Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

FORM 10-Q

 


 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2012

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 1-34354

 


 

ALTISOURCE PORTFOLIO SOLUTIONS S.A.

(Exact name of Registrant as specified in its Charter)

 


 

 

Luxembourg

 

Not applicable

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

291, route d’Arlon

L-1150 Luxembourg

Grand Duchy of Luxembourg

(Address of principal executive offices) (Zip Code)

 

+352 2469 7900
Registrant’s telephone number

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of October 15, 2012, there were 23,363,324 outstanding shares of the registrant’s shares of beneficial interest (excluding 2,049,424 shares held as treasury stock).

 

 

 



Table of Contents

 

Table of Contents

 

ALTISOURCE PORTFOLIO SOLUTIONS S.A.

 

FORM 10-Q

 

 

 

 

Page

PART I — Financial Information

 

 

 

 

Item 1

Interim Condensed Consolidated Financial Statements

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

Condensed Consolidated Statements of Operations

4

 

 

Condensed Consolidated Statements of Equity

5

 

 

Condensed Consolidated Statements of Cash Flows

6

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

 

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

 

 

 

 

Item 3

Quantitative and Qualitative Disclosures about Market Risk

36

 

 

 

 

 

Item 4

Controls and Procedures

36

 

 

 

 

PART II — Other Information

 

 

 

 

 

 

Item 1

Legal Proceedings

37

 

 

 

 

 

Item 6

Exhibits

38

 

 

 

 

SIGNATURES

 

39

 



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Interim Condensed Consolidated Financial Statements (Unaudited)

 

ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

84,429

 

$

32,125

 

Accounts receivable, net

 

62,497

 

52,005

 

Prepaid expenses and other current assets

 

9,060

 

5,002

 

Deferred tax assets, net

 

3,570

 

1,133

 

Total current assets

 

159,556

 

90,265

 

 

 

 

 

 

 

Premises and equipment, net

 

46,352

 

25,600

 

Deferred tax assets, net

 

4,460

 

4,373

 

Intangible assets, net

 

58,593

 

64,950

 

Goodwill

 

14,915

 

14,915

 

Investment in equity affiliate

 

13,598

 

14,470

 

Other assets

 

8,777

 

9,586

 

Total assets

 

$

306,251

 

$

224,159

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

61,264

 

$

44,867

 

Capital lease obligations - current

 

345

 

634

 

Other current liabilities

 

9,806

 

9,939

 

Total current liabilities

 

71,415

 

55,440

 

 

 

 

 

 

 

Capital lease obligations - non-current

 

 

202

 

Other non-current liabilities

 

2,441

 

2,574

 

 

 

 

 

 

 

Commitment and contingencies (Note 15)

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Common stock ($1.00 par value; 100,000 shares authorized; 25,413 issued and 23,363 outstanding as of September 30, 2012; 25,413 issued and 23,405 outstanding as of December 31, 2011)

 

25,413

 

25,413

 

Additional paid-in-capital

 

85,267

 

83,229

 

Retained earnings

 

200,736

 

126,161

 

Treasury stock, at cost (2,049 shares as of September 30, 2012 and 2,008 shares as of December 31, 2011)

 

(80,451

)

(72,048

)

Altisource equity

 

230,965

 

162,755

 

 

 

 

 

 

 

Non-controlling interests

 

1,430

 

3,188

 

Total equity

 

232,395

 

165,943

 

 

 

 

 

 

 

Total liabilities and equity

 

$

306,251

 

$

224,159

 

 

See accompanying notes to condensed consolidated financial statements.

 

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

143,988

 

$

109,793

 

$

427,259

 

$

291,731

 

Cost of revenue

 

94,287

 

73,339

 

278,785

 

191,385

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

49,701

 

36,454

 

148,474

 

100,346

 

Selling, general and administrative expenses

 

18,452

 

15,329

 

54,485

 

45,487

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

31,249

 

21,125

 

93,989

 

54,859

 

Other (expense) income, net

 

(267

)

(320

)

(939

)

294

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes and non-controlling interests

 

30,982

 

20,805

 

93,050

 

55,153

 

Income tax provision

 

(2,898

)

(1,843

)

(8,493

)

(5,377

)

 

 

 

 

 

 

 

 

 

 

Net income

 

28,084

 

18,962

 

84,557

 

49,776

 

Net income attributable to non-controlling interests

 

(1,060

)

(1,791

)

(4,223

)

(4,395

)

 

 

 

 

 

 

 

 

 

 

Net income attributable to Altisource

 

$

27,024

 

$

17,171

 

$

80,334

 

$

45,381

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

1.16

 

$

0.71

 

$

3.44

 

$

1.84

 

Diluted

 

$

1.08

 

$

0.67

 

$

3.23

 

$

1.76

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

23,338

 

24,341

 

23,347

 

24,602

 

Diluted

 

25,016

 

25,489

 

24,895

 

25,720

 

 

 

 

 

 

 

 

 

 

 

Transactions with related parties included above:

 

 

 

 

 

 

 

 

 

Revenue

 

$

86,558

 

$

63,827

 

$

257,491

 

$

166,311

 

Selling, general and administrative expenses

 

$

621

 

$

506

 

$

1,801

 

$

1,352

 

 

See accompanying notes to condensed consolidated financial statements.

 

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)

 

 

 

Altisource Equity

 

Non-

 

 

 

 

 

Common Stock

 

Additional
Paid-in Capital

 

Retained
Earnings

 

Treasury Stock,
at Cost

 

controlling
Interests

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2010

 

25,413

 

$

25,413

 

$

79,297

 

$

58,546

 

$

(14,418

)

$

3,060

 

$

151,898

 

Net income

 

 

 

 

45,381

 

 

4,395

 

49,776

 

Contributions from non-controlling interest holders

 

 

 

 

 

 

31

 

31

 

Distributions to non-controlling interest holders

 

 

 

 

 

 

(5,443

)

(5,443

)

Share-based compensation expense

 

 

 

2,109

 

 

 

 

2,109

 

Exercise of stock options

 

 

 

 

(2,943

)

3,718

 

 

775

 

Repurchase of shares

 

 

 

 

 

(35,471

)

 

(35,471

)

Balance, September 30, 2011

 

25,413

 

$

25,413

 

$

81,406

 

$

100,984

 

$

(46,171

)

$

2,043

 

$

163,675

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2011

 

25,413

 

$

25,413

 

$

83,229

 

$

126,161

 

$

(72,048

)

$

3,188

 

$

165,943

 

Net income

 

 

 

 

80,334

 

 

4,223

 

84,557

 

Contributions from non-controlling interest holders

 

 

 

 

 

 

27

 

27

 

Distributions to non-controlling interest holders

 

 

 

 

 

 

(6,008

)

(6,008

)

Share-based compensation expense

 

 

 

2,038

 

 

 

 

2,038

 

Exercise of stock options

 

 

 

 

(5,759

)

8,378

 

 

2,619

 

Repurchase of shares

 

 

 

 

 

(16,781

)

 

(16,781

)

Balance, September 30, 2012

 

25,413

 

$

25,413

 

$

85,267

 

$

200,736

 

$

(80,451

)

$

1,430

 

$

232,395

 

 

See accompanying notes to condensed consolidated financial statements.

