Executives from Altisource Portfolio Solutions S.A. (ASPS) attempted to calm the company’s investors in a call Friday, sharing their preliminary view of the fourth quarter and their plans for 2015.
During the call, William Shepro, Altisource’s CEO, and Michelle Esterman, the company’s chief financial officer, tried to assuage the concerns of the company’s investors, who’ve seen the value of their shares fall more than $100 in the last year.
The company stands shaken after its chairman, William Erbey, was forced to resign as part of $150 million settlement with the New York Department of Financial Services, over allegations into the servicing practices of Ocwen Financial (OCN) and its dealing with its related companies, namely Altisource.
According to the NYDFS, Erbey did not recuse himself from the approval process of transactions between the related companies. “Mr. Erbey, who owns approximately 15% of Ocwen’s stock, and nearly double that percentage of the stock of Altisource Portfolio, has participated in the approval of a number of transactions between the two companies or from which Altisource received some benefit, including the renewal of Ocwen’s forced placed insurance program in early 2014,” the NYDFS said.
That’s the very forced-placed insurance program that Altisource announced it was discontinuing in November, citing “uncertainties with industry-wide litigation and the regulatory environment.”
The NYDFS also said that the dealings between Ocwen and Altisource led to increased fees being passed onto consumers. “In one example, Altisource Portfolio subsidiary Hubzu, an online auction site, hosts nearly all Ocwen auctions,” the NYDFS said. “In certain circumstances, Hubzu has charged more for its services to Ocwen than to other customers — charges which are then passed on to borrowers and investors.”
During the call with investors, Shepro and Esterman said that charges that Hubzu charged more for its services to Ocwen are not true. “We strive to provide services to Ocwen at rates comparable to the market and we firmly believe we charge Ocwen market rates for those services,” CEO Shepro said.
Shepro said that the agreement between Altisource and Ocwen runs until 2025, and both parties can initiate a renegotiation of pricing at any time given market conditions.
HOW MUCH MONEY?
So just how much revenue does Altisource generate from its relationship with Ocwen?
Esterman told investors that Altisource expects to generate $551 million in revenue in 2015 from providing mortgage and technology services to Ocwen’s existing portfolio of non-agency loans.
Esterman also told investors that that figure is expected to fall over the next several years, from $551 million in 2015 to $306 million in 2019.
Esterman also said that given the current environment, with Ocwen facing increased regulatory pressure from New York and facing a potential mortgage servicing license suspension in California, Altisource has taken steps to address any potential loss in revenue from Ocwen.
“Recognizing that Ocwen is not likely to grow that much in the near term, we right-sized our organization and are realigning our expenses for this new reality,” Esterman said.
To “right-size” the organization, Esterman said that the company recently eliminated more than 800 individual employee positions and “hundreds” of contractors throughout the company’s “geographical footprint,” in an attempt to cut down on the company’s operating costs.
But those steps weren’t enough to counteract what appears to be a troublesome quarter for Altisource, according to preliminary earnings data shared in the call.
Esterman told investors that the company’s preliminary unaudited financial results for the fourth quarter show a GAAP pretax income of between $0 and $4 million. The company’s GAAP pretax income in previous quarters was $45 million in the third quarter, $57.6 million in the second quarter and $42.7 million in the first quarter.
“We are not pleased with these results,” Esterman said, adding that if the company’s cost-cutting measures were implemented at the beginning of the fourth quarter, “we estimate that it would be contributed $20 million to revenue and we anticipate similar savings going forward.”
When asked about Ocwen’s California situation, Shepro told investors “our understanding is that the likelihood of Ocwen losing its California servicing license is very low,” adding that Ocwen is working “expeditiously” to resolve this issue.
REVERSE COURSE?
The call and news of Altisource’s plans sent the company’s stock soaring Friday, with the stock closing up more than 50% for the day at $27.66. It was a stark reversal of what happened with the company's stock earlier in the week, when news of Ocwen's California situation sent the stock plummeting from from $26.94 to $16.49 in Tuesday's trading, a drop of nearly 39%.
Perhaps the stock price shot back up because the company also disclosed that it plans to execute a stock repurchase soon.
“We believe that Altisource’s stock is trading at a substantial discount to value,” Shepro said.
But not everyone was so keen on Altisource’s plans.
Sterne Agee Analyst Henry Coffey released a post conference report on the Altisource call and said the company’s comments regarding 2015 profitability, revenue, and potential share buybacks may have been enough to re-rally the company’s shares, but were not enough to answer the broader existential questions about the viability of the loss mitigation and REO disposition business given recent events.
“The unanswered question is what steps Altisource is taking to be sure that its fees and product offering will prove acceptable to some of its biggest antagonist (and biggest customers) mortgage-backed security note holders, state agencies, and other counter parties,” Coffey said.
“Buybacks are always a good idea, in our view, but the proposed buybacks (1.3 million + shares in estimate) will significantly deplete equity,” Coffey added. “The company is looking for a larger authorization than this and also considering buying in debt.”
