SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014 |
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 | 98-0554932 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
40, avenue Monterey
L-2163 Luxembourg
Grand Duchy of Luxembourg
(352) 24 69 79 00
(Address and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $1.00 par value | NASDAQ Global Select Market | |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
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 þ 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of the Registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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 þ | Accelerated filer o |
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 þ
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2014 was $1,824,344,937 based on the closing share price as quoted on the NASDAQ Global Market on that day and the assumption that all directors and executive officers of the Company, and their families, are affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.
As of February 20, 2015, there were 20,132,326 outstanding shares of the registrant’s shares of beneficial interest (excluding 5,280,422 shares held as treasury stock).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement to be filed subsequent to the date hereof with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the registrant’s Annual Meeting of Shareholders to be held on May 20, 2015 are incorporated by reference into Part III of this Report. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the registrant’s fiscal year ended December 31, 2014.
TABLE OF CONTENTS
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
FORM 10-K
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and certain information incorporated herein by reference contain forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements may relate to, among other things, future events or our future performance or financial condition. Words such as “anticipate,” “intend,” “expect,” “may,” “could,” “should,” “would,” “plan,” “estimate,” “believe,” “predict,” “potential,” or “continue” or the negative of these terms and comparable terminology are intended to identify such forward-looking statements. 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. 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 Item 1A of Part I “Risk Factors.” 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.
PART I
Except as otherwise indicated or unless the context requires otherwise, “Altisource,” “we,” “us,” “our” and the “Company” refer to Altisource Portfolio Solutions S.A., a Luxembourg société anonyme, or public limited company, and its wholly-owned subsidiaries.
ITEM 1. | BUSINESS |
The Company
Altisource® is a premier marketplace and transaction solutions provider for the real estate, mortgage and consumer debt industries offering both distribution and content. We leverage proprietary business process, vendor and electronic payment management software and behavioral science based analytics to improve outcomes for marketplace participants.
We are publicly traded on the NASDAQ Global Select Market under the symbol “ASPS.” We are incorporated under the laws of Luxembourg.
2014 Highlights
Our 2014 highlights include:
• | Recognized revenue of $1,078.9 million, a 40% increase compared to the year ended December 31, 2013; |
• | Recognized service revenue of $938.7 million, a 42% increase compared to the year ended December 31, 2013; |
• | Recognized diluted earnings per share of $5.69, a 10% increase compared to the year ended December 31, 2013; |
• | Generated cash flows from operations of $197.5 million, a 6% increase compared to the year ended December 31, 2013; |
• | The average number of loans serviced by Ocwen Financial Corporation and its subsidiaries (“Ocwen”) on REALServicing totaled 2.2 million, a 91% increase compared to the year ended December 31, 2013; |
• | On November 21, 2014, we acquired certain assets and assumed certain liabilities of Owners Advantage, LLC (“Owners.com”), a leading self-directed online real estate marketplace, for an initial purchase price of $19.8 million plus contingent earn out consideration of up to an additional $7.0 million over two years, subject to Owners.com achieving annual performance targets; |
• | On September 12, 2014, we completed the acquisition of certain assets and assumed certain liabilities of Mortgage Builder Software, Inc. (“Mortgage Builder”), a provider of mortgage loan origination and servicing software systems, for an initial purchase price of $15.7 million plus contingent earn out consideration of up to an additional $7.0 million over three years, subject to Mortgage Builder achieving annual performance targets; and |
• | On August 1, 2014, we amended our senior secured term loan agreement and increased our borrowings by $200.0 million. |
Reportable Segments
We classify our businesses into the following three reportable segments:
Mortgage Services: Provides services that span the mortgage and real estate lifecycle and are typically outsourced by loan servicers, loan originators, investors and other sellers of single family homes. We provide most of these services primarily for loan portfolios
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serviced by Ocwen. We also have longstanding relationships with commercial banks, 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, the Hubzu® and Owners.com® consumer real estate portals and real estate brokerage services. We also provide property management, lease management and renovation management services for single family rental properties.
Insurance services - Insurance services include an array of insurance services including pre-foreclosure, REO and refinance title searches, title insurance agency services, settlement and escrow services and loss draft claims processing. Prior to the November 11, 2014 discontinuation, we provided insurance program management and insurance brokerage services for REO and lender placed insurance companies.
Residential property valuation - Residential property valuation services principally include traditional appraisal products through our licensed appraisal management company and alternative valuation products, some of which are through our network of real estate professionals. We generally provide these services for residential loan servicers, residential lenders and investors in single family homes.
Default management services - Default management services principally include 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 include Mortgage Partnership of America, L.L.C. (“MPA”) and our contract underwriting and quality control businesses. MPA serves as the manager of Best Partners Mortgage Cooperative, Inc., which is referred to as the Lenders One® Mortgage Cooperative (“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 and insurance services businesses. In September 2014, we launched a new cooperative, Best Partners Mortgage Brokers Cooperative, Inc., which is referred to as the Wholesale One™ Mortgage Cooperative (“Wholesale One”), for the wholesale mortgage industry. Wholesale One provides a platform for mortgage brokers, wholesale lenders and related vendors to provide quality loans to U.S. consumers nationwide. The new cooperative will assist mortgage brokers and other third party originators with tools to improve their businesses.
Financial Services: Provides collection and customer relationship management services primarily to debt originators and servicers (e.g., credit card, auto lending, retail credit and mortgage) and the utility, insurance and hotel industries. Within the Financial Services segment, we provide the following services:
Asset recovery management - Asset recovery management principally includes post-charge-off debt collection services on a contingency fee basis.
Customer relationship management - Customer relationship management principally includes customer care, technical support and early stage collections services as well as insurance call center services and administrative support.
Technology Services: Comprises our REALSuite™ of software applications, Equator, LLC (“Equator”) software applications, Mortgage Builder® software applications and our information technology (“IT”) infrastructure management services. We currently provide our IT infrastructure management services to Ocwen, Home Loan Servicing Solutions, Ltd. (“HLSS”), Altisource Residential Corporation (“Residential”) and Altisource Asset Management Corporation (“AAMC”), through managed services agreements, and our other segments in a shared services model. Brief descriptions of the key REALSuite, Equator® and Mortgage Builder software solutions are below:
The REALSuite platform provides a fully integrated set of software applications and technologies that manage the end-to-end lifecycle for residential and commercial mortgage loan servicing including the automated management and payment of a distributed network of vendors.
REALServicing® - An enterprise residential mortgage loan servicing platform that offers an efficient and effective platform for loan servicing including default administration. This technology solution features automated workflows and robust reporting capabilities. The solution spans the loan servicing lifecycle from loan boarding to satisfaction
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including all collections, payment processing and reporting. We also offer the REALSynergy® enterprise commercial loan servicing system.
REALResolution™ - A technology platform that provides servicers with an automated default management and home retention solution for delinquent and defaulted loans.
REALTrans® - A patented electronic business-to-business exchange that automates and simplifies vendor selection, ordering, tracking and fulfilling of vendor provided services principally related to real estate and mortgage marketplaces. This technology solution, whether accessed through the web or integrated into a servicing system, connects to a marketplace of services through a single platform and delivers 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, provides servicers with the ability to automatically adjudicate invoices according to compliance rules and for electronic payments to be delivered after review and approval.
REALDoc® - An automated document management platform that consists of three primary modules: REALDoc Capture, which converts document images into processable data, indexes documents and provides customizable workflows based on data attributes; REALDoc Correspondence, which provides a scalable correspondence creation, management and delivery platform; and REALDoc Vault, which provides a scalable and distributed storage platform and secure document viewer.
REALAnalytics™ - A software platform that incorporates econometric models and behavioral economics to assist servicers in various aspects of servicing, including determination of loss mitigation options for decision-making by the servicer.
Equator - Includes the EQ Workstation®, EQ Marketplace®, EQ Midsource® and EQ Portal™ platforms and can be used separately or together as an end-to-end solution. EQ Workstation provides comprehensive, end-to-end workflow and transaction services to manage real estate and foreclosure related activities. EQ Marketplace provides a coordinated means of purchasing a variety of real estate services from vendors including real estate brokerage, title, closing, inspection and valuation. EQ Midsource allows users of EQ Workstation to outsource all or specific components of real estate related activities. EQ Portal provides realtors direct access to process real estate transactions with secure exchange of data and documents along with realtor marketing, training and certification.
Mortgage Builder - Includes the Architect®, Surveyance®, Colonnade® and LoanXEngine™ technologies, which are software solutions for mortgage banks, community banks, credit unions and other financial institutions. The Architect platform is a next generation all-inclusive origination platform available in the cloud that manages loans from prequalification through interim servicing and delivery. The Surveyance platform is a mobile origination solution that provides originators with the ability to service their clients remotely. The Colonnade platform is a comprehensive loan servicing solution and the LoanXEngine platform provides customer relationship management and product pricing and eligibility solutions.
Corporate Items and Eliminations: Includes interest expense and costs related to corporate support functions including executive, finance, legal, compliance, human resources, vendor management, risk and operational effectiveness and marketing, and also includes eliminations of transactions between the reportable segments. Corporate Items and Eliminations also include the cost of facilities until approximately 40% of the facilities are occupied by the business unit(s), at which time costs are charged to the business unit(s).
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. Service revenue 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 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 not owned by Altisource, and are included in revenue and reduced from net income to arrive at net income attributable to Altisource.
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Separation of the Residential Asset Businesses
On December 21, 2012, we completed the spin-off of two wholly-owned subsidiaries, Residential and AAMC, into separate publicly traded companies (the “Separation of the Residential Asset Businesses”). Residential’s common stock is listed on the New York Stock Exchange under the symbol “RESI,” and AAMC’s common stock is listed on the New York Stock Exchange’s NYSE MKT under the symbol “AAMC.” On December 24, 2012, we distributed all of the shares of Residential common stock and AAMC common stock to our shareholders of record as of December 17, 2012. Residential is focused on acquiring and managing single family rental properties by acquiring sub-performing and non-performing residential mortgage loans as well as single family homes at or following the foreclosure sale throughout the United States. AAMC provides asset management and certain corporate governance services to Residential. Residential and AAMC are further described in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Customers
Our customers include one of the largest sub-prime servicers in the United States, a government-sponsored enterprise (“GSE”), utility companies, commercial banks, servicers, investors, mortgage bankers and financial services companies. Our largest customer, Ocwen, accounted for 60% of our total revenue in 2014.
Related party revenue primarily consists of revenue earned directly from Ocwen and revenue earned from the loans serviced by Ocwen when Ocwen designates us as the service provider. Related party revenue from Ocwen as a percentage of segment and consolidated revenue was as follows for the years ended December 31:
2014 | 2013 | 2012 | |||
Mortgage Services | 67% | 71% | 68% | ||
Financial Services | 27% | 30% | <1% | ||
Technology Services | 41% | 49% | 42% | ||
Consolidated revenue | 60% | 65% | 59% | ||
We record revenue we earn from Ocwen under the service agreements at rates we believe to be market rates as we believe they are consistent with the fees we charge to other customers for comparable services and/or fees charged by our competitors.
