XNAS:ASPS Altisource Portfolio Solutions SA Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 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

(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

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 July 15, 2012, there were 23,319,098 outstanding shares of the registrant’s shares of beneficial interest (excluding 2,093,650 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

37

 

 

 

 

 

Item 4

Controls and Procedures

37

 

 

 

 

 

 

 

 

PART II — Other Information

 

 

 

 

 

 

Item 1

Legal Proceedings

38

 

 

 

 

 

Item 6

Exhibits

39

 

 

 

 

SIGNATURES

40

 



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)

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

45,159

 

$

32,125

 

Accounts receivable, net

 

70,321

 

52,005

 

Prepaid expenses and other current assets

 

5,745

 

5,002

 

Deferred tax assets, net

 

2,730

 

1,133

 

Total current assets

 

123,955

 

90,265

 

 

 

 

 

 

 

Premises and equipment, net

 

41,162

 

25,600

 

Deferred tax assets, net

 

4,460

 

4,373

 

Intangible assets, net

 

60,634

 

64,950

 

Goodwill

 

14,915

 

14,915

 

Investment in equity affiliate

 

13,891

 

14,470

 

Other assets

 

8,710

 

9,586

 

Total assets

 

$

267,727

 

$

224,159

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

50,740

 

$

44,867

 

Capital lease obligations - current

 

518

 

634

 

Other current liabilities

 

10,228

 

9,939

 

Total current liabilities

 

61,486

 

55,440

 

 

 

 

 

 

 

Capital lease obligations - non-current

 

 

202

 

Other non-current liabilities

 

2,502

 

2,574

 

 

 

 

 

 

 

Commitment and contingencies (Note 15)

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Common stock ($1.00 par value; 100,000 shares authorized; 25,413 issued and 23,319 outstanding as of June 30, 2012; 25,413 issued and 23,405 outstanding as of December 31, 2011)

 

25,413

 

25,413

 

Additional paid-in-capital

 

84,121

 

83,229

 

Retained earnings

 

175,074

 

126,161

 

Treasury stock, at cost (2,094 shares as of June 30, 2012 and 2,008 shares as of December 31, 2011)

 

(82,414

)

(72,048

)

Altisource equity

 

202,194

 

162,755

 

 

 

 

 

 

 

Non-controlling interests

 

1,545

 

3,188

 

Total equity

 

203,739

 

165,943

 

 

 

 

 

 

 

Total liabilities and equity

 

$

267,727

 

$

224,159

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

ALTISOURCE PORTFOLIO SOLUTIONS S.A.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

144,205

 

$

93,268

 

$

283,271

 

$

181,938

 

Cost of revenue

 

92,738

 

63,097

 

184,498

 

118,046

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

51,467

 

30,171

 

98,773

 

63,892

 

Selling, general and administrative expenses

 

19,018

 

13,904

 

36,033

 

30,158

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

32,449

 

16,267

 

62,740

 

33,734

 

Other (expense) income, net

 

(321

)

270

 

(672

)

614

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes and non-controlling interests

 

32,128

 

16,537

 

62,068

 

34,348

 

Income tax provision

 

(2,776

)

(1,847

)

(5,595

)

(3,534

)

 

 

 

 

 

 

 

 

 

 

Net income

 

29,352

 

14,690

 

56,473

 

30,814

 

Net income attributable to non-controlling interests

 

(1,271

)

(1,305

)

(3,163

)

(2,604

)

 

 

 

 

 

 

 

 

 

 

Net income attributable to Altisource

 

$

28,081

 

$

13,385

 

$

53,310

 

$

28,210

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

1.20

 

$

0.54

 

$

2.28

 

$

1.14

 

Diluted

 

$

1.13

 

$

0.52

 

$

2.15

 

$

1.09

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

23,316

 

24,625

 

23,353

 

24,734

 

Diluted

 

24,846

 

25,773

 

24,850

 

25,851

 

 

 

 

 

 

 

 

 

 

 

Transactions with related parties included above:

 

 

 

 

 

 

 

 

 

Revenue

 

$

88,153

 

$

53,694

 

$

170,933

 

$

102,484

 

Selling, general and administrative expenses

 

$

606

 

$

455

 

$

1,180

 

$

846

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

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

 

 

 

 

28,210

 

 

2,604

 

30,814

 

Contributions from non-controlling interest holders

 

 

 