 

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

 

 

 

Nine months ended

 

 

 

September 30,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

84,557

 

$

49,776

 

Reconciling items:

 

 

 

 

 

Depreciation and amortization

 

9,038

 

6,174

 

Amortization of intangible assets

 

3,833

 

3,952

 

Share-based compensation expense

 

2,038

 

2,109

 

Equity in losses of affiliate

 

872

 

355

 

Bad debt expense

 

1,170

 

999

 

Deferred income taxes

 

 

(32

)

Loss on sale or disposal of fixed assets

 

401

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(11,662

)

2,546

 

Prepaid expenses and other current assets

 

(4,058

)

5,066

 

Other assets

 

809

 

(4,109

)

Accounts payable and accrued expenses

 

10,405

 

71

 

Other current and non-current liabilities

 

(266

)

1,844

 

Net cash flows provided by operating activities

 

97,137

 

68,751

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Additions to premises and equipment

 

(24,199

)

(11,291

)

Acquisition of business, net of cash acquired

 

 

(2,515

)

Investment in equity affiliate

 

 

(15,000

)

Change in restricted cash

 

 

(177

)

Net cash flows used in investing activities

 

(24,199

)

(28,983

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Principal payments on capital lease obligations

 

(491

)

(544

)

Proceeds from stock option exercises

 

2,619

 

775

 

Purchase of treasury stock

 

(16,781

)

(35,471

)

Contributions from non-controlling interests

 

27

 

31

 

Distributions to non-controlling interests

 

(6,008

)

(5,443

)

Net cash flows used in financing activities

 

(20,634

)

(40,652

)

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

52,304

 

(884

)

Cash and cash equivalents at the beginning of the period

 

32,125

 

22,134

 

Cash and cash equivalents at the end of the period

 

$

84,429

 

$

21,250

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

Interest paid

 

$

39

 

$

65

 

Income taxes paid (refunded), net

 

$

2,252

 

$

(2,684

)

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

Amortization of tax-deductible goodwill

 

$

2,524

 

$

2,591

 

Premises and equipment purchased on account

 

$

5,992

 

$

 

 

See accompanying notes to condensed consolidated financial statements.

 

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ALTISOURCE PORTFOLIO SOLUTIONS S.A.

Notes to Condensed Consolidated Financial Statements

 

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION

 

Altisource Portfolio Solutions S.A., together with its subsidiaries (which may be referred to as Altisource, the Company, we, us or our), is a global provider of services focused on high-value, technology-enabled, knowledge-based solutions principally related to real estate and mortgage portfolio management, asset recovery and customer relationship management.

 

We are publicly traded on the NASDAQ Global Select market under the symbol ASPS. We were incorporated under the laws of Luxembourg on November 4, 1999 as Ocwen Luxembourg S.à r.l., renamed Altisource Portfolio Solutions S.à r.l. on May 12, 2009 and converted into Altisource Portfolio Solutions S.A. on June 5, 2009. We became a publicly traded company as of August 10, 2009 (the “Separation”). Prior to the Separation, our businesses were wholly-owned by Ocwen Financial Corporation (“Ocwen”).

 

In April 2011, we acquired Springhouse, LLC (“Springhouse”), an appraisal management company that utilizes a nationwide panel of appraisers to provide real estate appraisals principally to mortgage originators, including the members of the Lenders One mortgage cooperative (“Lenders One”) as described below, and real estate asset managers. In July 2011, we acquired the assembled workforce of a sub-contractor (“Tracmail”) in India that performs asset recovery services.

 

We conduct our operations through three reporting segments: Mortgage Services, Financial Services and Technology Services. In addition, we report our corporate related expenditures as a separate segment (see Note 16 for a description of our business segments).

 

Basis of Presentation

 

Our condensed consolidated financial statements include the assets, liabilities, revenues and expenses directly attributable to our operations. All significant inter-company and inter-segment transactions and accounts have been eliminated upon consolidation.

 

The Mortgage Partnership of America, L.L.C. (“MPA”), a wholly owned subsidiary of Altisource, is the manager of a national alliance of community mortgage bankers, correspondent lenders and suppliers of mortgage products and services that does business as Lenders One. The management agreement between MPA and Lenders One, pursuant to which MPA is the management company of Lenders One, represents a variable interest in a variable interest entity. MPA is the primary beneficiary of Lenders One as it has the power to direct the activities that most significantly impact Lenders One’s economic performance and the obligation to absorb losses or the right to receive benefits from Lenders One. As a result, Lenders One is presented in the accompanying condensed consolidated financial statements on a consolidated basis with the interests of the members reflected as non-controlling interests. As of September 30, 2012, Lenders One had total assets of $2.1 million and liabilities of less than $0.1 million.

 

We have prepared our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission (“SEC”) Regulation S-X. Accordingly, these financial statements do not include all of the information and notes required by GAAP for complete consolidated financial statements. In the opinion of management, all normal recurring adjustments considered necessary to fairly state the results for the interim periods presented have been included. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

 

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in our Form 10-K for the year ended December 31, 2011, filed with the SEC on February 16, 2012, which contains a summary of our significant accounting policies. Certain footnote detail is also omitted from the condensed consolidated financial statements unless there is a material change from the information included in the Form 10-K.

 

Fair Value of Financial Instruments

 

The fair value of financial instruments, which primarily include cash and cash equivalents, accounts receivable, net, restricted cash and accounts payable and accrued expenses at September 30, 2012 and December 31, 2011, are carried at amounts that approximate their fair value due to the short-term nature of these instruments.

 

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NOTE 2 — TRANSACTIONS WITH RELATED PARTIES

 

Ocwen®

 

Ocwen is our largest customer.  Ocwen and its wholly owned subsidiary, Ocwen Mortgage Servicing Inc. (“OMS”) are contractually obligated to purchase certain mortgage services and technology services from us under service agreements.  On October 1, 2012, the Ocwen agreement was extended by three years through 2020.  Separately, we signed a similar agreement on October 1, 2012 with OMS effective through 2020.  Ocwen and OMS are not restricted from redeveloping these services. We settle amounts with Ocwen on a daily, weekly or monthly basis depending upon the nature of the services and when the service is completed.

 

With respect to Ocwen, related party revenue consists of revenues earned directly from Ocwen and revenues earned from the loans serviced by Ocwen when Ocwen determines the service provider. We earn additional revenues on the loan portfolios serviced by Ocwen that are not considered related party revenues when a party other than Ocwen selects the service provider. As a percentage of each of our segment revenues and as a percentage of consolidated revenues, related party revenue was as follows:

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Mortgage Services

 

68

%

71

%

69

%

73

%

Technology Services

 

39

%

38

%

40

%

38

%

Financial Services

 

<1

%

<1

%

<1

%

<1

%

Consolidated revenue

 

60

%

58

%

60

%

57

%

 

We record revenues we earn from Ocwen under the various long-term servicing contracts at rates we believe to be market rates as they are consistent with one or more of the following: the fees we charge to other customers for comparable services; the rates Ocwen pays to other service providers; fees commensurate with market surveys prepared by unaffiliated firms; and prices charged by our competitors.