We earn additional revenue on the portfolios serviced by Ocwen that is not considered related party revenue when a party other than Ocwen selects Altisource as the service provider. For the years ended December 31, 2014, 2013 and 2012, we recognized revenue of $256.0 million, $161.9 million and $125.4 million, respectively, on the portfolios serviced by Ocwen that are not considered related party revenue.
Our services are provided to customers primarily located in the United States. Financial information for our segments can be found in Note 23 to our consolidated financial statements.
Sales and Marketing
We have experienced sales personnel and relationship managers with subject matter expertise. These individuals maintain relationships throughout the industry sectors we serve and play an important role in generating new client leads as well as identifying opportunities to expand our services with existing clients. Additional leads are also generated through requests for proposal processes. Our sales team works collaboratively and is compensated principally with a base salary and commission for sales generated.
Our primary sales and marketing focus is expanding relationships and services provided to existing customers and Lenders One and Wholesale One members as well as adding new Lenders One and Wholesale One members, adding new customers of Equator and Mortgage Builder, new default services customers and more consumer limited service brokerage customers. Given the highly concentrated nature of the industries we serve, the time and effort we spend in expanding relationships or winning new relationships is significant.
Intellectual Property
We rely on a combination of contractual restrictions, internal security practices, patents, trademarks, copyrights, trade secrets and other intellectual property to establish and protect our software, technology and expertise. We also own or, as necessary and
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appropriate, have obtained licenses from third parties to intellectual property relating to our services, processes and business. These intellectual property rights are important factors in the success of our businesses.
As of December 31, 2014, we have been awarded one patent that expires in 2023, four patents that expire in 2024, six patents that expire in 2025, two patents that expire in 2026, one patent that expires in 2029 and one patent that expires in 2030. In addition, we have registered trademarks, or recently filed applications for the registration of trademarks, in a number of jurisdictions including the United States, the European Community, India and in eight other jurisdictions. These trademarks generally can be renewed indefinitely, provided they are being used in commerce.
We actively protect our rights and intend to continue our policy of taking all measures we deem reasonable and necessary to develop and protect our patents, trademarks, copyrights, trade secrets and other intellectual property rights.
Industry and Competition
The industry verticals in which we engage are highly competitive and generally consist of a few national vendors as well as a large number of regional, local and in-house providers resulting in a fragmented market with disparate service offerings. From an overall perspective, we compete with global business process outsourcing firms. Our Mortgage Services segment competes with national and regional third party service providers and in-house servicing operations of large mortgage lenders and servicers. We also compete with companies providing online real estate auction services and limited service brokerage firms. Our Financial Services segment competes with other large receivables management companies as well as a fragmented group of smaller companies and law firms focused on collections. Our Technology Services segment competes with data processing and software development companies and in-house technology and software operations of other loan servicers.
Given the diverse nature of services we and our competitors offer, we cannot determine our position in the market with certainty, but we believe we represent only a small portion of very large markets. Given our size, some of our competitors may offer more diversified services, operate in broader geographic markets or have greater financial resources than we do. In addition, some of our larger customers retain multiple providers and continuously evaluate our performance against our competitors.
Competitive factors in our Mortgage Services business include the compliance, quality and timeliness of our services, the size and competence of our network of vendors and the breadth of the services we offer. Competitive factors in our Financial Services business include the ability to achieve a collection rate comparable to our competitors; the compliance, quality, timeliness and personal nature of the service; the consistency and professionalism of the service; and the recruitment, training and the retention of our workforce. Competitive factors in our Technology Services business include the quality of the technology-based applications or services; application features and functions; ease of delivery and integration; our ability to maintain, enhance and support the applications or services; our ability to recruit and retain software and other technical employees; and the cost of obtaining, maintaining and enforcing our patents.
Employees
As of December 31, 2014, we had the following number of employees:
United States | India | Philippines | Luxembourg | Consolidated Altisource | |||||||||||
Mortgage Services | 442 | 2,847 | 377 | 9 | 3,675 | ||||||||||
Financial Services | 874 | 2,113 | 86 | 2 | 3,075 | ||||||||||
Technology Services | 634 | 1,316 | 12 | 2 | 1,964 | ||||||||||
Corporate | 123 | 433 | 23 | 20 | 599 | ||||||||||
Total employees | 2,073 | 6,709 | 498 | 33 | 9,313 | ||||||||||
We have not experienced any work stoppages and we consider our relations with employees to be good. We believe our future success will depend, in part, on our continuing ability to attract, hire and retain skilled and experienced personnel.
Seasonality
Certain of our revenues are seasonal. More specifically, Mortgage Services’ revenue is impacted by REO sales and lawn maintenance, which tend to be at their lowest levels during fall and winter months and highest during spring and summer months.
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Financial Services’ asset recovery management revenue tends to be higher in the first quarter, as borrowers may utilize tax refunds and bonuses to pay debts, and generally declines throughout the rest of the year.
Government Regulation
Our business and the business of our customers are subject to extensive scrutiny and regulation by federal, state and local governmental authorities including the Federal Trade Commission (“FTC”), the Consumer Financial Protection Bureau (“CFPB”), the Securities and Exchange Commission (“SEC”) and the state and local agencies that license or oversee certain of our auction, real estate brokerage, mortgage and debt collection services, including insurance services and collection services. We also must comply with a number of federal, state and local consumer protection laws including, among others, the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act, Unfair, Deceptive or Abusive Acts and Practices statutes, the Real Estate Settlement Procedures Act (“RESPA”), the Truth in Lending Act (“TILA”), the Fair Credit Reporting Act, the Telephone Consumer Protection Act, the Homeowners Protection Act, the California Homeowner Bill of Rights and the Secure and Fair Enforcement for Mortgage Licensing (“SAFE”) Act. We are also subject to the requirements of the Foreign Corrupt Practices Act (“FCPA”) and comparable foreign laws, due to our activities in foreign jurisdictions.
Requirements can and do change as statutes and regulations are enacted, promulgated or amended. One such enacted regulation is the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The Dodd-Frank Act is extensive and includes reform of the regulation and supervision of financial institutions, as well as the regulation of derivatives, capital market activities and consumer financial services. The Dodd-Frank Act, among other things, created the CFPB, a federal entity responsible for regulating consumer financial services and products. Title XIV of the Dodd-Frank Act contains the Mortgage Reform and Anti-Predatory Lending Act (“Mortgage Act”). The Mortgage Act imposes a number of additional requirements on lenders and servicers of residential mortgage loans by amending and expanding certain existing regulations. In some cases, penalties for noncompliance are significant and could lead to settlements or consent orders affecting us or our customers that may curtail or restrict the business as it is currently conducted.
We are subject to licensing and regulation as a provider of certain services including, among others, services as a mortgage origination underwriter, valuation provider, appraisal management company, asset manager, property manager, title insurance agent, property and casualty insurance broker, real estate broker, auctioneer, foreclosure trustee and debt collector in a number of states. Our employees and subsidiaries may be required to be licensed by various state commissions for the particular type of service sold and to participate in regular continuing education programs. Periodically, we are subject to audits and examinations by federal, state and local regulatory agencies and receive subpoenas, civil investigative demands or other requests for information from such regulatory agencies in connection with their regulatory or investigative authority.
Available Information
We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other information with the SEC. These filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room located at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.
Our principal Internet address is www.altisource.com and we encourage investors to use it as a way of easily finding information about us. We promptly make the reports we file or furnish with the SEC, corporate governance information (including our Code of Business Conduct and Ethics), select press releases and other related information available on this website. The contents of our website are available for informational purposes only and shall not be deemed incorporated by reference in this report.
ITEM 1A. | RISK FACTORS |
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. If any of the following risks actually occur, our business, operating results and financial condition could be materially adversely affected.
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Risks Related to Our Business and Industry
Ocwen is our largest customer and the loss of Ocwen as a customer or a reduction in the size of Ocwen could adversely affect our business and results of operations.
For the year ended December 31, 2014, we generated approximately 60% of our revenue from Ocwen. Additionally, 24% of our 2014 revenue was earned on the portfolios serviced by Ocwen, but is not considered related party revenue because a party other than Ocwen selects Altisource as the service provider. Prior to the 2009 separation from Ocwen, our businesses were wholly-owned subsidiaries of Ocwen and since the 2009 separation Ocwen has been our largest customer. Ocwen purchases certain services from our Mortgage Services, Financial Services and Technology Services segments under service agreements that extend through August 2025, subject to termination under certain conditions. In addition, Ocwen purchases certain origination services from Altisource under an agreement that extends through January 2017, subject to termination under certain conditions.
Ocwen has been and is subject to a number of pending federal and state regulatory investigations, inquiries and requests for information that have or could result in adverse regulatory actions against Ocwen. For example, as a result of various regulatory actions, Ocwen is (i) subject to an independent auditor’s review of compliance with California servicing laws and has agreed not to obtain any new servicing rights in California until the regulator is satisfied with future document requests, (ii) operating under the oversight of an on-site operations monitor imposed by New York Department of Financial Services (“NYDFS”), which is assessing the adequacy and effectiveness of Ocwen’s operations, including information technology systems, (iii) required to perform benchmarking pricing studies for transactions with related parties, which are subject to periodic review by the monitor imposed by the NYDFS and (iv) subject to requirements under an agreement with the CFPB and various states attorneys general and agencies that imposed specific servicing guidelines and oversight by an independent national monitor, who recently reported they were investigating the reliability of information Ocwen has provided. In addition to these matters, Ocwen continues to be subject to other regulatory investigations, inquiries and requests for information and pending legal proceedings, and Ocwen may become subject to future federal and state regulatory investigations, inquiries and requests for information, any of which could also result in adverse regulatory or other actions against Ocwen.
As a result of these various difficulties faced by Ocwen, its debt and servicer ratings have been downgraded. Further, certain bondholders of Ocwen-serviced residential mortgage-backed securities alleged that Ocwen, as servicer of certain mortgage-backed securities trusts, defaulted on these servicing agreements.
Ocwen relies, in part, on HLSS to finance its operations. For a significant portion of Ocwen-serviced non-GSE loans, HLSS owns (1) the rights to receive the servicing fees that Ocwen is entitled to receive and (2) associated servicing advances. As a result of certain of the foregoing matters, HLSS has received notices of default with respect to certain of its debt financing and has received demands from a shareholder that servicing be transferred away from Ocwen.
The foregoing may have significant and varied effects on Ocwen’s business and our continuing relationships with Ocwen. For example, Ocwen may be required to alter the way it conducts business, including the parties it contracts with for services (including information technology services), it may be required to seek changes to its existing pricing structure with related parties or otherwise, it may lose or sell some or all of its non-GSE servicing rights or subservicing arrangements or may lose one or more of its state servicing licenses. Additional regulatory actions may impose additional restrictions on or require changes in Ocwen’s business that would require it to sell assets or change its business operations. Further, Ocwen’s ability to finance its operations and repay maturing obligations rests in large part on its ability and the ability of HLSS to continue to borrow money, which also may be affected by any or all of the circumstances described above. Any or all of these effects could result in our eventual loss of Ocwen as a customer or a reduction in the volume of services they purchase from us.