 

 

 

14

 

14

 

Distributions to non-controlling interest holders

 

 

 

 

 

 

(4,193

)

(4,193

)

Share-based compensation expense

 

 

 

1,379

 

 

 

 

1,379

 

Exercise of stock options

 

 

 

 

(2,012

)

2,522

 

 

510

 

Repurchase of shares

 

 

 

 

 

(12,546

)

 

(12,546

)

Balance, June 30, 2011

 

25,413

 

$

25,413

 

$

80,676

 

$

84,744

 

$

(24,442

)

$

1,485

 

$

167,876

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2011

 

25,413

 

$

25,413

 

$

83,229

 

$

126,161

 

$

(72,048

)

$

3,188

 

$

165,943

 

Net income

 

 

 

 

53,310

 

 

3,163

 

56,473

 

Contributions from non-controlling interest holders

 

 

 

 

 

 

24

 

24

 

Distributions to non-controlling interest holders

 

 

 

 

 

 

(4,830

)

(4,830

)

Share-based compensation expense

 

 

 

892

 

 

 

 

892

 

Exercise of stock options

 

 

 

 

(4,397

)

6,415

 

 

2,018

 

Repurchase of shares

 

 

 

 

 

(16,781

)

 

(16,781

)

Balance, June 30, 2012

 

25,413

 

$

25,413

 

$

84,121

 

$

175,074

 

$

(82,414

)

$

1,545

 

$

203,739

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

ALTISOURCE PORTFOLIO SOLUTIONS S.A.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Six months ended

 

 

 

June 30,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

56,473

 

$

30,814

 

Reconciling items:

 

 

 

 

 

Depreciation and amortization

 

5,200

 

4,114

 

Amortization of intangible assets

 

2,632

 

2,613

 

Share-based compensation expense

 

892

 

1,379

 

Equity in losses of affiliate

 

579

 

 

Bad debt expense

 

852

 

684

 

Deferred income taxes

 

 

634

 

Loss on sale or disposal of fixed assets

 

366

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(19,168

)

424

 

Prepaid expenses and other current assets

 

(743

)

6,590

 

Other assets

 

876

 

(2,288

)

Accounts payable and accrued expenses

 

5,873

 

(4,172

)

Other current and non-current liabilities

 

217

 

(2,630

)

Net cash flows provided by operating activities

 

54,049

 

38,162

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Additions to premises and equipment

 

(21,128

)

(3,419

)

Acquisition of business, net of cash acquired

 

 

(1,785

)

Investment in equity affiliate

 

 

(3,328

)

Change in restricted cash

 

 

(177

)

Net cash flows used in investing activities

 

(21,128

)

(8,709

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Principal payments on capital lease obligations

 

(318

)

(340

)

Proceeds from stock option exercises

 

2,018

 

510

 

Purchase of treasury stock

 

(16,781

)

(12,546

)

Contributions from non-controlling interests

 

24

 

14

 

Distributions to non-controlling interests

 

(4,830

)

(4,193

)

Net cash flows used in financing activities

 

(19,887

)

(16,555

)

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

13,034

 

12,898

 

Cash and cash equivalents at the beginning of the period

 

32,125

 

22,134

 

Cash and cash equivalents at the end of the period

 

$

45,159

 

$

35,032

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

Interest paid

 

$

28

 

$

46

 

Income taxes paid (refunded), net

 

$

1,255

 

$

(3,342

)

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

Amortization of tax-deductible goodwill

 

$

1,684

 

$

1,076

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



Table of Contents

 

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.

 

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 June 30, 2012, Lenders One had total assets of $2.7 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 June 30, 2012 and December 31, 2011, are carried at amounts that approximate their fair value due to the short-term nature of these instruments.

 

7



Table of Contents

 

NOTE 2 — TRANSACTIONS WITH RELATED PARTIES

 

Ocwen®

 

Ocwen is our largest customer and is contractually obligated to purchase certain mortgage services and technology services from us under service agreements.  These agreements extend until August 2017 subject to termination under certain provisions. Ocwen is 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
June 30,

 

Six months ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Mortgage Services

 

70

%

74

%

70

%

74

%

Technology Services

 

40

%

38

%

40

%

38

%

Financial Services

 

<1

%

1

%

<1

%

<1

%

Consolidated revenue

 

61

%

58

%

60

%

56

%

 

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.