 

Support Services

 

On August 10, 2012, Altisource entered into a five-year Support Services Agreement with OMS (the “Support Services Agreement”), setting forth certain services Altisource and OMS will provide to each other which are similar to the services Altisource and Ocwen provided to each other pursuant to a Transition Services Agreement.  These services include such areas as human resources, vendor management, corporate services, six sigma, quality assurance, quantitative analytics, treasury, accounting, risk management, legal, strategic planning and compliance. Payment for the services provided is based on the fully-allocated cost of providing the service based on an estimate of the time and expense of providing the service. For the nine months ended September 30, 2012 and 2011, we billed Ocwen and OMS $2.0 million and $1.7 million, respectively ($0.6 million and $0.8 million for the third quarters of 2012 and 2011, respectively), and Ocwen and OMS billed us $1.8 million and $1.4 million, respectively ($0.6 million and $0.5 million for the third quarters of 2012 and 2011, respectively) for services provided under the Support Services Agreement and the Transition Services agreement. These amounts are reflected as components of selling, general and administrative expenses in the condensed consolidated statements of operations.

 

Correspondent One and HLSS

 

In July 2011, we acquired an equity interest in Correspondent One S.A. (“Correspondent One” - see Note 7). We provide Correspondent One certain finance, human resources, legal support, facilities, technology, vendor management and risk management services. For the nine months ended September 30, 2012 and 2011, we billed Correspondent One $0.2 million and $0.1 million, respectively, under this agreement ($0.1 million for each of the third quarters of 2012 and 2011).

 

We also provide certain origination related services to Correspondent One.  We earned revenue of $0.2 million for the nine months ended September 30, 2012 ($0.2 million for the third quarter of 2012) from the provision of these services.

 

Home Loan Servicing Solutions, Ltd. (“HLSS”) is a public company whose primary objective is the acquisition of mortgage servicing rights and advances. In connection with the February 2012 HLSS initial public offering, HLSS acquired mortgage servicing related assets from Ocwen. Our Chairman is also the Chairman of HLSS. We provide HLSS certain finance, human resources and legal support services. For the nine months ended September 30, 2012, we billed HLSS $0.4 million under this agreement ($0.2 million for the third quarter).

 

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These amounts are reflected as a component of selling, general and administrative expenses in the condensed consolidated statements of operations.

 

NOTE 3 — ACCOUNTS RECEIVABLE, NET

 

Accounts receivable, net consists of the following:

 

 

 

September 30,

 

December 31,

 

(in thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Billed

 

 

 

 

 

Third parties

 

$

21,949

 

$

13,776

 

Ocwen

 

6,345

 

5,245

 

Correspondent One

 

165

 

123

 

HLSS

 

65

 

5

 

Other receivables

 

226

 

350

 

 

 

28,750

 

19,499

 

Unbilled

 

 

 

 

 

Third parties

 

32,717

 

31,831

 

Ocwen

 

4,049

 

2,722

 

Correspondent One

 

135

 

 

 

 

65,651

 

54,052

 

Allowance for doubtful accounts

 

(3,154

)

(2,047

)

 

 

 

 

 

 

Total

 

$

62,497

 

$

52,005

 

 

Unbilled fees consist primarily of asset management and default management services for which we recognize revenues over the service delivery period but bill following completion of the service.

 

NOTE 4 — PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

 

 

September 30,

 

December 31,

 

(in thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Maintenance agreements

 

$

5,840

 

$

1,903

 

Prepaid software license fees

 

970

 

1,445

 

Prepaid insurance

 

824

 

544

 

Prepaid facility costs

 

190

 

72

 

Other prepaid expenses

 

728

 

247

 

Cash held for clients

 

451

 

759

 

Other current assets

 

57

 

32

 

 

 

 

 

 

 

Total

 

$

9,060

 

$

5,002

 

 

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NOTE 5 — PREMISES AND EQUIPMENT, NET

 

Premises and equipment, net which includes amounts recorded under capital leases, consists of the following:

 

 

 

September 30,

 

December 31,

 

(in thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Computer hardware and software

 

$

62,125

 

$

39,452

 

Office equipment and other

 

16,799

 

15,068

 

Furniture and fixtures

 

5,164

 

4,299

 

Leasehold improvements

 

10,570

 

7,014

 

 

 

94,658

 

65,833

 

Less: Accumulated depreciation and amortization

 

(48,306

)

(40,233

)

 

 

 

 

 

 

Total

 

$

46,352

 

$

25,600

 

 

Depreciation and amortization expense, inclusive of capital lease obligations, amounted to $9.0 million and $6.2 million for the nine months ended September 30, 2012 and 2011, respectively ($3.8 million and $2.1 million for the third quarters of 2012 and 2011, respectively), and is included in cost of revenue for operating assets and in selling, general and administrative expenses for non-operating assets in the accompanying condensed consolidated statements of operations.

 

NOTE 6 — GOODWILL AND INTANGIBLE ASSETS, NET

 

Goodwill

 

There were no changes in goodwill during the nine months ended September 30, 2012. The following is a summary of goodwill by segment:

 

 

 

Mortgage

 

Financial

 

Technology

 

 

 

(in thousands)

 

Services

 

Services

 

Services

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2012 and December 31, 2011

 

$

10,919

 

$

2,378

 

$

1,618

 

$

14,915

 

 

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Table of Contents

 

Intangible Assets, Net

 

Intangible assets, net consist of the following:

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

estimated

 

Gross carrying amount

 

Accumulated amortization

 

Net book value

 

(dollars in thousands)

 

useful life
(years)

 

September 30,
2012

 

December 31,
2011

 

September 30,
2012

 

December 31,
2011

 

September 30,
2012

 

December 31,
2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Definite-lived intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

16

 

$

10,614

 

$

10,614

 

$

(3,942

)

$

(3,353

)

$

6,672

 

$

7,261

 

Customer lists

 

19

 

38,366

 

38,366

 

(17,203

)(a)

(13,010

)

21,163

 

25,356

 

Operating agreement

 

20

 

35,000

 

35,000

 

(4,667

)

(3,354

)

30,333

 

31,646

 

Non-compete agreement

 

4

 

1,300

 

1,300

 

(875

)

(613

)

425

 

687

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

$

85,280

 

$

85,280

 

$

(26,687

)

$

(20,330

)

$

58,593

 

$

64,950

 

 


(a)          Prior to our acquisition of Nationwide Credit, Inc. (“NCI®”) in 2007, NCI completed an acquisition which created tax-deductible goodwill that amortizes for tax purposes over time.  When we acquired NCI in 2007, we recorded a lesser amount of goodwill for financial reporting purposes than what had previously been recorded at NCI for tax purposes. This difference between the amount of goodwill recorded for financial reporting purposes and the amount recorded for taxes is referred to as “Component 2” goodwill and resulted in our recording periodic reductions first to our book goodwill balance in our consolidated financial statements. As our book goodwill balance was fully written off at December 31, 2010, we continue to amortize the remaining Component 2 goodwill for U.S. tax purposes by reducing certain intangible assets by the remaining tax benefits of the Component 2 goodwill as they are realized in our tax returns. The reduction in intangible assets was $2.5 million for each of the nine months ended September 30, 2012 and 2011, respectively. The balance of Component 2 goodwill remaining was $1.4 million as of September 30, 2012 which should generate $0.8 million of reductions of intangible assets when the benefit can be realized for U.S. tax purposes.