The loss of Ocwen as a customer or a significant reduction in the volume of services they purchase from us would significantly reduce our revenue and materially adversely affect our results of operations. Further, if Ocwen were to lose or sell a significant portion or all of its non-GSE servicing rights or subservicing arrangements or lose its state servicing licenses in states with a significant number of loans in Ocwen's servicing portfolio, our revenue and results of operations would be materially adversely affected. In addition, if there are significant changes to our contractual relationship with Ocwen or significant changes to our pricing to Ocwen for services from which we generate material revenue, Altisource’s revenue and results of operations could be materially negatively impacted.
Our continuing relationship with Ocwen may inhibit our ability to attract and retain other customers.
Given our close and continuing relationship with Ocwen and the regulatory scrutiny related to the way in which Ocwen does business with Altisource, we may encounter difficulties in attracting new customers and retaining existing customers. Should
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these and other potential customers view Altisource as part of Ocwen or as too closely related to or dependent upon Ocwen, they may be unwilling to utilize our services and our growth could be inhibited as a result.
We have key customer relationships, other than Ocwen, the loss of which could affect our business and results of operations.
While no individual client, other than Ocwen, represents more than 10% of our consolidated revenue, we are exposed to customer concentration. Most of our customers are not contractually obligated to continue to use our services at historical levels or at all. The loss of any of these key customers or their failure to pay us could reduce our revenue and adversely affect results of operations.
The strength of the economy and the housing market can affect demand for our services.
The performance and growth of our origination services business is dependent on the volume of loan originations by third parties. In the event of an economic slowdown, increase in interest rates or any other factor that would likely lead to a decrease in the level of origination transactions, including refinancing transactions, our origination services growth prospects could be adversely affected. Also, in a strengthening economy and housing market, reduced delinquencies negatively impact our default business. Further, in the event that adverse economic conditions or other factors lead to a decline in levels of home ownership and a reduction in the aggregate number of United States mortgage loans outstanding, our revenues from our software applications could be adversely affected.
Our business is subject to substantial competition.
The markets for our services are very competitive. Our competitors vary in size and in the scope and breadth of the services they offer. We compete for existing and new customers against both third parties and the in-house capabilities of our customers. Some of our competitors are more established and better known, have substantial resources and some have widely-used technology platforms which they seek to use as a competitive advantage to drive sales of other products and services. In addition, we expect the markets in which we compete will continue to attract new competitors and new technologies. These new technologies may render our existing technologies obsolete, resulting in operating inefficiencies and increased competitive pressure. There can be no assurance we will be able to compete successfully against current or future competitors or that competitive pressures we face in the markets in which we operate will not materially adversely affect our business, financial condition and results of operations.
Our intellectual property rights are valuable and any inability to protect them or challenges to our right to use them could reduce the value of our services or increase our costs.
Our patents, trademarks, trade secrets, copyrights and other intellectual property rights are important assets. The efforts we have taken to protect these proprietary rights may not be sufficient or effective in every case. The unauthorized use of our intellectual property or significant impairment of our intellectual property rights could harm our business, make it more expensive to do business or hurt our ability to compete. Protecting our intellectual property rights is costly and time consuming.
Although we seek to obtain patent protection for certain of our innovations, it is possible we may not be able to protect all of the innovations for which we seek protection. Changes in patent law, such as changes in the law regarding patentable subject matter, can also impact our ability to obtain patent protection for our innovations. In addition, given the costs of obtaining patent protection, we may choose not to protect certain innovations that later turn out to be important. Furthermore, there is always the possibility, despite our efforts, that the scope of the protection gained will be insufficient or an issued patent may be deemed invalid or unenforceable.
Further, as our technology solutions and services develop, we may become increasingly subject to infringement claims by others. Any claims, whether with or without merit, could:
• | be expensive and time-consuming to defend; |
• | cause us to cease making, licensing or using technology solutions that incorporate the challenged intellectual property; |
• | require us to redesign our technology solutions, if feasible; |
• | divert management’s attention and resources; and/or |
• | require us to enter into royalty or licensing agreements in order to obtain the right to use necessary technologies. |
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Technology failures, defects or inadequacies, development delays or installation difficulties, security breaches, acts of vandalism or the introduction of harmful code could damage our business operations and increase our costs.
Disruptions, failures, defects or inadequacies in our technology, delays in the development of, or installation difficulties with, our technology, or security breaches, acts of vandalism, system attacks or the introduction of malicious code to our technology, may interrupt or delay our ability to provide services to our customers. Any sustained and repeated disruptions in these services may have an adverse impact on our and our customers’ results of operations. Further, Ocwen or other of our customers may require changes and improvements to the systems we provide to them to manage the volume and complexity of their businesses, which changes and improvements may be costly and time consuming to implement and may create disruptions in our provision of services to customers, which could have an adverse impact on our business operations and financial position, and increase our costs. Additionally, the improper implementation or use of Altisource technology by customers could impact the operation of that technology, and potentially cause harm to our reputation, loss of customers, negative publicity or exposure to liability claims.
The Company’s databases containing proprietary information and personal information of our customers and employees could be breached, which could subject us to adverse publicity, costly government enforcement actions or private litigation, and expenses.
As part of our business and operation of our technology, we maintain proprietary information electronically and electronically receive, process, store and transmit consumer information and confidential and sensitive business information of our customers and employees. We rely on the security of our networks, databases, systems and processes and, in certain circumstances, those of third parties, such as vendors, to protect our proprietary information and information about our customers and employees. Criminals are constantly devising schemes to circumvent information technology security safeguards and other large companies have recently suffered serious data security breaches. If unauthorized parties gain access to our networks or databases, or those of our vendors, they may be able to steal, publish, delete, or modify our sensitive proprietary information and sensitive third party information, including personally identifiable information. In addition, employees may intentionally or inadvertently cause data or security breaches that result in unauthorized release of such personal or confidential information. In such circumstances, our business could suffer and we could be held liable to our customers, other parties, or employees, as well as be subject to regulatory or other actions for breaching privacy law or failing to adequately protect such information. This could result in costly investigations and litigation, civil or criminal penalties, operational changes or other response measures, loss of consumer confidence in our security measures and negative publicity that could adversely affect our financial condition, results of operations, and reputation. Furthermore, Congress or individual states could enact new laws regulating electronic commerce that could adversely affect us and our results of operations.
We have long development and sales cycles for many of our services and technology solutions and if we fail to close sales after expending significant time and resources to do so, our business, financial condition and results of operations may be adversely affected.
We may have long development and sales cycles for many of our services and technology solutions. We may expend significant time and resources in pursuing a particular service, technology solution or customer that does not generate revenue. We may encounter delays when developing new services or technology solutions. We may experience difficulties in installing or integrating our technologies on platforms used by our customers. Further, defects in our technology solutions, errors or delays in the processing of electronic transactions or other difficulties could result in interruption of business operations, delay in market acceptance, additional development and remediation costs, loss of customers, negative publicity or exposure to liability claims.
Delays due to the length of our sales cycle or costs incurred that do not result in sales could have a materially adverse effect on our business, financial condition or results of operations.
Our business and the business of our customers are subject to extensive scrutiny and regulation, and failure to comply with existing or new regulations may adversely impact us.
Our business and the business of our customers are subject to extensive scrutiny and regulation by federal, state and local governmental authorities including the FTC, the CFPB, the SEC and the state and local agencies that license or oversee certain of our auction, real estate brokerage, mortgage and debt collection services, including insurance services and collection services. We also must comply with a number of federal, state and local consumer protection laws including, among others, the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act, Unfair, Deceptive or Abusive Acts and Practices statutes, RESPA, TILA, the Fair Credit Reporting Act, the Telephone Consumer Protection Act, the Homeowners Protection Act, the California Homeowner Bill of Rights, the SAFE Act, the Mortgage Act, the FCPA and the Dodd-Frank Act. These requirements can and do change as statutes and regulations are enacted, promulgated or amended. We are also subject to licensing and regulation as a provider of certain services including, among others, services as a mortgage origination underwriter, valuation provider, appraisal management
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company, asset manager, property manager, title insurance agent, property and casualty insurance broker, real estate broker, auctioneer, foreclosure trustee and debt collector in a number of states. Our employees and subsidiaries may be required to be licensed by various state commissions for the particular type of service sold and to participate in regular continuing education programs. We incur significant ongoing costs to comply with licensing requirements and governmental regulations.
Participants in the industries in which we operate are subject to a high level of regulatory scrutiny. This scrutiny has included federal and state governmental agency review of all aspects of the mortgage servicing and lending industries and the debt collection industry, including an increased legislative and regulatory focus on consumer protection practices. In some cases, penalties for noncompliance are significantly increased and could lead to settlements or consent orders against us, or our customers, that may curtail or restrict our business as it is currently conducted. If regulators continue to impose new or more restrictive requirements, we may incur significant additional costs to comply with such requirements which could further adversely affect our results of operations or financial condition. In addition, our failure to comply with these laws and regulations can possibly lead to civil and criminal liability, loss of licensure, damage to our reputation in the industry, fines and penalties and litigation, including class action lawsuits or administrative enforcement actions. Any of these outcomes could harm our results of operations or financial condition.
Periodically, we are subject to audits and examinations by federal, state and local regulatory agencies and receive subpoenas, civil investigative demands or other requests for information from such regulatory agencies in connection with their regulatory or investigative authority. We are currently responding to such inquiries from federal and state agencies relating to certain aspects of our business. Responding to such audits, examinations and inquiries will cause us to incur costs, including legal fees or other charges, which may be material in amount. If any such audits, examinations or inquiries result in findings of noncompliance, we could incur fines, penalties, settlement costs or other damages or have sanctions imposed on us or restrictions imposed on our business that could have a material adverse effect on our business and results of operations.
National servicing standards and federal and state government scrutiny and regulation and other requirements require very specific loan modification and foreclosure procedures that have further reduced the number of loans entering the foreclosure process and have negatively impacted our default services revenue and profit. It is unclear when or if volumes will increase in the future.
Our customers are subject to government regulation, requiring our customers to, among other things, oversee their vendors and maintain documentation that demonstrates their oversight. If our performance does not meet our customers’ standards, our results of operations could be adversely affected.
Our customers are subject to a variety of government regulations, including those promulgated by the CFPB. Certain regulations require our customers to oversee their vendors and document the procedures performed to demonstrate that oversight. Altisource, as a vendor, is subject to oversight by our customers. If we do not meet the standards established by our customers or if any other oversight procedures result in a negative outcome for Altisource, we may lose customers or may no longer be granted referrals for certain services, negatively impacting our business and results of operations.
We rely on third party vendors for many aspects of our business. If our vendor oversight process is ineffective or we face difficulties managing our relationships with third party vendors, our results of operations could be adversely affected.
We rely on third party vendors to provide goods and services in relation to many aspects of our operations. Our dependence on these vendors makes our operations vulnerable to such third parties’ failure to perform adequately under our contracts with them. In addition, where a vendor provides services that we are required to provide under a contract with a client, we are generally responsible for such performance and could be held accountable by the client for any failure of performance by our vendors. We evaluate the competency and solvency of our key third party vendors. Additionally, we perform ongoing vendor oversight activities to identify any performance or other issues related to these vendors. If a vendor fails to provide the services that we require or expect, or fails to meet contractual requirements, such as service levels or compliance with applicable laws, the failure could negatively impact our business by adversely affecting our ability to serve our customers and/or subjecting us to litigation and regulatory risk for ineffective vendor oversight. Such a failure could adversely affect the reliability and quality of the services we provide our customers and could adversely affect our results of operations.