 

Transition Services

 

We have entered into a Transition Services agreement with Ocwen under which services in such areas as human resources, vendor management, corporate services, six sigma, quality assurance, quantitative analytics, treasury, accounting, tax, risk management, legal, strategic planning, compliance and other areas are provided to the counterparty. The agreement expires in August 2012 and we intend to extend the agreement.  For the six months ended June 30, 2012 and 2011, we billed Ocwen $1.4 million and $0.9 million, respectively ($0.6 million and $0.5 million for the second quarters of 2012 and 2011, respectively), and Ocwen billed us $1.2 million and $0.8 million, respectively ($0.6 million and $0.5 million for the second quarters of 2012 and 2011, respectively) for services provided under this 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 entered into an agreement with Correspondent One under which we provide certain finance, human resources, legal support, facilities, technology, vendor management and risk management services. For the six months ended June 30, 2012, we billed Correspondent One $0.1 million under this agreement.

 

Home Loan Servicing Solutions, Ltd. (“HLSS”) is a newly formed 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 and owns 5% of the outstanding stock of HLSS. We entered into an agreement with HLSS under which we provide certain finance, human resources and legal support services.  For the six months ended June 30, 2012, we billed HLSS $0.2 million under this agreement ($0.1 million for the second quarter).

 

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

 

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Table of Contents

 

NOTE 3 — ACCOUNTS RECEIVABLE, NET

 

Accounts receivable, net consists of the following:

 

 

 

June 30,

 

December 31,

 

(in thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Billed

 

 

 

 

 

Third parties

 

$

22,900

 

$

13,776

 

Ocwen

 

3,793

 

5,245

 

Correspondent One

 

223

 

123

 

HLSS

 

66

 

5

 

Other receivables

 

3,432

 

350

 

 

 

30,414

 

19,499

 

 

 

 

 

 

 

Unbilled

 

 

 

 

 

Third parties

 

38,668

 

31,831

 

Ocwen

 

4,103

 

2,722

 

 

 

73,185

 

54,052

 

Allowance for doubtful accounts

 

(2,864

)

(2,047

)

 

 

 

 

 

 

Total

 

$

70,321

 

$

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:

 

 

 

June 30,

 

December 31,

 

(in thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Maintenance agreements

 

$

3,568

 

$

1,903

 

Prepaid software license fees

 

684

 

1,445

 

Prepaid insurance

 

509

 

544

 

Prepaid facility costs

 

100

 

72

 

Other prepaid expenses

 

321

 

247

 

Cash held for clients

 

518

 

759

 

Other current assets

 

45

 

32

 

 

 

 

 

 

 

Total

 

$

5,745

 

$

5,002

 

 

9



Table of Contents

 

NOTE 5 — PREMISES AND EQUIPMENT, NET

 

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

 

 

 

June 30,

 

December 31,

 

(in thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Computer hardware and software

 

$

53,948

 

$

39,452

 

Office equipment and other

 

16,993

 

15,068

 

Furniture and fixtures

 

5,026

 

4,299

 

Leasehold improvements

 

9,625

 

7,014

 

 

 

85,592

 

65,833

 

Less: Accumulated depreciation and amortization

 

(44,430

)

(40,233

)

 

 

 

 

 

 

Total

 

$

41,162

 

$

25,600

 

 

Depreciation and amortization expense, inclusive of capital lease obligations, amounted to $5.2 million and $4.1 million for the six months ended June 30, 2012 and 2011, respectively ($2.9 million and $2.2 million for the second 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 six months ended June 30, 2012. The following is a summary of goodwill by segment:

 

 

 

Mortgage

 

Financial

 

Technology

 

 

 

(in thousands)

 

Services

 

Services

 

Services

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance, June 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)

 

June 30,
2012

 

December 31,
2011

 

June 30,
2012

 

December 31,
2011

 

June 30,
2012

 

December 31,
2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Definite-lived intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

16

 

$

10,614

 

$

10,614

 

$

(3,824

)

$

(3,353

)

$

6,790

 

$

7,261

 

Customer lists

 

19

 

38,366

 

38,366

 

(15,805

)(a)

(13,010

)

22,561

 

25,356

 

Operating agreement

 

20

 

35,000

 

35,000

 

(4,229

)

(3,354

)

30,771

 

31,646

 

Non-compete agreement

 

4

 

1,300

 

1,300

 

(788

)

(613

)

512

 

687

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

$

85,280

 

$

85,280

 

$

(24,646

)

$

(20,330

)

$

60,634

 

$

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 $1.7 million for each of the six months ended June 30, 2012 and 2011, respectively. The balance of Component 2 goodwill remaining was $2.8 million as of June 30, 2012 which should generate $1.7 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 $2.6 million for each of the six months ended June 30, 2012 and 2011 ($1.3 million for each of the second quarters of 2012 and 2011). 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 June 30, 2012.