 

Amortization expense for definite lived intangible assets was $3.8 million and $4.0 million for the nine months ended September 30, 2012 and 2011, respectively ($1.2 million and $1.3 million for the third quarters of 2012 and 2011, respectively). Amortization expense is estimated to be $5.0 million for 2012, $4.8 million for 2013, $4.5 million for 2014, $4.4 million for 2015 and $4.3 million for 2016.

 

NOTE 7 — INVESTMENT IN EQUITY AFFILIATE

 

Correspondent One purchases closed conforming and government guaranteed residential mortgages from approved mortgage bankers.  Correspondent One provides members of Lenders One additional avenues to sell loans beyond Lenders One’s preferred investor arrangements and the members’ own network of loan buyers. We have significant influence over the general operations of Correspondent One consistent with our 49% ownership level and therefore account for our investment under the equity method. We have no funding commitments to Correspondent One as of September 30, 2012.

 

Our net loss on this investment using the equity method was $0.9 million and $0.4 million for the nine months ended    September 30, 2012 and 2011, respectively (net loss of $0.3 million and $0.4 million for the third quarters of 2012 and 2011, respectively).

 

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Table of Contents

 

NOTE 8 — OTHER ASSETS

 

Other assets consist of the following:

 

 

 

September 30,

 

December 31,

 

(in thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Security deposits

 

$

7,039

 

$

7,615

 

Unbilled fees

 

1,540

 

1,773

 

Restricted cash

 

158

 

158

 

Other

 

40

 

40

 

 

 

 

 

 

 

Total

 

$

8,777

 

$

9,586

 

 

NOTE 9 — ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accounts payable and accrued expenses consist of the following:

 

 

 

September 30,

 

December 31,

 

(in thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Accounts payable

 

$

8,605

 

$

2,974

 

Accrued expenses - general

 

20,311

 

18,485

 

Accrued salaries and benefits

 

17,428

 

14,575

 

Income taxes payable, net

 

12,418

 

6,419

 

Payable to Ocwen

 

2,502

 

2,414

 

 

 

 

 

 

 

Total

 

$

61,264

 

$

44,867

 

 

Other current liabilities consist of the following:

 

 

 

September 30,

 

December 31,

 

(in thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Deferred revenue

 

$

1,962

 

$

4,581

 

Facility closure cost accrual, current portion

 

136

 

131

 

Collections due to clients

 

451

 

768

 

Overdrafts

 

4,127

 

3,501

 

Other

 

3,130

 

958

 

 

 

 

 

 

 

Total

 

$

9,806

 

$

9,939

 

 

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Table of Contents

 

Facility Closure Costs

 

During 2009, we accrued facility closure costs (included in other current and other non-current liabilities in the condensed consolidated balance sheet) primarily consisting of lease exit costs (expected to be paid through 2014) and severance related to the closure of two facilities. The following table summarizes the activity, all recorded in our Financial Services segment, for the nine months ended September 30, 2012:

 

(in thousands)

 

Lease Costs

 

 

 

 

 

Balance, December 31, 2011

 

$

455

 

Payments

 

255

 

Balance, September 30, 2012

 

200

 

Less: Long-term portion

 

64

 

 

 

 

 

Facility closure cost accrual, current portion

 

$

136

 

 

We do not expect significant additional costs related to the closure of these facilities.

 

NOTE 10 — SHARE-BASED COMPENSATION

 

We issue share-based awards in the form of stock options for certain employees and officers. We recorded share-based compensation expense of $2.0 million and $2.1 million for the nine months ended September 30, 2012 and 2011, respectively ($1.1 million and $0.7 million for the third quarters of 2012 and 2011, respectively). The amount in 2012 includes the reversal of $0.8 million of share-based compensation expense in the first quarter related to the departure of an Executive Officer in March 2012.

 

Outstanding share-based compensation currently consists only of stock option grants that are a combination of service-based and market-based options.

 

Service-based Options. These options are granted at fair value on the date of grant. The options generally vest over four years with equal annual cliff-vesting and expire on the earlier of 10 years after the date of grant or following termination of service. A total of 0.9 million service-based awards were outstanding at September 30, 2012.

 

Market-based Options. These option grants have two components each of which vest only upon the achievement of certain criteria. The first component, which we refer to internally as “ordinary performance” grants, consists of two-thirds of the market-based grant and begins to vest if the stock price realizes a compounded annual gain of at least 20% over the exercise price, so long as the stock price is at least double the exercise price. The remaining third of the market-based options, which we refer to internally as “extraordinary performance” grants, begins to vest if the stock price realizes a compounded annual gain of at least 25% over the exercise price, so long as it is at least triple the exercise price. The vesting schedule for all market-based awards is 25% upon achievement of the criteria and the remaining 75% in three equal annual installments. A total of 2.2 million market-based awards were outstanding at September 30, 2012.

 

The Company granted 0.3 million stock options (at a weighted average exercise price of $69.48 per share) and 0.2 million stock options (at a weighted average exercise price of $33.15 per share) during the nine months ended September 30, 2012 and 2011, respectively.

 

The fair value of the service-based options was determined using the Black-Scholes option pricing model while a lattice (binomial) model was used to determine the fair value of the market-based options using the following assumptions as of the grant date:

 

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Table of Contents

 

 

 

Nine months ended September 30, 2012

 

Nine months ended September 30, 2011

 

 

 

Black-Scholes

 

Binominal

 

Black-Scholes

 

Binominal

 

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

0.87% — 1.17%

 

0.08% — 2.04%

 

1.69% — 1.93%

 

0.04% — 3.03%

 

Expected stock price volatility

 

34.22% — 34.65%

 

34.20% — 34.60%

 

48.00%

 

55.70 — 55.80%

 

Expected dividend yield

 

 

 

 

 

Expected option life (in years)

 

6.25

 

 

6.25

 

 

Contractual life (in years)

 

 

14

 

 

14

 

Fair value

 

$

19.25 — $29.80

 

$

9.98 — $22.76

 

$

16.33 — $17.85

 

$

16.91 — $20.39

 

 

The following table summarizes the weighted-average fair value of stock options granted and the total intrinsic value of stock options

exercised:

 

 

 

Nine months ended September 30,

 

(in thousands, except per share amounts)

 

2012

 

2011

 

Weighted-average fair value at grant date per share

 

$

20.77

 

$

17.66

 

Intrinsic value of options exercised

 

11,535

 

4,193

 

Fair value of options vested

 

1,491

 

2,240

 

 

Share-based compensation expense is recorded net of estimated forfeiture rates ranging from 1% to 10%.

 

As of September 30, 2012, estimated unrecognized compensation costs related to share-based payments amounted to $5.5 million which we expect to recognize over a weighted-average remaining requisite service period of approximately 3.0 years.