If financial institutions at which we hold escrow and trust funds fail, it could have a materially adverse impact on our Company.
We hold customers’ assets in escrow and trust accounts at various financial institutions pending completion of certain real estate activities. We also hold cash in trust accounts at various financial institutions where contractual obligations mandate maintaining dedicated bank accounts for Financial Services collections. These amounts are held in escrow and trust accounts for limited periods of time and are not included in the accompanying consolidated balance sheets. We may become liable for funds owed to third
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parties as a result of the failure of one or more of these financial institutions, and there is no guarantee we would recover the funds deposited, whether through Federal Deposit Insurance Corporation coverage, private insurance or otherwise.
We may be subject to claims of legal violations or wrongful conduct which may cause us to pay unexpected litigation costs or damages or modify our products or processes.
From time to time, we may be subject to costly and time-consuming legal proceedings that claim legal violations or wrongful conduct. These lawsuits may involve clients, our clients’ customers, vendors, competitors and/or other large groups of plaintiffs and, if resulting in findings of violations, could result in substantial damages. Alternatively, we may be forced to settle some claims out of court and change existing company practices, services and processes that are currently revenue generating. This could lead to unexpected costs or a loss of revenue.
Our debt makes us more sensitive to the effects of economic change; our level of debt and provisions in our debt agreements could limit our ability to react to changes in the economy or our industry.
Our debt makes us more vulnerable to changes in our results of operations because a portion of our cash flows from operations is dedicated to servicing our debt and is not available for other purposes. Our debt is secured by virtually all of our assets and is trading at a substantial discount to face value. Our ability to raise additional debt is limited, subject to lender approval and would require modification of our current debt agreements. Additionally, increases in interest rates will negatively impact our cash flows as the interest on our debt is variable. The provisions of our debt agreement could have other negative consequences to us including the following:
• | limiting our ability to borrow money for our working capital, capital expenditures, debt service requirements or other general corporate purposes; |
• | limiting our flexibility in planning for, or reacting to, changes in our operations, our business or the industry in which we compete; |
• | requiring us to repay a portion of our excess cash flow, as defined in the debt agreement, in the event our debt to EBITDA ratios, as defined in the debt agreement, exceed certain thresholds; and |
• | placing us at a competitive disadvantage by limiting our ability to invest in the business. |
Our ability to make payments on our indebtedness depends on our ability to generate cash in the future. If we do not generate sufficient cash flows to meet our debt service and working capital requirements, we may need to seek additional financing or sell assets. This may make it more difficult for us to obtain financing on terms that are acceptable to us, or at all. Without any such financing, we could be forced to sell assets to make up for any shortfall in our payment obligations under unfavorable circumstances. If necessary, we may not be able to sell assets quickly enough or for sufficient amounts to enable us to meet our obligations.
In addition, our debt agreement contains covenants that limit our flexibility in planning for, or reacting to changes in, our business and our industry, including limitations on incurring additional indebtedness, making investments, granting liens and merging or consolidating with other companies. Complying with these covenants may impair our ability to finance our future operations or capital needs or to engage in other favorable business activities.
Our failure to comply with the covenants contained in our debt agreement, including as a result of events beyond our control, could result in an event of default which could materially and adversely affect our operating results and our financial condition.
Our debt agreement requires us to comply with various operational, reporting and other covenants that limit us from engaging in certain types of transactions. If there were an event of default under our debt agreement that was not cured or waived, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be immediately due and payable. We cannot assure you that our assets or cash flows would be sufficient to fully repay borrowings under our outstanding debt instruments, either upon maturity or if accelerated, upon an event of default or that we would be able to refinance or restructure the payments on those debt instruments.
Our failure to maintain certain debt to EBITDA ratios contained in our debt agreement could result in required payments to the lenders of a percentage of our excess cash flows, which could materially and adversely affect our ability to use our excess cash flows for other purposes.
Our debt agreement requires us to distribute 50% of our excess cash flows, as defined in the debt agreement, if our net debt to EBITDA ratio exceeds 3.50 to 1.00 and 25% of our excess cash flows if our net debt to EBITDA ratio is 3.50 to 1.00 or less, but greater than 3.00 to 1.00. If we were required to distribute a portion of our excess cash flows to our lenders, we may be limited
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in our ability to grow our business through acquisitions or investments in technology and we may be limited in our ability to repurchase our common stock. We cannot assure you that we will maintain debt to EBITDA ratios at levels that will not require us to distribute a portion of our excess cash flows to lenders.
Risks Related to our Growth Strategy
Our ability to grow is affected by our ability to retain and expand our existing client relationships and our ability to attract new customers.
Our ability to retain existing customers and expand those relationships and attract new customers is subject to a number of risks including the risk that we do not:
• | maintain or improve the compliance and quality of services we provide to our customers; |
• | meet or exceed the expectations of our customers; |
• | successfully leverage our existing client relationships to sell additional services; and |
• | attract other servicers and non-distressed home sellers as new customers. |
If our efforts to retain and expand our client relationships and to attract new customers do not prove effective, it could have a materially adverse effect on our business and results of operations and our ability to grow our operations.
Our ability to expand existing relationships and attract new customers is also affected by broader economic factors and the strength of the overall housing market, which can reduce demand for our services and increase competition for each customer’s business. See “The strength of the economy and the housing market can affect demand for our services.”
If we do not adapt our services to changes in technology or in the marketplace, or if our ongoing efforts to upgrade our technology and particularly our efforts to complete development of our technology are not successful, we could lose customers and have difficulty attracting new customers for our services.
The markets for our services are characterized by constant technological change, frequent introduction of new services and evolving industry standards. We are currently in the process of developing and introducing our technology. Our future success will be significantly affected by our ability to complete our current efforts and in the future enhance, primarily through use of automation, econometrics and behavioral science principles, our services and develop and introduce new services that address the increasingly sophisticated needs of our customers and their customers. These initiatives carry the risks associated with any new service development effort, including cost overruns, delays in delivery and performance effectiveness. There can be no assurance that we will be successful in developing, marketing and selling new services that meet these changing demands or completing the development of our technology. In addition, we may experience difficulties that could delay or prevent the successful development, introduction and marketing of these services. Finally, our services and their enhancements may not adequately meet the demands of the marketplace and achieve market acceptance. Any of these results would have a negative impact on our financial condition and results of operations and our ability to grow our operations.
Our growth objectives are dependent on the timing and market acceptance of our new service offerings.
Our ability to grow may be adversely affected by difficulties or delays in service development or the inability to gain market acceptance of new services to existing and new customers. There are no guarantees that new services will prove to be commercially successful.
Our business is dependent on the trend towards outsourcing.
Our continued growth at historical rates is dependent on the industry trend towards outsourced services. There can be no assurance this trend will continue as organizations may elect to perform such services themselves or may be prevented from outsourcing services. A significant change in this trend could have a materially adverse effect on our continued growth.
Acquisitions to accelerate growth initiatives involve potential risks.
During 2014, we acquired Mortgage Builder and Owners.com. During 2013, we acquired fee-based businesses from Ocwen and acquired Equator. We intend to continue to consider acquisitions of other businesses that could complement our business. In addition to considering acquisitions that could offer us greater access in our current markets, we also consider acquisitions of entities offering greater access and expertise in other asset types and markets that are related to ours but we do not currently serve.
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As we acquire businesses, we may face a number of risks including a loss of focus on our daily operations, the need for additional management, constraints on operating resources, constraints on financial resources from integration and system conversion costs, the inability to maintain key pre-acquisition relationships with customers, suppliers and employees and other integration risks. Any acquisition may result in the incurrence of additional amortization expense of related intangible assets, which could reduce our profitability. Our ability to pursue additional acquisitions in the future is dependent on our access to sufficient capital (equity or debt) to fund the acquisition and subsequent integration. We may not be able to secure adequate capital as needed on terms that are acceptable to us, or at all, and our ability to secure such capital through debt financing is limited by our current debt agreements.
Risks Related to International Business
Our international operations subject us to additional risks which could have an adverse effect on our results of operations.
We have reduced our operating expenses by utilizing lower cost labor in foreign countries such as India and the Philippines. As of December 31, 2014, 7,207 of our employees were based in India and the Philippines. These countries are subject to relatively higher degrees of political and social instability and may lack the infrastructure to withstand political unrest or natural disasters. Such disruptions can decrease efficiency and increase our costs in these countries. Weakness of the United States dollar in relation to the currencies used in these foreign countries may also reduce the savings achievable through this strategy. Furthermore, the practice of utilizing labor based in foreign countries has come under increased scrutiny in the United States and, as a result, some of our customers may require us to use labor based in the United States. We may not be able to pass on the increased costs of higher-priced United States-based labor to our customers, which ultimately could have an adverse effect on our results of operations.
The FCPA and other applicable anti-corruption laws and regulations prohibit corrupting payments by our employees, vendors and agents. Any violation of the applicable anti-corruption laws or regulations by us, our subsidiaries or our local agents, could have an adverse effect on our business and reputation and result in substantial financial penalties or other sanctions.
Any political or economic instability in these countries could result in our having to replace or reduce these labor sources, which may increase our labor costs and have an adverse impact on our results of operations.
Altisource is a Luxembourg company and it may be difficult to enforce judgments against it or its directors and executive officers.
Altisource is a public limited company organized under the laws of Luxembourg. As a result, Luxembourg law and the articles of incorporation govern the rights of shareholders. The rights of shareholders under Luxembourg law may differ from the rights of shareholders of companies incorporated in other jurisdictions. A significant portion of the assets of Altisource are located outside of the United States. It may be difficult for investors to enforce, in the United States, judgments obtained in United States courts against Altisource or its directors based on the civil liability provisions of the United States securities laws or to enforce, in Luxembourg, judgments obtained in other jurisdictions including the United States.
A significant change of the Luxembourg tax regime or of its interpretation by the Luxembourg tax authorities could adversely affect our results of operations.
Altisource is organized under the laws of, and headquartered in, Luxembourg. As a result, Altisource has a lower effective tax rate than some of its competitors. It is possible that changes in Luxembourg’s administrative taxation practices or applicable regulations may cause an increase in our effective tax rate, which could result in an adverse effect on our results of operations.
Risks Related to Our Employees
Our success depends on our directors, executive officers and key personnel.
Our success is dependent on the efforts and abilities of our directors, executive officers and other key employees, many of whom have significant experience in the real estate and mortgage, financial services and technology industries. In particular, we are dependent on the services of our Board of Directors and key executives at our corporate headquarters and personnel at each of our segments. The loss of the services of any of these directors, executives or key personnel, for any reason, could have a materially adverse effect upon our business, results of operations and financial condition.
Our inability to attract and retain skilled employees may adversely impact our business.
Our business is labor intensive and places significant importance on our ability to recruit, train and retain skilled employees. Additionally, demand for qualified technical and software professionals conversant in certain technologies may exceed supply as new and additional skills are required to keep pace with evolving computer technology. Our ability to locate and train employees
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is critical to achieving our growth objective. Our inability to attract and retain skilled employees or an increase in wages or other costs of attracting, training or retaining skilled employees could have a materially adverse effect on our business, financial condition and results of operations.
