Good day, everyone, and welcome to the Altisource First Quarter 2020 Earnings Conference Call. I will now turn the call over to your host, Michelle Esterman, Chief Financial Officer. Please proceed.

Thank you, operator. We first want to remind you that the earnings release, Form 10-Q and quarterly slides are available on our website at www.altisource.com. These provide additional information investors may find useful. Our remarks today include forward-looking statements, which involve a number of risks and uncertainties that could cause actual results to differ. In addition to the usual uncertainty associated with forward-looking statements, the current COVID-19 pandemic and its potential impact makes it extremely difficult to predict the future state of the economy and its impact on Altisource. Please review the forward-looking statements section in the company's earnings release, quarterly slides and Form 10-Q as well as the risk factors contained in our 2019 Form 10-K and first quarter of Form 10-Q, which describe factors that may lead to different results. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. In our earnings release and quarterly slides, you will find additional disclosures regarding the non-GAAP measures. A reconciliation of GAAP to non-GAAP measures is included in the appendix to the quarterly slides. Joining me for today's call is Bill Shepro, our Chairman and Chief Executive Officer. I would now like to turn the call over to Bill.

Thank you, Michelle. Good morning and thank you for joining today's call. COVID-19 is having an unprecedented impact on human life, the economy and the industries in which we operate. Given this environment, today I will provide a brief summary of our first quarter performance, discuss the virus-related disruptions in the real estate mortgage and servicing industry and describe the actions we are taking to address the short to medium-term impact and the potential longer-term opportunities from the crisis. Our first quarter financial performance was lower than the same period last year. From the 2019 disposition of certain businesses, the run-off of Ocwen's service portfolios and the impact that COVID-19-related governmental restrictions and changing vendor and consumer behavior patterns affected our default-related businesses. This was partially offset by stronger performance from our customers other than Ocwen, NRZ and RESI in both our default and origination-related businesses. As you can see on Slide 5, in the first quarter, we generated $0.17 of adjusted diluted earnings per share, $4.4 million of adjusted pre-tax income and $13.2 million of adjusted EBITDA, and $113.2 million of service revenue. Across our three core businesses, as shown on Slide 6, first quarter 2020 service revenue from customers other than Ocwen, NRZ and RESI grew by 36% compared to the first quarter of 2019 and was modestly higher than the fourth quarter despite COVID-19 headwinds. This year-over-year increase is primarily due to the growth in our customer base, market share expansion and for our origination-related services, lower interest rates. We anticipate that the pandemic will have a short to medium-term negative impact on default-related revenue from these customers but in the longer term should support strong growth. For a more detailed description of our first quarter financial performance compared to prior periods, please refer to today's press release and 10-Q. Turning to the business environment and the impact Coronavirus is having on the real estate mortgage and servicing industry and Altisource. Today, much of the country is operating under shelter-in-place and social distancing restrictions and non-essential businesses are closed or operating in a work-from-home environment. At the same time, the Federal Reserve lowered interest rates in early March. Despite assistance programs from the federal government, the pandemic has had an unfortunate and large negative impact on the economy with a tremendous number of employee furloughs and terminations across the country. Over the last several weeks, 26.5 million people filed unemployment claims and the Mortgage Bankers Association estimates that 7% of borrowers were in forbearance as of April 19, up from 0.25% in early March. The Congressional Budget Office estimates that the unemployment rate will be 16% in the third quarter and greater than 10% for 2021. These factors have led to a disruption in the real estate mortgage and servicing markets and greater borrower demand to refinance their mortgages. While it's too early to estimate the duration of the pandemic, Slide 7 summarizes certain COVID-19 programs and what we believe the impact could be for Altisource. We anticipate that the short to medium-term revenue impact on Altisource will largely be driven by two factors. First, with most of the country confined to their homes and growing unemployment, we expect that home buying activity will be significantly lower. This should largely impact our Hubzu and settlement services businesses. Second, with governmental foreclosure and eviction moratoriums and other borrower relief, along with shelter-in-place and social distancing restrictions, we expect that foreclosure and eviction referrals will also be substantially lower. We anticipate that this will negatively impact our Equator, title, foreclosure trustee, valuation and field service businesses. At the same time, we anticipate that the low interest rate environment will support strong growth in our origination-related services. Altisource, like other companies in our industry, is adapting to this rapidly changing environment. We have three areas of focus. First, maintaining the health and safety of our employees. Second, adjusting our operations to mitigate some of the impact to our customers and business, while complying with governmental orders and guidance. Third, addressing our cost structure and preserving