 

The following table summarizes the activity of our stock options:

 

 

 

Number of
options

 

Weighted
average
exercise
price

 

Weighted
average
contractual
term
(in years)

 

Aggregate
intrinsic value
(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2011

 

3,243,958

 

$

14.19

 

6.7

 

$

116,755

 

Granted

 

278,500

 

69.48

 

 

 

 

 

Exercised

 

(221,615

)

13.00

 

 

 

 

 

Forfeited

 

(179,095

)

28.35

 

 

 

 

 

Outstanding at September 30, 2012

 

3,121,748

 

18.28

 

6.3

 

$

212,188

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2012

 

1,936,789

 

$

11.28

 

5.6

 

$

145,205

 

 

Stock Repurchase Authorization

 

In May 2012, our shareholders approved a new stock repurchase program, which replaces the previous stock repurchase program. Under the new plan, we are authorized to purchase up to 3.5 million shares of our common stock in the open market in addition to amounts previously purchased under the prior plan. From authorization of the prior plan in May 2010 through September 30, 2012, we have purchased approximately 2.5 million shares of our common stock in the open market at an average price of $37.49 per share. During the nine months ended September 30, 2012, we purchased 0.3 million shares of common stock at an average price of $63.25 per share. Since no common stock was repurchased during the second and third quarters of 2012, 3.5 million shares of common stock remain available for repurchase under the plan.

 

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Table of Contents

 

NOTE 11 — COST OF REVENUE

 

Cost of revenue principally includes payroll and employee benefits associated with personnel employed in customer service and operations roles, fees paid to external providers related to provision of services, reimbursable expenses, technology and telephony expenses as well as depreciation and amortization of operating assets. The components of cost of revenue were as follows for the three and nine months ended September 30, 2012 and 2011:

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

(in thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

$

28,840

 

$

22,497

 

$

84,314

 

$

59,296

 

Outside fees and services

 

31,084

 

21,528

 

91,494

 

57,221

 

Reimbursable expenses

 

24,326

 

21,834

 

77,846

 

56,934

 

Technology and communications

 

6,900

 

5,904

 

17,890

 

13,439

 

Depreciation and amortization

 

3,137

 

1,576

 

7,241

 

4,495

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

94,287

 

$

73,339

 

$

278,785

 

$

191,385

 

 

NOTE 12 — SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

Selling, general and administrative expenses include payroll for personnel employed in executive, finance, legal, human resources, vendor management, risk and six sigma roles. This category also includes occupancy costs, professional fees and depreciation and amortization on non-operating assets. The components of selling, general and administrative expenses were as follows for the three and nine months ended September 30, 2012 and 2011:

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

(in thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

$

5,212

 

$

5,530

 

$

15,995

 

$

17,275

 

Professional services

 

2,089

 

1,479

 

5,550

 

4,636

 

Occupancy related costs

 

6,641

 

4,449

 

19,308

 

12,008

 

Amortization of intangible assets

 

1,201

 

1,339

 

3,833

 

3,952

 

Depreciation and amortization

 

701

 

483

 

1,797

 

1,679

 

Other

 

2,608

 

2,049

 

8,002

 

5,937

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

18,452

 

$

15,329

 

$

54,485

 

$

45,487

 

 

NOTE 13 — OTHER (EXPENSE) INCOME, NET

 

Other (expense) income, net consists of the following:

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

(in thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Equity loss in affiliate

 

$

(293

)

$

(355

)

$

(872

)

$

(355

)

Interest expense

 

(10

)

(20

)

(39

)

(67

)

Interest income

 

49

 

5

 

75

 

27

 

Change in fair value of put option

 

 

70

 

 

652

 

Other, net

 

(13

)

(20

)

(103

)

37

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

(267

)

$

(320

)

$

(939

)

$

294

 

 

Equity in loss of affiliate represents our proportional share of the losses in Correspondent One (see Note 7).

 

15



Table of Contents

 

NOTE 14 — EARNINGS PER SHARE

 

Basic earnings per share (“EPS”) is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion of all dilutive securities.

 

Basic and diluted EPS for the three and nine months ended September 30, 2012 and 2011 are calculated as follows:

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

(in thousands except per share data)

 

2012

 

2011

 

2012

 

2011

 

Net income attributable to Altisource

 

$

27,024

 

$

17,171

 

$

80,334

 

$

45,381

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding, basic

 

23,338

 

24,341

 

23,347

 

24,602

 

Dilutive effect of stock options

 

1,678

 

1,148

 

1,548

 

1,118

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding, diluted

 

25,016

 

25,489

 

24,895

 

25,720

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

Basic

 

$

1.16

 

$

0.71

 

$

3.44

 

$

1.84

 

Diluted

 

$

1.08

 

$

0.67

 

$

3.23

 

$

1.76

 

 

For each of the three and nine months ended September 30, 2012 and September 30, 2011, an immaterial amount of options that were anti-dilutive have been excluded from the computation of diluted EPS. These options were anti-dilutive because their exercise price was greater than the average market price of our common stock. Also excluded from the computation of diluted EPS for the nine months ended September 30, 2012 and 2011 are 0.3 million and 0.7 million options, respectively (0.2 million and 0.7 million for the three months ended September 30, 2012 and 2011, respectively), granted for shares that are issuable upon the achievement of certain market and performance criteria related to our common stock price and an annualized rate of return to investors that have not been met at this point.

 

NOTE 15 — COMMITMENTS AND CONTINGENCIES

 

Litigation

 

From time to time, we are involved in legal proceedings arising in the ordinary course of business. We record a liability for litigation if an unfavorable outcome is probable and the amount of loss can be reasonably estimated, including expected insurance coverage. For proceedings where a range of loss is determined, we record a best estimate of loss within the range. When legal proceedings are material, we disclose the nature of the litigation and to the extent possible the estimate of loss or range of loss. In the opinion of management, after consultation with legal counsel and considering insurance coverage where applicable, the outcome of current legal proceedings both individually and in the aggregate will not have a material impact on our financial condition, results of operations or cash flows.

 

Escrow Balances

 

We hold customers’ assets in escrow at various financial institutions pending completion of certain real estate activities. These amounts are held in escrow for limited periods of time, generally consisting of a few days and are not included in the condensed consolidated balance sheets. Amounts held in escrow were $24.7 million and $17.7 million as of September 30, 2012 and December 31, 2011 respectively.

 

NOTE 16 — SEGMENT REPORTING

 

Our business segments are based upon our organizational structure which focuses primarily on the services offered and are consistent with the internal reporting used by our Chief Executive Officer to evaluate operating performance and to assess the allocation of our resources.

 

We classify our businesses into three reportable segments. Mortgage Services principally consists of mortgage portfolio management services that span the mortgage lifecycle. Financial Services principally consists of unsecured asset recovery and customer relationship management. Technology Services principally consists of modular, comprehensive integrated technological solutions for loan servicing, vendor management and invoice presentment and payment as well as providing infrastructure

 

16



Table of Contents

 

support. In addition, our Corporate Items and Eliminations segment includes eliminations of transactions between the reporting segments and also includes costs recognized by us related to corporate support functions such as executive, finance, legal, human resources, vendor management, risk and six sigma.