Risks Related to Our Relationships
We could have conflicts of interest with Ocwen, Residential, AAMC, HLSS and certain members of our management, which may be resolved in a manner adverse to us.
We have significant business relationships with and provide services to Ocwen and Residential. We also provide certain services to AAMC and HLSS. Ocwen, Residential, AAMC and HLSS have been related parties of Altisource. Our former Chairman, William C. Erbey, who stepped down from the Altisource, Ocwen, Residential, AAMC and HLSS Boards of Directors effective January 16, 2015, owns or controls common stock in each of these companies. As of December 31, 2014, Mr. Erbey owned or controlled approximately 29% of the common stock of Altisource, approximately 14% of the common stock of Ocwen, approximately 4% of the common stock of Residential, approximately 28% of the common stock of AAMC and approximately 1% of the common stock of HLSS. Additionally, certain members of our management have equity interests in Ocwen, Residential, AAMC and/or HLSS. Such ownership interests could create, or appear to create, conflicts of interest with respect to matters potentially or actually involving or affecting us and Ocwen, Residential, AAMC and HLSS, as the case may be.
We follow policies, procedures and practices to avoid potential conflicts with respect to our dealings with Ocwen, Residential, AAMC and HLSS. We also manage potential conflicts of interest through oversight by independent members of our Board of Directors (independent directors constitute a majority of our Board of Directors and our current Chairman is an independent director), and we will also seek to manage these potential conflicts through dispute resolution and other provisions of our agreements with Ocwen, Residential, AAMC and HLSS. There can be no assurance that such measures will be effective, that we will be able to resolve all conflicts with Ocwen, Residential, AAMC or HLSS or that the resolution of any such conflicts will be no less favorable to us than if we were dealing with a third party that had none of the connections we have with these businesses.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
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ITEM 2. PROPERTIES
Our principal executive offices are located in leased office space in Luxembourg, Grand Duchy of Luxembourg. A summary of our principal leased office space as of December 31, 2014 and the segments primarily occupying each location is as follows:
Mortgage Services | Financial Services | Technology Services | Corporate and Support Services | |||||
Luxembourg | X | X | X | X | ||||
United States | ||||||||
Atlanta, GA | X | X | X | X | ||||
Boston, MA | X | X | ||||||
Coppell, TX | X | X | ||||||
Endicott, NY | X | |||||||
Fort Washington, PA | X | |||||||
Irvine, CA | X | |||||||
Los Angeles, CA | X | |||||||
Plano, TX | X | |||||||
Sacramento, CA | X | |||||||
Seattle, WA | X | |||||||
Southfield, MI | X | |||||||
St. Louis, MO | X | |||||||
Tempe, AZ | X | |||||||
Pasay City, Philippines | X | X | X | X | ||||
India | ||||||||
Bangalore | X | X | X | X | ||||
Goa | X | |||||||
Mumbai | X | X | X | X | ||||
We do not own any real property. We consider these facilities to be suitable and adequate for the management and operations of our business.
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ITEM 3. | LEGAL PROCEEDINGS |
From time to time, we are involved in legal and administrative proceedings arising in the course of our business. We record a liability for these matters if an unfavorable outcome is probable and the amount of loss can be reasonably estimated, including expected insurance coverage. For proceedings where the reasonable estimate of loss is a range, we record a best estimate of loss within the range.
On September 8, 2014, the West Palm Beach Firefighter’s Pension Fund filed a putative securities class action suit against Altisource and certain of its officers and directors in the United States District Court for the Southern District of Florida alleging violations of the Securities Exchange Act of 1934 and Rule 10b-5 with regard to disclosures concerning pricing and transactions with related parties that allegedly inflated Altisource share prices. The court subsequently appointed the Pension Fund of the International Union of Painters and Allied Trades District Council 35 and the Annuity Fund of the International Union of Painters and Allied Trades District Council 35 as Lead Plaintiffs. On January 30, 2015, Lead Plaintiffs filed an amended class action complaint which adds Ocwen Financial Corporation as a defendant, and seeks a determination that the action may be maintained as a class action on behalf of purchasers of the Company’s securities between April 25, 2013 and December 21, 2014 and an unspecified amount of damages. Altisource intends to vigorously defend this lawsuit. Altisource is unable to predict the outcome of this lawsuit or reasonably estimate the potential loss, if any, arising from the suit, given that motions to dismiss have not yet been filed or adjudicated, discovery has not commenced and significant legal and factual issues remain to be determined.
In addition to the matter referenced above, we are involved in legal actions in the course of our business, some of which seek monetary damages. We do not believe that the outcome of these proceedings, both individually and in the aggregate, will have a material impact on our financial condition, results of operations or cash flows.
Our businesses are also subject to extensive regulation which may result in regulatory proceedings or actions against us. See Item 1A of Part I, “Risk Factors” above. For further information, see Note 22 to the consolidated financial statements.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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PART II — OTHER INFORMATION
ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
Our common stock is listed on the NASDAQ Global Select Market under the symbol “ASPS.” The following table sets forth the high and low close of day sales prices for our common stock, for the periods indicated, as reported by the NASDAQ Global Select Market:
2014 | ||||||||
Quarter ended | Low | High | ||||||
March 31 | $ | 98.38 | $ | 164.48 | ||||
June 30 | 95.36 | 125.84 | ||||||
September 30 | 83.98 | 119.95 | ||||||
December 31 | 29.44 | 101.99 | ||||||
2013 | ||||||||
Quarter ended | Low | High | ||||||
March 31 | $ | 67.35 | $ | 96.02 | ||||
June 30 | 69.43 | 100.15 | ||||||
September 30 | 95.22 | 142.30 | ||||||
December 31 | 132.88 | 170.19 | ||||||
The number of holders of record of our common stock as of February 20, 2015 was 65. The number of beneficial shareholders is substantially greater than the number of holders as a large portion of our common stock is held through brokerage firms.
Dividends
We have never declared or paid cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future. The provisions of our senior secured term loan agreement, as amended, limit, among other things, our ability to pay dividends. Luxembourg law also limits our ability to pay dividends, including statutory reporting requirements and dividend amount limitations based on annual net income and net income carried forward, less any amounts placed in reserve.
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Stock Performance Graph
The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return on the S&P 500 Index for the five year period ending on December 31, 2014. The graph assumes an investment of $100 at the beginning of this period and does not include the effects of the post-distribution values of Residential and AAMC, which were distributed to Altisource shareholders in December 2012. The comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock.
12/31/09 | 6/30/10 | 12/31/10 | 6/30/11 | 12/31/11 | 6/30/12 | 12/31/12 | 6/30/13 | 12/31/13 | 6/30/14 | 12/31/14 | ||||||||||||||||||||||||||||||||||
Altisource | $ | 100.00 | $ | 117.87 | $ | 136.78 | $ | 175.32 | $ | 239.07 | $ | 348.88 | $ | 412.82 | $ | 449.26 | $ | 755.74 | $ | 545.88 | $ | 160.98 | ||||||||||||||||||||||
S&P 500 | 100.00 | 92.43 | 112.78 | 118.43 | 112.78 | 122.16 | 127.90 | 144.05 | 165.76 | 175.79 | 184.64 | |||||||||||||||||||||||||||||||||
NASDAQ Composite | 100.00 | 92.95 | 116.91 | 122.23 | 114.81 | 129.35 | 133.07 | 149.98 | 184.06 | 194.27 | 208.71 | |||||||||||||||||||||||||||||||||
Securities Authorized for Issuance under Equity Compensation Plans
The information required by this item is incorporated herein by reference to our definitive proxy statement in connection with our 2015 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.
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Issuer Purchases of Equity Securities
On February 28, 2014, our shareholders approved a new stock repurchase program, which replaced the previous stock repurchase program. Under the new program, we are authorized to purchase up to 3.4 million shares of our common stock, based on a limit of 15% of the outstanding shares of common stock on the date of approval, in the open market, at a minimum price of $1.00 per share and a maximum price of $500.00 per share. This is in addition to amounts previously purchased under the prior programs. From authorization of the previous programs through December 31, 2014, we have purchased approximately 6.2 million shares of our common stock in the open market at an average price of $79.16 per share. We purchased 2.5 million shares of common stock at an average price of $103.67 per share during the year ended December 31, 2014 and 1.2 million shares at an average price of $116.99 per share during the year ended December 31, 2013. As of December 31, 2014, approximately 1.1 million shares of common stock remain available for repurchase under the new program. Our senior secured term loan agreement limits the amount we can spend on share repurchases in any year and may prevent repurchases in certain circumstances. As of December 31, 2014, approximately $225 million was available to repurchase our common stock under our senior secured term loan.
The following table presents information related to the repurchases of our equity securities during the three months ended December 31, 2014:
Period | Total number of shares purchased(1) | Weighted average price paid per share | Total number of shares purchased as part of publicly announced plans or programs(2) | Maximum number of shares that may yet be purchased under the plans or programs(2) | |||||||||
Common stock: | |||||||||||||
October 1 — 31, 2014 | 475,388 | $ | 98.61 | 475,388 | 1,138,338 | ||||||||
November 1 — 30, 2014 | — | — | — | 1,138,338 | |||||||||
December 1 — 31, 2014 | — | — | — | 1,138,338 | |||||||||
Total shares of common stock | 475,388 | $ | 98.61 | 475,388 | 1,138,338 | ||||||||
(1) | May include shares withheld from employees to satisfy tax withholding obligations that arose from the exercise of stock options. |
(2) | On February 28, 2014, our shareholders approved a new stock repurchase program which replaced the previous program and authorized us to purchase up to 3.4 million shares of our common stock in the open market. |
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ITEM 6. | SELECTED FINANCIAL DATA |
The following selected financial data as of and for the years ended December 31, 2014, 2013, 2012, 2011 and 2010 has been derived from our audited consolidated financial statements.
The historical results presented below may not be indicative of our future performance.
The selected consolidated financial data should be read in conjunction with the information contained in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto in Item 8 of Part II, “Financial Statements and Supplementary Data.”