liquidity to prepare for what could be a period of lower revenue than planned. To help maintain the health of our employees and comply with governmental orders, over a month-and-a-half ago, we began implementing our business continuity plans and enabling work-from-home capabilities where possible across the organization. Our employees were able to rapidly adjust to this new environment with minimal operational disruption. The majority of our global workforce is working remotely with a small number of employees continuing to perform essential functions at our facilities where permitted. For these employees, we have implemented heightened hygiene protocols. We're also seeking to minimize operational disruptions and deliver for our customers as best we can despite the impact from COVID-19. Our customers rely upon Altisource to perform critical functions for their loan origination and servicing operations. Our customer relationship management, sales and operations teams are in regular contact with our customers and we are working diligently to manage what is in our control and pivoting our operations to address business-related challenges and opportunities. Finally, we are preparing the firm for what could be a period of lower-than-planned revenue due to the effects of COVID-19. We believe our current financial position, along with changes we are making to our cost structure, will help preserve liquidity and benefit from what we believe could be a longer-term opportunity in a rising delinquency and lower interest rate environment. Turning to Slide 8. From a liquidity perspective, we believe that Altisource is well positioned with $79 million in cash and equivalents, $294 million of debt and $173 million of net debt less marketable securities. Our marketable securities include 3.5 million RESI shares that we anticipate will be sold for $43 million in cash if the previously announced sale of RESI closes. Our debt is covenant-light and doesn't mature until April 2020. In addition to cost reduction activities planned prior to the pandemic, we have taken several measures to further reduce our 2020 expenses to address the anticipated impact from COVID-19. Unfortunately, as part of these measures, we have to make the difficult decision to furlough and terminate certain employees and temporarily reduce director, executive and employee compensation. Based on these and other cost reduction measures, we anticipate reducing our 2020 cash expenses by an estimated $45 million to $50 million compared to the fourth quarter 2019 annual run rate. This is in addition to the savings and outside goods and services that generally declined proportionately with fewer service referrals. As we are operating in uncharted waters and the impact on Altisource remains fluid, we plan to continue to evaluate our cost structure and intend to make adjustments as circumstances may warrant. We're also seeking to maintain capacity for anticipated growth in our origination-related services, continue to innovate across our businesses and prepare for what we believe will be strong medium to longer-term demand for our default-related services from growing loan delinquencies. In time, we anticipate homebuyers will return to the market and we will sell our Hubzu inventory. We further believe the unprecedented level of foreclosure and eviction relief will subside and if unemployment rates remain elevated, delinquency levels are likely to be higher than they were before the pandemic began. To give you a sense of the potential impact of delinquency rates from this crisis, Black Knight recently estimated that at a 15% unemployment rate, mortgage delinquency rates could rise from approximately 3.7% to 10.3%. While we believe the tremendous governmental relief efforts will help mitigate the horrific impact that this pandemic is having on consumers and the broader economy, delinquency rates were at historical lows prior to the crisis and are likely to stabilize at a higher rate post-crisis. As a leading national provider of services to support residential loan originators and servicers, we believe Altisource is in a strong position to support the industry and capture a sizable share of the business opportunity that a low interest rate and rising delinquency environment would present. We conservatively estimate that every 1% increase in mortgage delinquencies increases the addressable market for our default-related services by over $700 million from what was a total addressable market of roughly $4 billion pre-crisis. I'd like to conclude by thanking our employees who quickly adjusted to our new operating environment and remain incredibly focused on serving our customers. Our performance for our customers will allow us to emerge from this challenging situation positioned for long-term success with new opportunities. I'll now open up the call for questions. Operator?

And your first question comes from Mike Grondahl with Northland Securities.

Hey. Good morning, Bill and Michelle. The roughly $90 million of Ocwen-related revenues, how did that compare to kind of your forecast or kind of internal budget?

Yes. Mike, we were largely on track to achieve our plan in the first quarter until March. And then in March, we started to see a disruption from the pandemic. So we actually were not that far off a plan, I'd say, probably in total, a couple of million dollars off of plan from an EBITDA or adjusted EBITDA or adjusted pre-tax perspective.

Got it. And Ocwen moving to that new servicing platform, is there any catch-up happening there or does that sort of delay still exist?

No. So if you remember, in the fourth quarter, our conversion rate for REO sales improved quite substantially over prior periods. In the first quarter, again we are largely on track to convert where we expected for REO sales, and then March hit, and you had delays in REO closings, higher cancellations, all are a result of the pandemic.