 

Financial information for our segments is as follows:

 

 

 

Three months ended September 30, 2012

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

Mortgage

 

Financial

 

Technology

 

Items and

 

Consolidated

 

(in thousands)

 

Services

 

Services

 

Services

 

Eliminations

 

Altisource

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

115,882

 

$

15,394

 

$

19,076

 

$

(6,364

)

$

143,988

 

Cost of revenue

 

72,774

 

11,784

 

15,418

 

(5,689

)

94,287

 

Gross profit

 

43,108

 

3,610

 

3,658

 

(675

)

49,701

 

Selling, general and administrative expenses

 

6,155

 

3,116

 

1,851

 

7,330

 

18,452

 

Income from operations

 

36,953

 

494

 

1,807

 

(8,005

)

31,249

 

Other (expense) income, net

 

(290

)

(6

)

(5

)

34

 

(267

)

Income before income taxes and non-controlling interests

 

$

36,663

 

$

488

 

$

1,802

 

$

(7,971

)

$

30,982

 

 

 

 

Nine months ended September 30, 2012

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

Mortgage

 

Financial

 

Technology

 

Items and

 

Consolidated

 

(in thousands)

 

Services

 

Services

 

Services

 

Eliminations

 

Altisource

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

341,446

 

$

49,649

 

$

53,984

 

$

(17,820

)

$

427,259

 

Cost of revenue

 

218,969

 

35,780

 

40,098

 

(16,062

)

278,785

 

Gross profit

 

122,477

 

13,869

 

13,886

 

(1,758

)

148,474

 

Selling, general and administrative expenses

 

17,458

 

10,550

 

5,519

 

20,958

 

54,485

 

Income from operations

 

105,019

 

3,319

 

8,367

 

(22,716

)

93,989

 

Other expense, net

 

(857

)

(22

)

(22

)

(38

)

(939

)

Income before income taxes and non-controlling interests

 

$

104,162

 

$

3,297

 

$

8,345

 

$

(22,754

)

$

93,050

 

 

 

 

Three months ended September 30, 2011

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

Mortgage

 

Financial

 

Technology

 

Items and

 

Consolidated

 

(in thousands)

 

Services

 

Services

 

Services

 

Eliminations

 

Altisource

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

82,170

 

$

17,303

 

$

14,827

 

$

(4,507

)

$

109,793

 

Cost of revenue

 

55,106

 

12,676

 

9,700

 

(4,143

)

73,339

 

Gross profit

 

27,064

 

4,627

 

5,127

 

(364

)

36,454

 

Selling, general and administrative expenses

 

4,227

 

4,268

 

756

 

6,078

 

15,329

 

Income from operations

 

22,837

 

359

 

4,371

 

(6,442

)

21,125

 

Other expense, net

 

(283

)

(9

)

(12

)

(16

)

(320

)

Income before income taxes and non-controlling interests

 

$

22,554

 

$

350

 

$

4,359

 

$

(6,458

)

$

20,805

 

 

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Nine months ended September 30, 2011

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

Mortgage

 

Financial

 

Technology

 

Items and

 

Consolidated

 

(in thousands)

 

Services

 

Services

 

Services

 

Eliminations

 

Altisource

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

207,384

 

$

54,779

 

$

41,115

 

$

(11,547

)

$

291,731

 

Cost of revenue

 

135,670

 

39,738

 

26,479

 

(10,502

)

191,385

 

Gross profit

 

71,714

 

15,041

 

14,636

 

(1,045

)

100,346

 

Selling, general and administrative expenses

 

11,663

 

12,230

 

3,489

 

18,105

 

45,487

 

Income from operations

 

60,051

 

2,811

 

11,147

 

(19,150

)

54,859

 

Other (expense) income, net

 

340

 

(27

)

(39

)

20

 

294

 

Income before income taxes and non-controlling interests

 

$

60,391

 

$

2,784

 

$

11,108

 

$

(19,130

)

$

55,153

 

 

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Item 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

When we refer to “we”, “our”, “the Company” or “Altisource”, we mean Altisource Portfolio Solutions S.A. and its consolidated subsidiaries.

 

Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our businesses, current developments, financial condition, results of operations and liquidity. Our MD&A should be read in conjunction with our Form 10-K for the year ended December 31, 2011. Significant sections of the MD&A are as follows:

 

Overview. This section, beginning on page 20, provides a description of recent developments we believe are important in understanding the results of operations and financial condition or in understanding anticipated future trends. It also provides a brief description of significant transactions and events that affect the comparability of results and a discussion of the progress being made on our growth initiatives.

 

Consolidated Results of Operations. This section, beginning on page 24, provides an analysis of our consolidated results of operations for the three and nine months ended September 30, 2012 and 2011.

 

Segment Results of Operations. This section, beginning on page 26, provides an analysis of each business segment for the three and nine months ended September 30, 2012 and 2011. In addition, we discuss significant transactions, events and trends that may affect the comparability of the results being analyzed.

 

Liquidity and Capital Resources. This section, beginning on page 34, provides an analysis of our cash flows for the nine months ended September 30, 2012 and 2011. We also discuss restrictions on cash movements, future commitments and capital resources.

 

FORWARD-LOOKING STATEMENTS

 

Certain statements in this Form 10-Q regarding anticipated financial outcomes, business and market conditions, outlook and other similar statements related to Altisource’s future financial and operational performance, are “forward looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements may be identified by the use of terminology such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms and other comparable terminology. Forward-looking statements are not guarantees of future performance and involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially. The following are examples of such items and is not intended to be an all-inclusive list:

 

·                  assumptions related to the sources of liquidity and the adequacy of financial resources;

 

·                  assumptions about our ability to grow our business;

 

·                  assumptions about our ability to improve margins;

 

·                  expectations regarding collection rates and placements in our Financial Services segment;

 

·                  assumptions regarding the impact of seasonality;

 

·                  estimates regarding the calculation of our effective tax rate; and

 

·                  estimates regarding our reserves and valuations.

 

Important factors that could cause actual results to differ materially from those suggested by the forward-looking statements include, but are not limited to, the risks discussed in the “Risk Factors” section of our Form 10-K for the year ended December 31, 2011 and include the following:

 

·                  our ability to retain and expand our existing customers and attract new customers;

 

·                  technology failures;

 

·                  our business is dependent on the trend toward outsourcing; and

 

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·                  our ability to comply with and burdens imposed by changes in governmental regulations, taxes and policies.

 

We caution you not to place undue reliance on these forward-looking statements which reflect our view only as of the date of this report. We are under no obligation (and expressly disclaim any obligation) to update or alter any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any such statement is based.

 

OVERVIEW

 

Our business

 

We are a global provider of services focused on high-value, technology-enabled, knowledge-based solutions principally related to mortgage and real estate portfolio management, asset recovery and customer relationship management.

 

We classify our business into the following three reportable segments:

 

Mortgage Services:  Provides services that span the mortgage lifecycle and are typically outsourced by loan servicers and originators. We provide these services primarily for loan portfolios serviced by Ocwen. We also have longstanding relationships with some of the leading capital markets firms, commercial banks, hedge funds, insurance companies and mortgage bankers. Within the Mortgage Services segment, we provide the following services:

 

Asset management — Asset management services principally include property preservation, property inspection, real estate owned (“REO”) asset management, our consumer real estate portal and REO brokerage operations. We plan to provide leasing, rehabilitation and property management services for single-family rental properties after Altisource Residential acquires rental properties as described in our growth initiatives below.

 

Residential property valuation — Residential property valuation services principally include traditional appraisal products through our licensed appraisal management company and alternative valuation products primarily through our network of real estate professionals. We generally provide these services for loan servicers and mortgage bankers.