For the years ended December 31, | ||||||||||||||||||||
(in thousands, except per share data) | 2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||
Revenue | $ | 1,078,916 | $ | 768,357 | $ | 568,360 | $ | 423,687 | $ | 301,378 | ||||||||||
Cost of revenue | 707,180 | 492,480 | 366,201 | 275,849 | 189,059 | |||||||||||||||
Gross profit | 371,736 | 275,877 | 202,159 | 147,838 | 112,319 | |||||||||||||||
Selling, general and administrative expenses | 201,282 | 113,810 | 74,712 | 62,131 | 57,352 | |||||||||||||||
Income from operations | 170,454 | 162,067 | 127,447 | 85,707 | 54,967 | |||||||||||||||
Other income (expense), net: | ||||||||||||||||||||
Interest expense | (23,363 | ) | (20,291 | ) | (1,210 | ) | (85 | ) | (119 | ) | ||||||||||
Other income (expense), net | 174 | 557 | (1,588 | ) | 288 | 923 | ||||||||||||||
Total other income (expense), net | (23,189 | ) | (19,734 | ) | (2,798 | ) | 203 | 804 | ||||||||||||
Income before income taxes and non-controlling interests | 147,265 | 142,333 | 124,649 | 85,910 | 55,771 | |||||||||||||||
Income tax (provision) benefit | (10,178 | ) | (8,540 | ) | (8,738 | ) | (7,943 | ) | 403 | |||||||||||
Net income | 137,087 | 133,793 | 115,911 | 77,967 | 56,174 | |||||||||||||||
Net income attributable to non-controlling interests | (2,603 | ) | (3,820 | ) | (5,284 | ) | (6,855 | ) | (6,903 | ) | ||||||||||
Net income attributable to Altisource | $ | 134,484 | $ | 129,973 | $ | 110,627 | $ | 71,112 | $ | 49,271 | ||||||||||
Earnings per share: | ||||||||||||||||||||
Basic | $ | 6.22 | $ | 5.63 | $ | 4.74 | $ | 2.92 | $ | 1.96 | ||||||||||
Diluted | $ | 5.69 | $ | 5.19 | $ | 4.43 | $ | 2.77 | $ | 1.88 | ||||||||||
Transactions with related parties included above: | ||||||||||||||||||||
Revenue | $ | 666,800 | $ | 502,087 | $ | 338,227 | $ | 245,262 | $ | 154,988 | ||||||||||
Cost of revenue | 38,610 | 19,983 | 13,469 | 5,180 | — | |||||||||||||||
Selling, general and administrative expenses | (268 | ) | 569 | (542 | ) | (166 | ) | (744 | ) | |||||||||||
Other income | — | 773 | 86 | — | — | |||||||||||||||
December 31, | ||||||||||||||||||||
(in thousands) | 2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||
Cash and cash equivalents | $ | 161,361 | $ | 130,324 | $ | 105,502 | $ | 32,125 | $ | 22,134 | ||||||||||
Accounts receivable, net | 112,183 | 104,787 | 88,955 | 52,005 | 53,495 | |||||||||||||||
Premises and equipment, net | 127,759 | 87,252 | 50,399 | 25,600 | 17,493 | |||||||||||||||
Intangible assets, net | 245,246 | 276,162 | 56,586 | 64,950 | 72,428 | |||||||||||||||
Goodwill | 90,851 | 99,414 | 14,915 | 14,915 | 11,836 | |||||||||||||||
Loan to Ocwen | — | — | 75,000 | — | — | |||||||||||||||
Total assets | 788,221 | 730,052 | 429,226 | 224,159 | 197,800 | |||||||||||||||
Long-term debt, net (including current portion) | 588,614 | 395,256 | 198,027 | — | — | |||||||||||||||
Capital lease obligations | — | — | 233 | 836 | 1,532 | |||||||||||||||
Total liabilities | 746,778 | 572,311 | 269,397 | 58,216 | 45,902 | |||||||||||||||
Significant events affecting our historical earnings trends from 2012 through 2014, including acquisitions, are described in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is a supplement to the accompanying consolidated financial statements and 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. Significant sections of the MD&A are as follows:
Overview. This section, beginning below, provides a description of recent developments we believe are important in understanding our results of operations and financial condition as well as understanding anticipated future trends. It also provides a brief description of significant transactions and events that affect the comparability of financial results and a discussion of the progress being made on our growth initiatives.
Consolidated Results of Operations. This section, beginning on page 27, provides an analysis of our consolidated results of operations for the three years ended December 31, 2014.
Segment Results of Operations. This section, beginning on page 30, provides an analysis of each business segment for the three years ended December 31, 2014 as well as Corporate Items and Eliminations. 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 39, provides an analysis of our cash flows for the three years ended December 31, 2014. We also discuss restrictions on cash movements, future commitments and capital resources.
Critical Accounting Policies. This section, beginning on page 42, identifies those accounting principles we believe are most important to our financial results and that require significant judgment and estimates on the part of management in application. We provide all of our significant accounting policies in Note 2 to the accompanying consolidated financial statements.
Other Matters. This section, beginning on page 45, provides a discussion of off-balance sheet arrangements to the extent they exist. In addition, we provide a tabular discussion of contractual obligations, discuss any significant commitments or contingencies and related parties.
OVERVIEW
Our Business
We are a premier marketplace and transaction solutions provider for the real estate, mortgage and consumer debt industries offering both distribution and content. We leverage proprietary business process, vendor and electronic payment management software and behavioral science based analytics to improve outcomes for marketplace participants.
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. The Mortgage Services segment provides services that span the mortgage and real estate lifecycle and are typically outsourced by loan servicers, loan originators and investors and other sellers of single family homes. The Financial Services segment provides collection and customer relationship management services primarily to debt originators and servicers (e.g., credit card, auto lending, retail credit and mortgage) and the utility, insurance and hotel industries. The Technology Services segment principally consists of our REALSuite software applications, Equator’s software applications, Mortgage Builder’s software applications and our IT infrastructure services. The REALSuite platform provides a fully integrated set of software applications and technologies that manage the end-to-end lifecycle for residential and commercial mortgage loan servicing including the automated management and payment of a distributed network of vendors. Equator’s software applications provide comprehensive, end-to-end workflow and transaction services to manage real estate and foreclosure related activities and purchase related services from vendors. Mortgage Builder provides mortgage origination and servicing software applications. In addition, Corporate Items and Eliminations include eliminations of transactions between the reportable segments, interest expense and costs related to corporate support functions including executive, finance, legal, compliance, human resources, vendor management, risk and operational effectiveness and marketing.
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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. Service revenue 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 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 not owned by Altisource, and are included in revenue and reduced from net income to arrive at net income attributable to Altisource.
We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.
Altisource’s Vision and Growth Initiatives
Altisource provides a suite of mortgage, real estate and consumer debt services, leveraging our technology and global operations. Our relationship with Ocwen provided a foundation on which we built our business and Ocwen, as our largest customer, remains an important priority for us. Leveraging the services we have built through the Ocwen and other relationships, Altisource is focused on becoming the premier provider of real estate and mortgage marketplaces offering both distribution and content to a diversified customer base. Within the real estate and mortgage markets, we are facilitating transactions related to home sales, home rentals, home maintenance, mortgage origination and mortgage servicing.
While we expect our revenue from Ocwen’s servicing portfolio will decline in 2015, we believe we have opportunities to continue to build our business from our revenue and diversification initiatives. Ocwen remains a very important component of our business and we believe that its existing non-GSE portfolio provides continuing revenue opportunities for Altisource. While we have been working on our strategic growth initiatives for some time, we have historically had to balance this activity with the need to support Ocwen during a period of its own rapid growth. Given our current expectations relative to Ocwen going forward and the recognized importance of diversifying further our customer base, we are increasing our focus on our strategic growth initiatives. Our strategic growth initiatives are:
Mortgage market:
• | attract new clients to our comprehensive default related businesses |
• | grow our origination services and technologies |
Real estate market:
• | expand our innovative online real estate marketplace |
• | grow our property management and renovation services business |
Stock Repurchase Plan
On February 28, 2014, our shareholders approved a new stock repurchase program, which replaced the previous stock repurchase program. Under the new program, we are authorized to purchase up to 3.4 million shares of our common stock, based on a limit of 15% of the outstanding shares of common stock on the date of approval, in the open market, at a minimum price of $1.00 per share and a maximum price of $500.00 per share. This is in addition to amounts previously purchased under the prior programs. From authorization of the previous programs through December 31, 2014, we have purchased approximately 6.2 million shares of our common stock in the open market at an average price of $79.16 per share. We purchased 2.5 million shares of common stock at an average price of $103.67 per share during the year ended December 31, 2014 and 1.2 million shares at an average price of $116.99 per share during the year ended December 31, 2013. As of December 31, 2014, approximately 1.1 million shares of common stock remain available for repurchase under the new program. Our senior secured term loan agreement limits the amount we can spend on share repurchases in any year and may prevent repurchases in certain circumstances. As of December 31, 2014, approximately $225 million was available to repurchase our common stock under our senior secured term loan.
Separation of Residential Asset Businesses
On December 21, 2012, we completed the spin-off of Residential and AAMC to our shareholders. See “Separation of the Residential Asset Businesses” in Item 1 of Part I, “Business.”
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On December 24, 2012, the shares of Residential and AAMC were distributed to our shareholders of record as of December 17, 2012, in the form of a taxable pro rata stock distribution. Our shareholders received a pro rata distribution of:
• | one share of Residential common stock for every three shares of Altisource common stock held; |
• | one share of AAMC common stock for every ten shares of Altisource common stock held; and |
• | cash in lieu of fractional Residential and AAMC shares. |
Residential is focused on acquiring and managing single family rental properties by acquiring sub-performing and non-performing residential mortgage loans as well as single family homes at or following the foreclosure sale throughout the United States. AAMC provides asset management and certain corporate governance services to Residential. We provide property management, lease management and renovation management services to Residential. Prior to the separation, we capitalized Residential with $100 million of cash and AAMC with $5 million of cash.
We eliminated the assets and liabilities of Residential and AAMC from our consolidated balance sheet effective at the close of business on December 21, 2012. As Residential and AAMC were development stage companies and had not yet commenced operations at the time of separation, these entities had no historical results of operations. We do not expect any negative impact on our future operations other than interest expense on the debt we borrowed in November 2012 to capitalize these entities.
The carrying value of net assets transferred by Altisource was as follows:
(in thousands) | Residential | AAMC | Total | |||||||||
Cash | $ | 100,000 | $ | 5,000 | $ | 105,000 | ||||||
Reduction in Altisource retained earnings | $ | 100,000 | $ | 5,000 | $ | 105,000 | ||||||
Correction of Immaterial Errors
As previously disclosed, during 2014 we determined that while we properly identified our related parties in previously issued financial statements, disclosures of certain immaterial related party expenses were omitted. We have corrected the previously presented disclosures of related party expenses in Note 4 - Transactions with Related Parties and on the face of the consolidated statements of operations for the years ended December 31, 2013 and 2012. The impact of correcting these items in the notes to the consolidated financial statements had the effect of:
• | increasing the amounts disclosed as related party cost of revenue from Ocwen by $20.0 million and $13.5 million for the years ended December 31, 2013 and 2012, respectively; |
• | increasing the amounts disclosed as selling, general and administrative expenses (“SG&A”) from Ocwen billings to Altisource by $1.7 million and $0.7 million for the years ended December 31, 2013 and 2012, respectively; |
• | decreasing the amounts disclosed as SG&A from Altisource billings to Ocwen by $0.1 million and less than $0.1 million for the years ended December 31, 2013 and 2012, respectively; and |
• | decreasing the amounts disclosed as SG&A from Altisource billings to AAMC by $0.5 million for the year ended December 31, 2013 (no adjustment for the year ended December 31, 2012). |
Correcting these items on the face of the consolidated statements of operations resulted in the disclosure of related party cost of revenue of $20.0 million and $13.5 million for the years ended December 31, 2013 and 2012, respectively, and a decrease in previously disclosed related party SG&A by $2.4 million and $3.0 million for the years ended December 31, 2013 and 2012, respectively.
In accordance with the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) Topic 250, Accounting Changes and Error Corrections, the Company evaluated the effect of the disclosure and presentation errors on its previously issued annual and quarterly financial statements, both qualitatively and quantitatively, and concluded that the related party disclosures in the Company’s previously issued annual and quarterly financial statements are not materially misstated.