Got it. So really the first quarter on an adjusted EBITDA basis, just a couple of million kind of spread between COVID and some of the other things you've mentioned. Got it.

That's right.

And the incremental $45 million to $50 million that you're pulling out of the business or streamlining the business, any rough thought how much of that is cost of goods sold, how much of that might be SG&A savings?

Sure. Think of all cash expenses aside from the cost of goods sold. In addition to the $45 million to $50 million, our cost of goods sold will mainly decrease in line with lower referrals. For instance, if we get fewer field service referrals or inspections and we don't request an inspection from someone in the field, those costs will also decrease. We have significantly reduced expenses directly within our control, which are not necessarily linked to referrals, by $45 million to $50 million. This represents about a 15% reduction in our expense base, excluding outside goods and services from our fourth quarter run rate.

Got it. So I guess I'm still trying to understand the breakdown between cost of goods sold and SG&A. Is most of it cost of goods sold then?

So when I say cost of goods sold, certainly employee cost inside of cost of goods sold. So when I say, I should really separate, you have employee costs and cost of goods sold, and then you have outside goods and services. Outside goods and services will decline based on receiving fewer referrals.

Volume?

Yes, outside goods and services are not included in the $45 million to $50 million, but we expect that to decrease with fewer referrals. We anticipate that compensation and benefits along with other costs within cost of goods sold and SG&A will also decrease by about $45 million to $50 million, in addition to outside goods and services.

Got it. And the line you guys break out in the P&L for SG&A, in the first quarter, it was $28 million not inside cost of goods sold. That's going to come down meaningfully then over the course of the year?

Yes. I think you're going to see reductions and, Michelle, you could jump in here both in cost of goods sold as well as in SG&A. That's exactly right. You'll see it in both places, Mike.

Okay, great. Lastly, what is your best estimate for cash flow or cash usage in 2020?

There's a lot of uncertainty regarding the impact COVID will have on our business. We are only about a month to a month-and-a-half into this. Based on our best estimate, our goal with the cost reduction plan is to maintain a cash position close to what we had at the beginning of the year by the end of this year. I expect it will decrease, but it should remain relatively close to where we started. That's our target for the cost reduction plan. However, there are many unknowns tied to the pandemic and its effects on our different businesses. We'll have to wait and see. Essentially, we planned to preserve liquidity.

Got it. Maybe just lastly, it looks like you had a couple or several nice wins in the first quarter. Anyone to call out there, a couple of them looked to be large on your slide?

Yes, let me just pull the slide. Give me a second.

9.1.

Yes, we achieved a few significant wins. One important highlight is our channel partner agreement for Verification Services, which we see as a large opportunity. We are essentially reselling various Verification Services, and based on the initial feedback from the Lenders One members, we believe we can save them a substantial amount of money while still maintaining a decent margin on that product. We expect this to ramp up throughout the year, and as we generate more referrals, our cost of goods from the vendor will decrease, allowing us to anticipate revenue growth and margin improvement as the year progresses. Additionally, we recently launched a field services opportunity with a major non-bank servicer, and we are now working to launch with the same customer Hubzu, focusing on their FHA portfolio, which we are excited about. Furthermore, in Trelix, our loan fulfillment business that handles underwriting, processing, closings, and quality control, we are gaining significant traction. Our current focus is on hiring and training enough staff to meet the high demand for our services. We are prioritizing capacity for our loyal existing clients, but we also have several promising prospects that could lead to substantial growth in that area.

Got it. Great. Thank you.

Thanks, Mike.

Your next question comes from Rajiv Sharma with B. Riley FBR.

Hi. Good morning. My question is about the impact of the moratorium on the current flow of business. When do you expect the moratorium to start and how long do you anticipate it will last? Additionally, how are the advances and payments that servicers are dealing with, along with the support from various agencies, affecting their ability to manage these advances? What impact does this have on your referral business flow?