 

Closing and insurance services — Closing and insurance services principally include an array of title search, closing and title agency services including document preparation, pre-foreclosure and REO title searches, escrow and title insurance, and other insurance related services applicable to residential loan servicers. We also began to provide closing and title agency services on newly originated loans.

 

Default management services — Default management services principally provides foreclosure trustee services for loan servicers and non-legal processing and related services for and under the supervision of foreclosure, bankruptcy and eviction attorneys.

 

Origination management services - Origination management services principally includes MPA’s operations and our contract underwriting and quality control business. MPA serves as the manager of Lenders One, a national alliance of independent mortgage bankers that provides its members with education and training along with revenue enhancing, cost reducing and market share expanding opportunities. We provide other origination related services in the residential property valuation business. In addition, some of the origination related reseller businesses, including the flood certification business, are included in the Technology Services REALSuite business.

 

Financial Services:  Provides collection and customer relationship management services primarily to debt originators and servicers (e.g., credit card, auto lending, retail credit, mortgages) and the utility and insurance industry. Within the Financial Services segment, we provide the following services:

 

Asset recovery management — Asset recovery management principally provides post-charge-off consumer debt collection services on a contingency fee basis.

 

Customer relationship management — Customer relationship management provides customer care and early stage collections services.  In addition, customer relationship management provides insurance and claims processing, call center services and analytical support.

 

Technology Services:  Comprises our REALSuite TM of applications as well as our information technology (“IT”) infrastructure services. We only provide our IT infrastructure services to Ocwen, Home Loan Servicing Solutions (“HLSS”), Correspondent One, our two recently formed subsidiaries, Altisource Residential and Altisource Asset Management, discussed below, and ourselves.  The REALSuite platform provides a fully integrated set of software applications and technologies that manage the

 

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end-to-end lifecycle for residential and commercial mortgage loan servicing including the automated management and payment of a distributed network of vendors.  A brief description of the key REALSuite software products is below:

 

REALServicing® — an enterprise residential mortgage loan servicing product that offers an efficient and effective platform for loan servicing including default administration. This technology solution features automated workflows, a dialogue engine and robust reporting capabilities.  The solution spans the loan servicing lifecycle from loan boarding to satisfaction including all collections, payment processing and reporting.  We also offer REALSynergy®, an enterprise commercial loan servicing system.

 

REALTrans® a patented electronic business-to-business exchange that automates and simplifies the ordering, tracking and fulfilling of vendor provided services principally related to mortgages.  This technology solution, whether web-based or integrated into a servicing system, connects multiple service providers through a single platform and forms an efficient method for managing a large scale network of vendors.

 

REALRemit® — a patented electronic invoicing and payment system that provides vendors with the ability to submit invoices electronically for payment and to have invoice payments deposited directly to their respective bank accounts.

 

Corporate Items and Eliminations: Includes costs related to corporate support functions including executive, finance, legal, human resources, vendor management, risk and six sigma and also includes eliminations of transactions between the reporting segments.

 

We classify revenue in three categories:  service revenue, revenue from reimbursable expenses and non-controlling interests. In evaluating our performance, we focus on service revenue which consists of amounts attributable to our fee based services. Reimbursable expenses and non-controlling interests are pass-through items for which we earn no margin.  Reimbursable expenses consist of amounts that we incur on behalf of our customers in performing our fee based services, but we pass such costs directly on to our customers without any additional markup.  Non-controlling interests represent the earnings of Lenders One, a consolidated entity that is not owned by Altisource.  It is included in revenue and reduced from net income to arrive at net income attributable to Altisource.

 

Stock repurchase plan

 

In May 2012, our shareholders approved a new stock repurchase program, which replaces the previous stock repurchase program. Under the new plan, we are authorized to purchase up to 3.5 million shares of our common stock in the open market in addition to amounts previously purchased under the prior plan. From authorization of the prior plan in May 2010 through September 30, 2012, we have purchased approximately 2.5 million shares of our common stock in the open market at an average price of $37.49 per share. During the nine months ended September 30, 2012, we purchased 0.3 million shares of common stock at an average price of $63.25 per share. Since no common stock was repurchased during the second and third quarters of 2012, 3.5 million shares of common stock remain available for repurchase under the plan. The distribution of Altisource Residential and Altisource Asset Management to our shareholders restricts our ability to repurchase shares for a period of time as Luxembourg law limits share repurchases to approximately the balance of Altisource Portfolio Solutions S.A.’s retained earnings less treasury shares.

 

Growth initiatives

 

We believe that Ocwen provides significant growth opportunities for Altisource.  On October 3, 2012, Ocwen announced its agreement to acquire Homeward Residential Holdings Inc. (“Homeward Residential”) from WL Ross & Co. LLC.  We believe the acquisition will bring growth to Ocwen and Altisource, increasing the number of loans serviced by Ocwen by over 50%.  Additionally, we believe the acquisition will expand Ocwen’s origination capacity providing a sustainable source of future growth for Ocwen and a new customer for our growing origination related services business.

 

On October 24, 2012, Ocwen and Walter Investment Management Corp. announced they were jointly awarded the highest and best bid in the auction of Residential Capital LLC’s loan servicing portfolio.  The transaction is subject to the completion of definitive acquisition documents and the approval of the bankruptcy court.

 

We believe the market opportunity for default related services will remain strong for the next three to five years, if not longer. However, we recognize that default related revenue will eventually peak. Our strategy for the future continues to include providing high quality mortgage servicing related services to Ocwen and others. In addition, we have developed four initiatives to expand and diversify our revenue and customer base in areas other than mortgage default in order to help meet our longer term earnings growth objective. Our core capabilities and technologies are the foundation of each initiative we are pursuing. The four initiatives are:

 

·                  developing the residential asset business for single-family home rentals;

 

·                  growing our origination related services by leveraging our acquisition of Lenders One and our investment in Correspondent One;

 

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·                  fully developing our consumer real estate portal for distressed and non-distressed home sales; and

 

·                  improving the Financial Services segment’s earnings and growing its revenue.

 

Residential asset businesses — We are in the process of establishing residential asset management related businesses to support the growing residential single-family rental market as we believe there is a significant opportunity to leverage and extend our existing infrastructure and competencies to this market.  The single-family residential rental market in the United States is a $3 trillion industry, accounting for 52% of all residential rental units in 2011. With the continued displacement of homeowners related to foreclosure and other economic circumstances, we believe the demand for single-family rentals will significantly increase.

 

Because of the different capital considerations and the operating metrics associated with owning and renting single-family homes, we believe the entity that owns the residential assets is best suited to operate separate and apart from Altisource. In this regard, we have created two companies that we intend to separate and distribute to our shareholders. The first, Altisource Residential will acquire residential related assets and, the second, Altisource Asset Management, will provide asset management and advisory services to Altisource Residential. Altisource will provide construction management, rental property management and leasing brokerage services to Altisource Residential, creating a long-term, stable revenue stream for Altisource. Further, to the extent Altisource Residential acquires non-performing loans, Altisource Residential intends to retain Ocwen to service the loans who, in turn, will retain us to provide default related and technology services.