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Factors Affecting Comparability
The following items may impact the comparability of our results:
• | The average number of loans serviced by Ocwen on REALServicing was 2.2 million for the year ended December 31, 2014 compared to 1.2 million and 0.7 million for the years ended December 31, 2013 and 2012, respectively. The average number of delinquent non-GSE loans serviced by Ocwen on REALServicing was 352 thousand for the year ended December 31, 2014 compared to 296 thousand and 211 thousand for the years ended December 31, 2013 and 2012, respectively; |
• | On November 21, 2014, we acquired Owners.com, a leading self-directed online real estate marketplace, for an initial purchase price of $19.8 million plus contingent earn out consideration of up to an additional $7.0 million over two years, subject to Owners.com achieving annual performance targets; |
• | In the fourth quarter of 2014, we discontinued our lender placed insurance brokerage line of business; |
• | On September 12, 2014, we completed the acquisition of Mortgage Builder, a provider of mortgage loan origination and servicing software systems, for an initial purchase price of $15.7 million plus contingent earn out consideration of up to an additional $7.0 million over three years, subject to Mortgage Builder achieving annual performance targets; |
• | Bad debt expense increased during 2014, driven primarily from the default management services business. A change in our customers’ business model and fourth quarter 2014 discussions with these customers led us to believe that a portion of the accounts receivable balance is no longer collectible; |
• | On November 15, 2013, we acquired Equator for an initial purchase price of $63.4 million plus contingent earn out consideration of up to an additional $80 million over three years, subject to Equator achieving annual performance targets. During 2014, the fair value of the Equator contingent consideration was reduced by $37.9 million with a corresponding increase in earnings. As a result of the adjustment in the fair value of the Equator contingent consideration, we determined that the Equator goodwill was impaired and recorded an estimated impairment loss of $37.5 million in 2014. The net impact on earnings was an increase of $0.5 million; |
• | On April 12, 2013, we completed the Residential Capital, LLC (“ResCap”) fee-based business transaction with Ocwen for an aggregate purchase price of $128.8 million; |
• | On March 29, 2013, we completed the acquisition of the Homeward Residential Capital, Inc. (“Homeward”) fee-based businesses from Ocwen for an aggregate purchase price of $75.8 million; and |
• | In November 2012, we borrowed $200.0 million under a senior secured term loan agreement and increased our borrowings to $400.0 million on May 7, 2013. On December 9, 2013, we refinanced the senior secured term loan which included, among other changes, lowering the interest rate of the term loans. On August 1, 2014, we amended our senior secured term loan agreement and increased our borrowings by $200.0 million to $594.5 million. Interest expense totaled $23.4 million for the year ended December 31, 2014 compared to $20.3 million and $1.2 million for the years ended December 31, 2013 and 2012, respectively. |
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CONSOLIDATED RESULTS OF OPERATIONS
Summary Consolidated Results
Following is a discussion of our consolidated results of operations for the years ended December 31, 2014, 2013 and 2012. For a more detailed discussion of the factors that affected the results of our business segments in these periods, see “Segment Results of Operations” below.
The following table sets forth information on our results of operations for the years ended December 31:
(in thousands, except per share data) | 2014 | % Increase (decrease) | 2013 | % Increase (decrease) | 2012 | |||||||||||||
Service revenue | ||||||||||||||||||
Mortgage Services | $ | 650,026 | 33 | $ | 490,333 | 39 | $ | 351,908 | ||||||||||
Financial Services | 98,312 | 6 | 92,479 | 45 | 63,979 | |||||||||||||
Technology Services | 230,367 | 122 | 103,891 | 40 | 74,189 | |||||||||||||
Eliminations | (40,026 | ) | 62 | (24,644 | ) | 6 | (23,147 | ) | ||||||||||
938,679 | 42 | 662,059 | 42 | 466,929 | ||||||||||||||
Reimbursable expenses | 137,634 | 34 | 102,478 | 7 | 96,147 | |||||||||||||
Non-controlling interests | 2,603 | (32 | ) | 3,820 | (28 | ) | 5,284 | |||||||||||
Total revenue | 1,078,916 | 40 | 768,357 | 35 | 568,360 | |||||||||||||
Cost of revenue | 707,180 | 44 | 492,480 | 34 | 366,201 | |||||||||||||
Gross profit | 371,736 | 35 | 275,877 | 36 | 202,159 | |||||||||||||
Selling, general and administrative expenses | 201,282 | 77 | 113,810 | 52 | 74,712 | |||||||||||||
Income from operations | 170,454 | 5 | 162,067 | 27 | 127,447 | |||||||||||||
Other income (expense), net: | ||||||||||||||||||
Interest expense | (23,363 | ) | 15 | (20,291 | ) | N/M | (1,210 | ) | ||||||||||
Other income (expense), net | 174 | (69 | ) | 557 | 135 | (1,588 | ) | |||||||||||
Total other income (expense), net | (23,189 | ) | 18 | (19,734 | ) | N/M | (2,798 | ) | ||||||||||
Income before income taxes and non-controlling interests | 147,265 | 3 | 142,333 | 14 | 124,649 | |||||||||||||
Income tax provision | (10,178 | ) | 19 | (8,540 | ) | (2 | ) | (8,738 | ) | |||||||||
Net income | 137,087 | 2 | 133,793 | 15 | 115,911 | |||||||||||||
Net income attributable to non-controlling interests | (2,603 | ) | (32 | ) | (3,820 | ) | (28 | ) | (5,284 | ) | ||||||||
Net income attributable to Altisource | $ | 134,484 | 3 | $ | 129,973 | 17 | $ | 110,627 | ||||||||||
Margins: | ||||||||||||||||||
Gross profit/service revenue | 40 | % | 42 | % | 43 | % | ||||||||||||
Income from operations/service revenue | 18 | % | 24 | % | 27 | % | ||||||||||||
Earnings per share: | ||||||||||||||||||
Basic | $ | 6.22 | 10 | $ | 5.63 | 19 | $ | 4.74 | ||||||||||
Diluted | $ | 5.69 | 10 | $ | 5.19 | 17 | $ | 4.43 | ||||||||||
N/M — not meaningful.
Revenue
We recognized service revenue of $938.7 million, $662.1 million and $466.9 million for the years ended December 31, 2014, 2013 and 2012, respectively. The continued growth in service revenue over the three year period was primarily driven by Ocwen’s growth, higher auction mix for houses sold on Hubzu, revenue from Equator which we acquired in November 2013 and growth in our Financial Services business from new customer relationship management customers. These increases were partially offset by (1) a decline in the default management services business driven by lower levels of foreclosure starts and (2) the fourth quarter of 2013 loss of an origination management services customer which eliminated its affinity relationship with Altisource and its other similar vendor partners.
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The increase in revenue from reimbursable expenses during the three year period is due primarily to the growth of Ocwen’s loan servicing portfolio, although reimbursable expenses can vary significantly from period to period based on the mix of services ordered.
Certain of our revenues are impacted by seasonality. More specifically, Mortgage Services’ revenue is impacted by REO sales and lawn maintenance, which tend to be at their lowest level during the fall and winter months and highest during spring and summer months. Financial Services’ asset recovery management revenue tends to be higher in the first quarter, as borrowers may utilize tax refunds and bonuses to pay debts, and generally declines throughout the rest of the year.
Cost of Revenue and Gross Profit
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 the provision of services, reimbursable expenses, technology and telecommunications expenses and depreciation and amortization of operating assets.
We recognized cost of revenue of $707.2 million, $492.5 million and $366.2 million for the years ended December 31, 2014, 2013 and 2012, respectively. The increase in cost of revenue during the three year period is primarily attributable to revenue growth during the same period and the increased investment in the development of our technology. However, our 2014 cost structure is not in line with our current vision and expected growth. Recognizing that our business with Ocwen is not expected to grow in the near term due to challenges faced by Ocwen, we developed and are executing on a plan that includes eliminating certain non-revenue generating businesses, reducing vendor costs and eliminating staff to realign our expenses for this new reality.
Gross profit increased to $371.7 million, representing 40% of service revenue, for the year ended December 31, 2014 compared to $275.9 million, representing 42% of service revenue, for the year ended December 31, 2013 and $202.2 million, representing 43% of service revenue, for the year ended December 31, 2012. Gross profit as a percentage of service revenue declined in 2014 from a shift in revenue across segments with higher growth in the lower margin Technology Services segment. Margin expansion in the Mortgage Services segment was partially offset by margin decreases in the other segments. In the Mortgage Services segment, we expanded our gross profit margin by fully utilizing employees that we were carrying in 2013 in anticipation of new business and performing certain services with our employees that were previously performed by outside vendors. In the Financial Services segment, the gross profit margin decline was driven by revenue mix as the higher margin mortgage charge-off collections business represented a lower percentage of revenue in the Financial Services segment in 2014. In the Technology Services segment, gross profit margin decreased primarily due to our continued investment in our technology to support our growth, partially offset by higher gross profit margin in the Equator business. In 2013, we experienced higher growth in the lower margin property inspection and preservation services from the initial referrals from the Homeward and ResCap portfolios and higher costs in our Technology Services segment due to investing in the development of our technology to support our growth initiatives, partially offset by improved performance in our Financial Services segment from the growth of higher margin mortgage charge-off and customer relationship management services.
Selling, General and Administrative Expenses and Income from Operations
SG&A includes payroll for personnel employed in executive, finance, legal, compliance, human resources, vendor management, risk and operational effectiveness and marketing roles. This category also includes occupancy costs, professional fees and depreciation and amortization of intangible assets.
We recognized SG&A of $201.3 million, $113.8 million and $74.7 million for the years ended December 31, 2014, 2013 and 2012, respectively. The increase in SG&A during the three year period was primarily driven by higher marketing costs primarily related to Hubzu and increased amortization of intangible assets primarily from the Homeward, ResCap and Equator acquisitions which closed on March 29, 2013, April 12, 2013 and November 15, 2013, respectively. Marketing costs were $24.1 million, $5.0 million and $2.5 million for the years ended December 31, 2014, 2013 and 2012, respectively. Amortization expense was $37.7 million, $28.2 million and $5.0 million for the years ended December 31, 2014, 2013 and 2012, respectively. SG&A also increased from higher compensation expense and related employee and occupancy costs from increased headcount to support growth and higher legal and compliance related costs. Bad debt expense increased for the year ended December 31, 2014 by $13.7 million, driven primarily from the default management services business. A change in our customers’ business model and fourth quarter 2014 discussions with these customers led us to believe that a portion of the accounts receivable balance is no longer collectible.
The liability for contingent consideration is reflected at fair value and adjusted each reporting period with the change in fair value recognized in earnings. During 2014, the fair value of the contingent consideration related to the Equator acquisition was reduced by $37.9 million with a corresponding increase in earnings based on management’s revised estimates that expected earnings of
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Equator will be lower than projected at the time of acquisition. As a result of the adjustment in the fair value of the Equator contingent consideration and based on our goodwill assessment, we determined that the Equator goodwill was impaired and recorded an impairment loss of $37.5 million for the year ended December 31, 2014.