 

Our net loss on this investment using the equity method was $0.6 million for the six months ended June 30, 2012 ($0.3 million loss for the three months ending June 30, 2012). There are no comparative 2011 amounts as Correspondent One did not commence operations until July 2011.

 

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Table of Contents

 

NOTE 8 — OTHER ASSETS

 

Other assets consist of the following:

 

 

 

June 30,

 

December 31,

 

(in thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Security deposits

 

$

6,836

 

$

7,615

 

Unbilled fees

 

1,676

 

1,773

 

Restricted cash

 

158

 

158

 

Other

 

40

 

40

 

 

 

 

 

 

 

Total

 

$

8,710

 

$

9,586

 

 

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

 

Accounts payable and accrued expenses consist of the following:

 

 

 

June 30,

 

December 31,

 

(in thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Accounts payable

 

$

4,204

 

$

2,974

 

Accrued expenses - general

 

18,141

 

18,485

 

Accrued salaries and benefits

 

15,492

 

14,575

 

Income taxes payable, net

 

10,603

 

6,419

 

Payable to Ocwen

 

2,300

 

2,414

 

 

 

 

 

 

 

Total

 

$

50,740

 

$

44,867

 

 

Other current liabilities consist of the following:

 

 

 

June 30,

 

December 31,

 

(in thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Deferred revenue

 

$

2,413

 

$

4,581

 

Facility closure cost accrual, current portion

 

134

 

131

 

Collections due to clients

 

518

 

768

 

Overdrafts

 

5,630

 

3,501

 

Other

 

1,533

 

958

 

 

 

 

 

 

 

Total

 

$

10,228

 

$

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 six months ended June 30, 2012:

 

(in thousands)

 

Lease Costs

 

 

 

 

 

Balance, December 31, 2011

 

$

455

 

Payments

 

(79

)

Balance, June 30, 2012

 

376

 

Less: Long-term portion

 

(242

)

 

 

 

 

Facility closure cost accrual, current portion

 

$

134

 

 

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 $0.9 million and $1.4 million for the six months ended June 30, 2012 and 2011, respectively ($1.1 million and $0.6 million for the second quarter 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 June 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 June 30, 2012.

 

The Company granted 0.2 million stock options (at an average exercise price of $63.14 per share) and 0.1 million stock options (at an average exercise price of $29.99 per share) during the six months ended June 30, 2012 and 2011, respectively.

 

The fair value of the service-based options was determined using the Black-Scholes options 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:

 

 

 

June 30, 2012

 

June 30, 2011

 

 

 

Black-Scholes

 

Binominal

 

Black-Scholes

 

Binominal

 

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

0.97% – 1.17%

 

0.08% – 2.04%

 

2.20

%

0.03% – 3.18%

 

Expected stock price volatility

 

34.22% – 34.65%

 

34.20% – 34.60%

 

48.00

%

55.90%

 

Expected dividend yield

 

 

 

 

 

Expected option life (in years)

 

6.25

 

 

6.25

 

 

Contractual life (in years)

 

 

14

 

 

14

 

Fair value

 

$19.25 – $22.80

 

$11.65 – $17.27

 

$

16.55

 

$18.09 and $18.76

 

 

13



Table of Contents

 

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

 

 

 

June 30,

 

(in thousands, except per share amounts)

 

2012

 

2011

 

 

 

 

 

 

 

Weighted-average fair value at grant date per share

 

$

16.86

 

$

16.03

 

Intrinsic value of options exercised

 

8,339

 

2,855

 

Fair value of options vested

 

973

 

788

 

 

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

 

As of June 30, 2012, estimated unrecognized compensation costs related to share-based payments amounted to $4.9 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

 

198,500

 

63.14

 

 

 

 

 

Exercised

 

(177,389

)

12.85

 

 

 

 

 

Forfeited

 

(159,095

)

