk about some of the new products that were launched on the Lenders One origination side, especially the credit reporting? Can you give more color on that and how that's kind of doing in the first half of the year -- in the beginning of the year?
It's interesting. On the credit reporting business, we became a credit reporting agency in 2021 and went live with our first customer in January of 2022. And since then, we've grown the business to 30 customers. And I think last month, we did roughly $900,000 of revenue in that -- between the credit reporting business and the related white label services. And I think we're on track probably by March, if not March and April to be over $1 million a month run rate. So I think -- excuse me, that's a very good example of how we can take a new product, launch it, roll it out to our members and generate $1 million a month in revenue or $12 million a year of annual revenue. And so the whole strategy around Lenders One in our origination business is to continue to work with our members to understand of what their needs are, what their pain points are. And then we leverage their buying power to launch new programs to help them make more money and better compete. And so an example, which I talked about in my prepared remarks, is homeowners insurance. So we're working with a insure tech company and launching this quarter a program to help our members and their loan officers and their borrowers efficiently and with less friction, get quotes for homeowners insurance. So we're pretty excited about that program. It's still early. But we -- what we like about that business is, we earn a commission on every policy that's originated. And then that creates an annuity to the extent those borrowers renew the policy, we are an ongoing commission revenue in subsequent years. Another product we're in the process of launching is a flood insurance program. We're calling it Lenders One flood insurance. And here, again, we're working with a partner to offer our members a cost-effective flood insurance policy. And again, the whole strategy is launch it gain adoption, that gives us a stronger buying power that ultimately helps reduce our costs and provide a stronger pricing to our members, which increases the adoption and increases the profitability of the members and our profitability. So we're pretty excited around the launch of these new programs, and we're optimistic that these -- a couple of new programs we launch each year can contribute to future revenue and earnings growth.
Great. And then moving on to the Default Services segment part of the business with the slower conversion into REOs, the indications are that you started -- or you have been focusing more on the earlier part of the foreclosure the pre-foreclosure process, is that accurate?
Yes. So Raj, what we're seeing is the early stage delinquencies, as I pointed out on our call, look like they're starting to pick up. And clearly, foreclosure initiations have picked up substantially from the time of the pandemic, although not quite back at the levels they were at prior to the pandemic. What we haven't seen yet is that those early 2022 foreclosures make it all the way to the end. And so what we're doing now and what we're working on with our customers, existing and new customers, is focusing on those early-stage activities, where we are seeing a pretty good lift in referral volumes. So just to give you an example, in the fourth quarter, in our trustee business and our foreclosure title search business we saw about a 30% increase in referral volumes compared to the fourth quarter of the prior year. And that trend is continuing in the first quarter of this year. So what we're doing from a sales perspective is focusing a lot on those earlier-stage activities, where there is an increase in referral volumes. And the guidance we gave doesn't -- assumes we're going to get a lift in some of those earlier stage activities, but we're only assuming a very modest lift at the end. So as the market continues to get back to normal and your inflows and outflows stabilize, there is some upside, we think, to what we're -- what we're forecasting. But because we're not seeing that increase or that conversion rate increase at the end yet, we're trying to be more conservative in terms of how we're approaching our guidance.
Got it. And then just last question for me. On the fiscal '24 guidance, can you talk about perhaps to guide to the cadence of is there a slight rise in foreclosure activity. Is the guidance largely back half loaded?
Yes. So I think you're going to see that -- look, from a revenue perspective, I think in the first quarter, March, is a -- it was -- for a variety of reasons, is a tough comp for us. But January and February, I think our revenue, Michelle, correct me if I'm wrong, was roughly 8%, 9% higher service revenue than the same time last year and better than every month last year other than March, our revenue in both January and February. So I think we're off to a good start from a revenue perspective. I talked about our EBITDA being $900,000 in the month of January. We think February is going to continue to be strong. So Raj, to answer your question, I think you're going to see the revenue as we ramp -- the good news is we've largely won the customers that support our revenue growth for the year, and it's all about the timing for how we ramp those customers, how they onboard and ramp throughout the year. So we feel -- and that's why there's a range in our revenue forecast because it's all about -- it's either wins that we already have signed a contract or we've gotten a verbal commitment that are in those numbers, largely that are in those numbers. And as we ramp throughout the year, we would expect that revenue to grow and our EBITDA to grow. So I think I would look to -- and Michelle, correct me if I'm wrong, first quarter, I think, because of March will be a tough comp from a revenue side, but we'll be pretty close to revenue -- service revenue last year. EBITDA will be better in the first quarter than last year, and we would expect our EBITDA and revenue to grow as the year progresses as we ramp these customers that we've already won and where we've gotten a verbal commitment.