The following table presents the impact of the change in the fair value of the Equator contingent consideration (“Equator Earn Out”) and Equator goodwill impairment for the year ended December 31, 2014 and are included in SG&A in the consolidated statements of operations:
(in thousands) | ||||
Change in the fair value of Equator Earn Out | $ | (37,924 | ) | |
Goodwill impairment | 37,473 | |||
$ | (451 | ) | ||
Our 2014 cost structure is not in line with our current vision and expected growth. Recognizing that our business with Ocwen is not expected to grow in the near term due to challenges faced by Ocwen, we developed and are executing on a plan that includes reducing vendor costs and eliminating staff to realign our expenses for this new reality.
Income from operations increased to $170.5 million, representing 18% of service revenue, for the year ended December 31, 2014 compared to $162.1 million, representing 24% of service revenue, for the year ended December 31, 2013 and $127.4 million, representing 27% of service revenue, for the year ended December 31, 2012. The decrease in operating income margin is primarily driven by higher growth in lower margin services, the timing of investments in new services, the timing of boarding new loans, higher Hubzu marketing costs, increases in the amortization of intangible assets recorded in connection with the Homeward, ResCap and Equator acquisitions and the other increases in SG&A, as discussed above.
Other Income (Expense), net
Other income (expense), net principally includes interest expense and interest income. Interest expense for the year ended December 31, 2014 was $23.4 million, an increase of $3.1 million compared to the year ended December 31, 2013 resulting from the additional $200.0 million senior secured term loan borrowings on August 1, 2014 and the additional $200.0 million senior secured term loan borrowings on May 7, 2013, partially offset by lower interest rates from the senior secured term loan refinancing on December 9, 2013. Interest expense for the year ended December 31, 2013 was $20.3 million, an increase of $19.1 million compared to the year ended December 31, 2012 resulting from the initial senior secured loan borrowing in the fourth quarter of 2012 and the additional $200.0 million senior secured term loan borrowings on May 7, 2013. We recognized interest income of $0.1 million for the year ended December 31, 2014. Additionally, we recognized interest income of $0.9 million and $0.2 million for the years ended December 31, 2013 and 2012, respectively, primarily from a $75.0 million loan to Ocwen, which was repaid in February 2013.
Income Tax Provision
We recognized an income tax provision of $10.2 million, $8.5 million and $8.7 million for the years ended December 31, 2014, 2013 and 2012, respectively. Our effective tax rate was 6.9%, 6.0% and 7.0% for the years ended December 31, 2014, 2013 and 2012, respectively. The effective tax rate in all three periods differs from the Luxembourg statutory tax rate (29.2% in 2014, 29.2% in 2013 and 28.8% in 2012) primarily due to the effect of certain deductions in Luxembourg from a tax ruling, which expires in 2019 unless extended or renewed, and the mix of income and losses with varying tax rates in multiple taxing jurisdictions. Our consolidated effective income tax rate for financial reporting purposes may change periodically due to changes in enacted tax rates, fluctuations in the mix of income earned from our domestic and international operations, which may be subject to differing tax rates, and our ability to utilize net operating loss and tax credit carryforwards.
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SEGMENT RESULTS OF OPERATIONS
The following section provides a discussion of results of operations of our business segments. Transactions between segments are accounted for as third party arrangements for purposes of presenting segment results of operations. Intercompany transactions primarily consist of IT infrastructure services. We reflect these as service revenue in the Technology Services segment and technology and telecommunications expense within cost of revenue and SG&A in the segment receiving the services.
Financial information for our segments is as follows:
For the year ended December 31, 2014 | ||||||||||||||||||||
(in thousands) | Mortgage Services | Financial Services | Technology Services | Corporate Items and Eliminations | Consolidated Altisource | |||||||||||||||
Revenue | ||||||||||||||||||||
Service revenue | $ | 650,026 | $ | 98,312 | $ | 230,367 | $ | (40,026 | ) | $ | 938,679 | |||||||||
Reimbursable expenses | 137,447 | 187 | — | — | 137,634 | |||||||||||||||
Non-controlling interests | 2,603 | — | — | — | 2,603 | |||||||||||||||
790,076 | 98,499 | 230,367 | (40,026 | ) | 1,078,916 | |||||||||||||||
Cost of revenue | 484,512 | 64,338 | 194,301 | (35,971 | ) | 707,180 | ||||||||||||||
Gross profit | 305,564 | 34,161 | 36,066 | (4,055 | ) | 371,736 | ||||||||||||||
Selling, general and administrative expenses | 94,678 | 18,791 | 31,950 | 55,863 | 201,282 | |||||||||||||||
Income from operations | 210,886 | 15,370 | 4,116 | (59,918 | ) | 170,454 | ||||||||||||||
Other income (expense), net | 204 | 62 | (31 | ) | (23,424 | ) | (23,189 | ) | ||||||||||||
Income before income taxes and non-controlling interests | $ | 211,090 | $ | 15,432 | $ | 4,085 | $ | (83,342 | ) | $ | 147,265 | |||||||||
Margins: | ||||||||||||||||||||
Gross profit/service revenue | 47 | % | 35 | % | 16 | % | N/M | 40 | % | |||||||||||
Income from operations/service revenue | 32 | % | 16 | % | 2 | % | N/M | 18 | % | |||||||||||
Transactions with related parties: | ||||||||||||||||||||
Revenue | $ | 544,255 | $ | 27,064 | $ | 95,481 | $ | — | $ | 666,800 | ||||||||||
Cost of revenue | 35,565 | 188 | 2,857 | — | 38,610 | |||||||||||||||
Selling, general and administrative expenses | 1,078 | — | 335 | (1,681 | ) | (268 | ) | |||||||||||||
N/M — not meaningful.
30
For the year ended December 31, 2013 | ||||||||||||||||||||
(in thousands) | Mortgage Services | Financial Services | Technology Services | Corporate Items and Eliminations | Consolidated Altisource | |||||||||||||||
Revenue | ||||||||||||||||||||
Service revenue | $ | 490,333 | $ | 92,479 | $ | 103,891 | $ | (24,644 | ) | $ | 662,059 | |||||||||
Reimbursable expenses | 101,999 | 479 | — | — | 102,478 | |||||||||||||||
Non-controlling interests | 3,820 | — | — | — | 3,820 | |||||||||||||||
596,152 | 92,958 | 103,891 | (24,644 | ) | 768,357 | |||||||||||||||
Cost of revenue | 374,713 | 55,328 | 84,538 | (22,099 | ) | 492,480 | ||||||||||||||
Gross profit | 221,439 | 37,630 | 19,353 | (2,545 | ) | 275,877 | ||||||||||||||
Selling, general and administrative expenses | 46,515 | 15,571 | 12,442 | 39,282 | 113,810 | |||||||||||||||
Income from operations | 174,924 | 22,059 | 6,911 | (41,827 | ) | 162,067 | ||||||||||||||
Other income (expense), net | (136 | ) | (10 | ) | 7 | (19,595 | ) | (19,734 | ) | |||||||||||
Income before income taxes and non-controlling interests | $ | 174,788 | $ | 22,049 | $ | 6,918 | $ | (61,422 | ) | $ | 142,333 | |||||||||
Margins: | ||||||||||||||||||||
Gross profit/service revenue | 45 | % | 41 | % | 19 | % | N/M | 42 | % | |||||||||||
Income from operations/service revenue | 36 | % | 24 | % | 7 | % | N/M | 24 | % | |||||||||||
Transactions with related parties: | ||||||||||||||||||||
Revenue | $ | 423,969 | $ | 27,591 | $ | 50,527 | $ | — | $ | 502,087 | ||||||||||
Cost of revenue | 19,049 | 826 | 108 | — | 19,983 | |||||||||||||||
Selling, general and administrative expenses | 391 | — | 244 | (66 | ) | 569 | ||||||||||||||
Interest income | — | — | — | 773 | 773 | |||||||||||||||
N/M — not meaningful.
For the year ended December 31, 2012 | ||||||||||||||||||||
(in thousands) | Mortgage Services | Financial Services | Technology Services | Corporate Items and Eliminations | Consolidated Altisource | |||||||||||||||
Revenue | ||||||||||||||||||||
Service revenue | $ | 351,908 | $ | 63,979 | $ | 74,189 | $ | (23,147 | ) | $ | 466,929 | |||||||||
Reimbursable expenses | 95,604 | 543 | — | — | 96,147 | |||||||||||||||
Non-controlling interests | 5,284 | — | — | — | 5,284 | |||||||||||||||
452,796 | 64,522 | 74,189 | (23,147 | ) | 568,360 | |||||||||||||||
Cost of revenue | 285,586 | 46,737 | 54,634 | (20,756 | ) | 366,201 | ||||||||||||||
Gross profit | 167,210 | 17,785 | 19,555 | (2,391 | ) | 202,159 | ||||||||||||||
Selling, general and administrative expenses | 25,099 | 13,415 | 8,888 | 27,310 | 74,712 | |||||||||||||||
Income from operations | 142,111 | 4,370 | 10,667 | (29,701 | ) | 127,447 | ||||||||||||||
Other income (expense), net | (1,713 | ) | (27 | ) | (25 | ) | (1,033 | ) | (2,798 | ) | ||||||||||
Income before income taxes and non-controlling interests | $ | 140,398 | $ | 4,343 | $ | 10,642 | $ | (30,734 | ) | $ | 124,649 | |||||||||
Margins: | ||||||||||||||||||||
Gross profit/service revenue | 48 | % | 28 | % | 26 | % | N/M | 43 | % | |||||||||||
Income from operations/service revenue | 40 | % | 7 | % | 14 | % | N/M | 27 | % | |||||||||||
Transactions with related parties: | ||||||||||||||||||||
Revenue | $ | 306,774 | $ | 208 | $ | 31,245 | $ | — | $ | 338,227 | ||||||||||
Cost of revenue | 13,330 | 88 | 51 | — | 13,469 | |||||||||||||||
Selling, general and administrative expenses | 84 | — | 370 | (996 | ) | (542 | ) | |||||||||||||
Interest income | — | — | — | 86 | 86 | |||||||||||||||
N/M — not meaningful.
31
Mortgage Services
Revenue
Revenue by service line was as follows for the years ended December 31:
(in thousands) | 2014 | % Increase (decrease) | 2013 | % Increase (decrease) | 2012 | |||||||||||||
Service revenue: | ||||||||||||||||||
Asset management services | $ | 356,433 | 80 | $ | 197,999 | 84 | $ | 107,480 | ||||||||||
Insurance services | 154,830 | 29 | 119,835 | 40 | 85,601 | |||||||||||||
Residential property valuation | 101,173 | (2 | ) | 103,300 | 29 | 80,322 | ||||||||||||
Default management services | 22,728 | (46 | ) | 41,812 | (17 | ) | 50,224 | |||||||||||
Origination management services | 14,862 | (46 | ) | 27,387 | (3 | ) | 28,281 | |||||||||||
Total service revenue | 650,026 | 33 | 490,333 | 39 | 351,908 | |||||||||||||
Reimbursable expenses: | ||||||||||||||||||
Asset management services | 130,864 | 35 | 96,944 | 4 | 92,992 | |||||||||||||
Insurance services | 4,408 | 168 | 1,647 | (25 | ) | 2,186 | ||||||||||||
Default management services | 2,032 | (36 | ) | 3,177 | N/M | 426 | ||||||||||||
Origination management services | 143 | (38 | ) | 231 | N/M | — | ||||||||||||
Total reimbursable expenses | 137,447 | 35 | 101,999 | 7 | 95,604 | |||||||||||||