23.75

 

 

 

 

 

Outstanding at June 30, 2012

 

3,105,974

 

16.50

 

6.5

 

$

175,076

 

 

 

 

 

 

 

 

 

 

 

Exercisable at June 30, 2012

 

1,818,151

 

$

11.16

 

5.8

 

$

112,847

 

 

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 June 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 six months ended June 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 quarter 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 six months ended June 30, 2012 and 2011:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

(in thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

$

27,989

 

$

19,959

 

$

55,474

 

$

36,799

 

Outside fees and services

 

31,757

 

17,532

 

60,410

 

35,693

 

Reimbursable expenses

 

24,814

 

19,459

 

53,520

 

35,100

 

Technology and communications

 

5,866

 

4,557

 

10,990

 

7,535

 

Depreciation and amortization

 

2,312

 

1,590

 

4,104

 

2,919

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

92,738

 

$

63,097

 

$

184,498

 

$

118,046

 

 

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 six months ended June 30, 2012 and 2011:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

(in thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

$

6,400

 

$

5,825

 

$

10,783

 

$

11,745

 

Professional services

 

1,806

 

1,055

 

3,461

 

3,157

 

Occupancy related costs

 

6,158

 

4,062

 

12,667

 

7,559

 

Amortization of intangible assets

 

1,292

 

1,340

 

2,632

 

2,613

 

Depreciation and amortization

 

609

 

586

 

1,096

 

1,196

 

Other

 

2,753

 

1,036

 

5,394

 

3,888

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

19,018

 

$

13,904

 

$

36,033

 

$

30,158

 

 

NOTE 13 — OTHER (EXPENSE) INCOME, NET

 

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

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

(in thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Equity loss in affiliate

 

$

(255

)

$

 

$

(579

)

$

 

Interest expense

 

(14

)

(24

)

(29

)

(47

)

Interest income

 

10

 

17

 

26

 

22

 

Change in fair value of put option

 

 

225

 

 

582

 

Other, net

 

(62

)

52

 

(90

)

57

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

(321

)

$

270

 

$

(672

)

$

614

 

 

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 six months ended June 30, 2012 and 2011 are calculated as follows:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

(in thousands except per share data)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Altisource

 

$

28,081

 

$

13,385

 

$

53,310

 

$

28,210

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding, basic

 

23,316

 

24,625

 

23,353

 

24,734

 

Dilutive effect of stock options

 

1,530

 

1,148

 

1,497

 

1,117

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding, diluted

 

24,846

 

25,773

 

24,850

 

25,851

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

Basic

 

$

1.20

 

$

0.54

 

$

2.28

 

$

1.14

 

Diluted

 

$

1.13

 

$

0.52

 

$

2.15

 

$

1.09

 

 

For each of the three and six months ended June 30, 2012 and June 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 six months ended June 30, 2012 and 2011 are 0.3 million and 0.6 million options, respectively (0.3 million and 0.6 million for the three months ended June 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 the 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 $34.8 million and $17.7 million as of June 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

 

16



Table of Contents

 

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 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 June 30, 2012

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

Mortgage

 

Financial

 

Technology

 

Items and

 

Consolidated

 

(in thousands)

 

Services

 

Services

 

Services

 

Eliminations

 

Altisource

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

115,903

 

$

16,239

 

$

17,886

 

$

(5,823

)

$

144,205

 

Cost of revenue

 

73,156

 

11,663

 

13,214

 

(5,295

)

92,738

 

Gross profit

 

42,747

 

4,576

 

4,672

 

(528

)

51,467

 

Selling, general and administrative expenses

 

5,612

 

3,604

 

1,819

 

7,983

 

19,018

 

Income (loss) from operations

 

37,135

 

972

 

2,853

 

(8,511

)

32,449

 

Other expense, net

 

(246

)

(2

)

(6

)

(67

)

(321

)

Income (loss) before income taxes and non-controlling interests

 

$

36,889

 

$

970

 

$

2,847

 

$

(8,578

)

$

32,128

 

 

 

 

Six months ended June 30, 2012

 

 

 

 

 

 

Corporate

 

 

 

 

 

Mortgage

 

Financial

 

Technology

 

Items and

 

Consolidated

 

(in thousands)

 

Services

 

Services

 

Services

 

Eliminations

 

Altisource

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

225,564

 

$

34,255

 

$

34,908

 