 

For Altisource, entering the construction management, rental property management and leasing brokerage rental markets are complementary extensions of our existing service offerings, leveraging our significant economies of scale.  As a result, we believe our per unit operating costs will be substantially lower than others in the industry.  With our operating cost advantage, we believe that we can provide these services to Altisource Residential at a cost similar to an apartment unit managed by a multi-family REIT.

 

In the third quarter of 2012, we filed Form 10 registration statements to separate Altisource Residential and Altisource Asset Management from Altisource. We expect to complete the separation around the end of the year. At the same time, we continue to extend our internal residential asset management capabilities to the rehabilitation, leasing and management of single family homes. Altisource will be the exclusive service provider of these services to Altisource Residential. As Altisource Residential develops and grows its business, Altisource will establish an attractive, longer term revenue stream.

 

Mortgage origination related services — With an objective of long-term growth in the origination services market, we acquired the manager of the Lenders One mortgage cooperative in February 2010.  In 2011, the members of Lenders One originated approximately $107 billion of loans.  We estimate that in excess of $1.5 billion was spent on origination related services in connection with these loans.  The manager of the cooperative leverages the size of Lenders One, 241 members strong as of September 30, 2012, to obtain better execution on the sale of closed loans with third parties and to achieve lower costs on origination related services from third parties.

 

Leveraging our vendor network, technology, scale, global workforce and lower sales costs, we have begun offering origination related services directly to the members at a price we believe is below the current market.  Many of the services are in place and are similar to the services we provide in our default related business.

 

Our service revenue from origination related services grew to $10.1 million for the third quarter of 2012, an increase of 69% over the third quarter of 2011. We also sequentially grew our origination related services revenue by 23% over the second quarter of 2012. This is reflective of Lenders One membership growth, strong origination volume and an increasing number of the Lenders One members retaining Altisource to provide them with origination related services. When comparing the end of the third quarter of 2012 to the end of the second quarter of 2012, Lenders One membership increased from 232 to 241 and the number of signed agreements with the members increased from 108 to 128. During the third quarter of 2012, we also began a pilot of our initial bundle of origination related services with several of the Lenders One members. We hope to complete the pilot of our ordering and services delivery portal during the fourth quarter and roll-out our initial bundle of origination related services to the full complement of members beginning in 2013.

 

Consumer real estate portal — We are also continuing to fully develop our consumer real estate portal as we believe there are opportunities to benefit from a shifting consumer preference for on-line transacting.  The consumer real estate portal provides an automated, transparent and integrated on-line solution for buying and selling real estate and, eventually, related services.  Like the residential rental business, the market for this business is immense.  The 2012 forecast for home sales in the United States is approximately $780 billion.  These sales will generate over $40 billion in brokerage commissions annually.  Based on our observations, we believe the industry is beginning to see a shift in consumer behavior and attitudes toward on-line transacting for homes. For the nine months ended September 30, 2012, we sold more than 20,000 homes through our consumer real estate portal, and our revenue has grown to $40.3 million in the first nine months of 2012, compared to $22.3 million for the same period in 2011 (the consumer real estate portal is part of our asset management services business in our Mortgage Services segment).

 

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In the third quarter of 2012, we launched the business under the new Hubzu TM brand (“Hubzu”), with a significantly enhanced user experience. The new Hubzu website provides easier navigation and improved overall experience for our customers with enhanced content, tools and resources to guide our customers through the process.  Hubzu also improves the auction and traditional sale process by providing more transparency on the buyers’ offers and detailed status updates and notifications.

 

With the launch of Hubzu, we have initiated two efforts to grow the business. First, we are beginning to have conversations with servicers and financial institutions to add them to our marketplace and further extend our leadership position in REO home sales.  We continue to believe our ability to accelerate the sales process at the right price will deliver significant value to these customers. In addition, we are in the final stages of preparing to open up Hubzu to individual listing agents and brokers. Over the past year, we have received interest from individual listing agents to utilize both our significant market reach and simple and transparent offer management system for their clients. We intend to leverage the launch of this new segment to lay the foundation for a broader entry into the non-distressed home sale market.

 

Financial Services segment — This segment includes our receivables management and customer care businesses. We believe the Financial Services segment has meaningful expansion opportunities but generates lower margins than we believe should be achieved.  Therefore, we continue to build the foundation for higher margins.  In 2012, we are simplifying the technology architecture, increasing automation and implementing borrower self-help programs. In the third quarter, we eliminated a legacy mainframe system, allowing us to leverage our dialogue engine and introduce borrower self help for all products while reducing costs. We expect our margin improvement initiatives to be complete by the end of the first half of 2013.

 

From a revenue perspective, we recently invested in a sales team and are developing a pipeline of new business. Looking to 2013, we intend to pursue growth from existing customers and deeper penetration of the industries we currently serve. In 2014, with our next generation technology in place, we plan to provide higher margin platform business process outsourcing solutions, similar to what is being used by Ocwen. These solutions include a suite of technologies, including dialogue engines and customized customer self-help programs, to improve performance and reduce variability in outcomes.

 

Factors affecting comparability

 

The following additional items may impact the comparability of our results:

 

·                  On average, Ocwen serviced 0.7 million loans for the nine months ended September 30, 2012 compared to 0.5 million loans for the nine months ended September 30, 2011.

 

·                  In April 2011, we acquired Springhouse, an appraisal management company that utilizes a nationwide panel of appraisers to provide real estate appraisals principally to mortgage originators, including the members of Lenders One, and real estate asset managers.

 

·                  In July 2011, we acquired the assembled workforce of a sub-contractor in India that performs asset recovery services.

 

·                  Throughout 2011, we repurchased 1.6 million shares of our common stock under our stock repurchase program, and during the nine months ended September 30, 2012, we purchased 0.3 million shares of our common stock under the program (none during the third quarter of 2012).

 

·                  In the first quarter of 2012, we increased our employee levels in anticipation of Ocwen boarding additional loans. Additional loans were boarded by Ocwen in April and June of 2012 (June was almost exclusively government-sponsored enterprise (“GSE”) loans).

 

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CONSOLIDATED RESULTS OF OPERATIONS

 

Summary Consolidated Results

 

Following is a discussion of our consolidated results of operations for the periods indicated.

 

The following table sets forth information regarding our results of operations for the three and nine months ended September 30, 2012 and 2011:

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

 

 

 

 

% Increase

 

 

 

 

 

% Increase

 

(dollars in thousands, except per share data)

 

2012

 

2011

 

/ (decrease)

 

2012

 

2011

 

/ (decrease)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Services

 

$

90,607

 

$

58,915

 

54

 

$

259,926

 

$

147,768

 

76

 

Financial Services

 

15,283

 

16,934

 

(10

)

49,100

 

53,067

 

(7

)

Technology Services

 

19,076

 

14,827

 

29

 

53,984

 

41,115

 

31

 

Eliminations

 

(6,364

)

(4,507

)

(41

)

(17,820

)

(11,547

)

(54

)

 

 

118,602

 

86,169

 

38

 

345,190

 

230,403

 

50

 

Reimbursable expenses

 

24,326

 

21,833

 

11

 

77,846

 

56,933

 

37

 

Non-controlling interests

 

1,060

 

1,791

 

(41

)

4,223

 

4,395

 

(4

)

Total revenue

 

143,988

 

109,793