[Operator Instructions] Our next question comes from the line of Mike Grondahl with Northland.
How would you describe your outlook for Hubzu inventory over the course of '24?
And Michelle, you can jump in as well. So I think, Mike, we're being very -- we're trying to be conservative on Hubzu inventory. So I think we're focusing a lot on what we can control. And what we can control around a lot of these sales wins and the earlier stage of foreclosure starts, we're making really, really good progress. And we think that's going to drive pretty significant revenue and EBITDA growth. We're being more cautious on Hubzu because until we actually see that conversion rate from a foreclosure start all the way to the end, getting back to sort of the pre-pandemic levels, we want to be more modest in our projections. Michelle, I don't have the inventory in front of me projection. But I think it's a very modest growth in inventory, Mike, as my recollection.
Got it. And Slide 9 lays out a bunch of wins in a dollar amount. But as it's been for a while, revenue from those wins really lag, is '24 and '25 kind of the years that the growth in revenue catches up to those strong sales wins. How do we just think about that conversion?
So the bottom line, it just takes time from when you win to when you ramp. Of course, things can happen and customers could go out of business, they could increase market share, decrease market share. So a lot could happen with these wins, and we sort of leave it as a static. But there's a -- in the $58.4 million, Mike, there's a couple of larger wins this new REO renovation business we won, that's got massive potential for us, and we haven't launched it yet. So that's going to launch, we think we're going to get our first referrals hopefully in the next week or two and that's got the potential to become very, very significant from a revenue perspective. We launched a new construction lending program in our Granite business. that's been ramping as the year progressed last year, but we're nowhere near to stabilize from a revenue perspective. Michelle, help me out here -- our REO win that we got our first referral, I think, in September, we issued a press release around that win. I mean it takes -- we're getting an attractive number of referrals. It takes time for those referrals ultimately to get to an REO sale and generate revenue. But it's ramping quite nicely. And as we planned, we would -- we are expecting as the year progresses to get more market share from that customer as well. So the bottom line, Mike, is it just takes time from these wins to actually generating revenue and earnings. But they're very -- they're household names. They're very attractive wins and we believe the margins are strong in those -- in that -- associated with that revenue. And we're going to continue to ramp it this year and next.
Got it. Got it. And then lastly, any milestones related to the debt this year to remind us about? Or not that any amounts do or anything, but just like any milestones you need to reach during '24 for the debt?
Yes. No, look, I think we've made really strong progress in a very, very tough environment, as I talked about in the prepared remarks, you had both the pandemic impact to the default market and the higher interest rates impacting the origination market a bit of a perfect storm. And even during this difficult time. we've improved our EBITDA over the last couple of years by over $30 million, and we're forecasting $21 million, $22 million improvement this year. So I think we're going in the right direction in terms of getting back to strong margins, strong EBITDA the costs are in line. And as we continue to make progress in our growth, our plans are to ultimately refinance the debt. So right now, we've got time. The debt matures in April '25, but we have an automatic right subject to some conditions around an extension fee and complying with reps and warrants another year. And so we feel good about our position. We got to continue to grow our adjusted EBITDA and put the company in a position to refi the debt and hopefully reduce our interest expense.
[Operator Instructions] I'm showing no further questions in the queue. I would now like to turn the call back over to Bill for closing remarks.
Great. Thank you, operator. We're pleased with our financial performance and sales wins in 2023 and believe this sets us up really well for this year. Thanks for joining.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.