$

(11,456

)

$

283,271

 

Cost of revenue

 

146,195

 

23,996

 

24,680

 

(10,373

)

184,498

 

Gross profit

 

79,369

 

10,259

 

10,228

 

(1,083

)

98,773

 

Selling, general and administrative expenses

 

11,303

 

7,434

 

3,668

 

13,628

 

36,033

 

Income (loss) from operations

 

68,066

 

2,825

 

6,560

 

(14,711

)

62,740

 

Other expense, net

 

(567

)

(16

)

(17

)

(72

)

(672

)

Income (loss) before income taxes and non-controlling interests

 

$

67,499

 

$

2,809

 

$

6,543

 

$

(14,783

)

$

62,068

 

 

 

 

Three months ended June 30, 2011

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

Mortgage

 

Financial

 

Technology

 

Items and

 

Consolidated

 

(in thousands)

 

Services

 

Services

 

Services

 

Eliminations

 

Altisource

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

65,507

 

$

17,983

 

$

13,572

 

$

(3,794

)

$

93,268

 

Cost of revenue

 

43,544

 

13,574

 

9,334

 

(3,355

)

63,097

 

Gross profit

 

21,963

 

4,409

 

4,238

 

(439

)

30,171

 

Selling, general and administrative expenses

 

2,853

 

3,502

 

1,537

 

6,012

 

13,904

 

Income (loss) from operations

 

19,110

 

907

 

2,701

 

(6,451

)

16,267

 

Other income (expense), net

 

258

 

(7

)

(12

)

31

 

270

 

Income (loss) before income taxes and non-controlling interests

 

$

19,368

 

$

900

 

$

2,689

 

$

(6,420

)

$

16,537

 

 

17



Table of Contents

 

 

 

Six months ended June 30, 2011

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

Mortgage

 

Financial

 

Technology

 

Items and

 

Consolidated

 

(in thousands)

 

Services

 

Services

 

Services

 

Eliminations

 

Altisource

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

125,214

 

$

37,476

 

$

26,288

 

$

(7,040

)

$

181,938

 

Cost of revenue

 

80,564

 

27,062

 

16,779

 

(6,359

)

118,046

 

Gross profit

 

44,650

 

10,414

 

9,509

 

(681

)

63,892

 

Selling, general and administrative expenses

 

7,436

 

7,962

 

2,733

 

12,027

 

30,158

 

Income (loss) from operations

 

37,214

 

2,452

 

6,776

 

(12,708

)

33,734

 

Other income (expense), net

 

623

 

(18

)

(27

)

36

 

614

 

Income (loss) before income taxes and non-controlling interests

 

$

37,837

 

$

2,434

 

$

6,749

 

$

(12,672

)

$

34,348

 

 

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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 25, provides an analysis of our consolidated results of operations for the three and six months ended June 30, 2012 and 2011.

 

Segment Results of Operations. This section, beginning on page 27, provides an analysis of each business segment for the three and six months ended June 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 35, provides an analysis of our cash flows for the six months ended June 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 towards 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 asset management services for single-family rental properties in the future.

 

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 plan to provide closing and title agency services on newly originated loans in the future.

 

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, our contract underwriting business and our developing loan fulfillment 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.

 

With the deployment, beginning in the third quarter of 2012 and continuing through 2014, of our next generation technologies to support our mortgage services businesses, we believe we will be more cost efficient and more effective at providing higher quality mortgage related services for Ocwen, and for other customers.  With deployment in the Financial Services business occurring through 2014, we believe it will also enable this segment to gain market share in its existing markets and develop 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. The tools applicable to our Financial Services segment include our optimal resolution model and our vendor, business process management, dialogue and invoice payment and presentment technologies.   Through the use of these tools and technologies, we believe we can improve our customers’ profitability, reduce our hiring, training and compliance costs, scale our operations faster and, at the same time, create stickier customer relationships across higher valued services.

 

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 June 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 six months ended June 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 quarter of 2012, 3.5 million shares of common stock remain available for repurchase under the plan.

 

Growth initiatives

 

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;

 

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

 

·                  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 related businesses to support the growing residential single-family rental market as we believe there is a significant opportunity that leverages our existing infrastructure and competencies.  The single-family residential rental market in the United States is a $3 trillion industry, accounting for 52% of all residential rental units. With the continued displacement of homeowners related to foreclosure and other economic circumstances, we believe the demand for single-family rentals will significantly increase.  Studies estimate that over four million distressed loans and REO will be converted to rental homes by 2015.  Despite the size of the single-family residential rental market, it has received very little attention as most people have historically viewed the industry as extremely fragmented, localized and decentralized.  We believe, on the other hand, that there are significant opportunities to consolidate the market by leveraging purchasing, technology and centralized operations and management.  We know firsthand, as a result of establishing Altisource as one of the few nationwide single-family REO management and property inspection and preservation companies in the United States, that property management can be executed on a national scale.  Unlike most property management firms, we are not constrained by the location of the home.  We have existing nationwide single-family asset management, property inspection and preservation, real estate brokerage and settlement services operations, primarily performed from centralized lower cost locations.

 

Entering the residential rental market is a complementary extension of our existing service offerings, leveraging our significant economies of scale.  As a result, we believe our per unit operating costs are substantially lower than others in the industry.  With our operating cost advantage, we believe that we can manage a single-family home at a cost similar to an apartment unit managed by a multi-family REIT.

 

Because of the different capital considerations and the operating metrics associated with owning and renting single-family homes, we believe this business 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. It is intended that 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, it is intended that it will retain Ocwen to service the loans who, in turn, will retain us to provide default related and technology services.

 

Throughout the second quarter, we continued to broaden our internal capabilities and processes.  When Altisource Residential begins acquiring homes, we will be instrumental in the efficient launch of their operations.  Our preparations for the separation of Altisource Residential and Altisource Asset Management are ongoing, including preparation of required documents to file with the Securities and Exchange Commission.  We continue to expect the separation to occur in the second half of the year.

 

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, now 232 members strong, 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.

 

We are developing two channels to grow our origination related business and further increase the members’ profitability.  First, we invested in Correspondent One to buy closed loans from the members of Lenders One.  With the exit of several of the larger correspondent lenders from the market, there are fewer available avenues through which members can sell their loans. Our intent is for Correspondent One to become a competitive, attractively priced alternative for the members.

 

Second, 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 cost we believe is below market.  Many of the services are in place and are similar to the services we provide in our default related business.  We anticipate our growth in origination related service revenue will accelerate after our next generation technology is in place to support the ordering and delivery of these services.  We are nearing the completion of the development phase of this technology and plan to pilot the portal with some of the members in the third quarter of 2012.  Once the pilot and any resulting remediation are complete, we plan to offer a bundle of origination related services to the full membership of Lenders One.

 

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While we are very early in the rollout of these two channels, there are encouraging signs that the strategy is working.  Our service revenue from origination related services has grown to $8.3 million in the second quarter of 2012, a 73% increase from the second quarter of 2011. Lenders One net membership has grown by 18 members in 2012 with 7 net members added in the second quarter. Altisource has signed service agreements to provide origination services with 108 members, and we are negotiating 36 additional contracts. Correspondent one increased loans purchased from $5.7 million in the first quarter to $10.9 million in the second quarter of 2012. Further, Correspondent One increased its loan pipeline from $3.7 million at the end of the first quarter to $18.6 million at the end of the second quarter of 2012 with $31.6 million in the pipeline as of July 20, 2012.  The number of approved sellers to Correspondent One also increased from 12 in the first quarter to 28 in the second quarter.

 

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 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. In 2011, we sold approximately 20,000 homes through our consumer real estate portal, and our revenue has grown to $25.6 million in the first half of 2012, compared to $12.3 million in the first half of 2011 (the consumer real estate portal is part of our Mortgage Services segment).

 

Unlike some of the other public and private real estate related websites, our portal is not based on a marketing, informational model.  Rather, we are centered on executing real estate transactions.  Our objective is to become the premier end-to-end real estate transaction marketplace that seamlessly and efficiently connects home buyers, sellers and real estate service providers for distressed and non-distressed homes.  We believe the real estate purchasing and sales market is underserved and consumers will welcome a new product offering transparency, simplicity and lower transaction costs.  Using Altisource’s next generation technologies, we believe the consumer real estate portal will transform the way real estate services are delivered by providing a unique transaction processing platform that offers an automated, transparent and integrated solution to buy and sell homes and purchase the related services as part of a home buying experience.

 

We believe the key to selling homes quickly at an optimal sales price is generating a high volume of relevant prospective buyer traffic to e