Sure. First, regarding the moratorium, there are two key points to consider. The first is that the federal government and several states have enacted a moratorium on foreclosures and evictions, which effectively halts those activities and will reduce our inflows into real estate owned properties. This could also lead to fewer referrals connected to those businesses. As for the federal moratorium, if I recall correctly, it lasts for 60 days, while some state moratoriums may extend beyond that timeframe. The second aspect involves the forbearance plans that have been introduced for both government loans and GSE loans. These plans allow consumers to initially defer their mortgage payments for up to six months, with the possibility of extending that period for another six months if necessary. Borrowers who are directly or indirectly affected can participate in this program and pause their mortgage payments for a total of up to a year. We expect that once the moratoriums conclude, there will be an increase in both foreclosure-related referrals and scenario-related referrals. However, we don’t anticipate seeing a significant impact until the fourth quarter of this year and the first quarter of next year, when forbearance periods begin to end. Much will also depend on the unemployment rate; if it remains relatively low, individuals who are still employed should be able to modify their loans and possibly roll past due payments into the mortgage or extend the amortization period. Conversely, if unemployment rises, those affected may struggle to meet their mortgage obligations, which would trigger the default process. In the short term, we aim to swiftly adjust our cost structure to navigate what we believe will be a temporary decline in referrals while maintaining capacity for what we expect will be growth in origination. We anticipate that interest rates will remain low for the foreseeable future, and we also want to be prepared for a likely rise in delinquencies as we move into next year. Therefore, we will continue to innovate across our products and ensure we have the capacity to support that anticipated growth.

Regarding the servicers and their ability to advance payments, how does that affect you? If some servicers have difficulty advancing payments, with or without assistance, I would like to know how that impacts Altisource.

Yes, the environment is changing quickly, but the government has established programs that limit servicers' payment advances to four months. If a loan enters a forbearance plan, the servicer is required to advance payments for four months. It is still uncertain when that servicer will be reimbursed for the advance, but the obligations to advance payments will cease for loans under forbearance after four months. This is a positive initial measure to assist both bank and non-bank servicers with their payment obligations. I don’t believe this will have a direct impact on Altisource, although it remains to be seen since the government programs do not cover private label securities. It is still an unresolved issue regarding how those advances will be managed, but historically, Ocwen has handled their payment obligations effectively. Therefore, we do not expect this to have a direct impact on Altisource.

Got it. Thank you. I just have one last question. You just mentioned how your addressable market goes up with every percentage point increase in delinquency rates. And so I just wanted to clarify to it goes up, and you said by $700 million, and prior to COVID, it was a $4 billion addressable market. So up 17%, 18% and the increase in the addressable market for every 1 percentage point increase in delinquency rates. Is that the right way? Am I looking at that right?

Yes. And what we did was we looked at both for GSE loans, FHA loans and private label or whole loans. And basically, a 1% increase across each of those products would result in roughly a $700 million increase to the addressable market for us.

You expect the volume to start increasing in either the fourth quarter or the first quarter, depending on how things turn out.

Yes, Rajiv. At Altisource, we're assuming the second and third quarters will be the hardest hit from the impact of COVID-19. We will start to recover, but we won't fully recover in the fourth quarter and then depending on what happens with unemployment and delinquency rates going into next year, we could start to see an increase in delinquency rates and meaningful improvement in revenue. And then on the origination side, we're seeing it now given the sustained low interest rates, the origination volumes are continuing to grow across all the services we provide to loan originators.

Got it. Thank you so much. Thank you for answering; I'll get offline. Thanks.

Thanks, Rajiv.

Okay. And your next question comes from Ramin Kamali with Credit Suisse.

Hi, Bill. Hi, Michelle. Thanks for taking my call. Hope you're doing well. I'm trying to understand what the business really looks like today. I guess month April has wrapped up, but just to get a sense by segment. I assume Field Services should remain relatively active, whereas the other two segments are probably a bit more compromised. Could you give me a sense of Front environment like percentage of the segment, operating percentage wise? And then at the current run rate, like what's the kind of monthly burn or how should I think in the back some of the monthly fixed cost base in the current environment?

Let's break down the three business segments. In the marketplace segment, which includes Hubzu and Equator, we're seeing the most significant impact from foreclosure moratoriums and stay-at-home orders, which are hindering home sales. We're estimating that Hubzu will be down at least 75% over the next few quarters before it starts to improve. It's important to note that these are just our best estimates given the uncertainty we're facing. Regarding Field Services, we expect to be below our initial plans, but the impact isn't as severe as we had expected based on April's performance. It seems to be holding up reasonably well despite being down from our projections. In the MRES sector, which encompasses mortgage and real estate solutions, there are several origination-related businesses that may perform better than we anticipated. However, our default title and trustee business, as well as the default valuation within that unit, will face some challenges. Overall, we planned to end the year with cash slightly lower than where we started. We aim to maintain a similar cash position by the year's end, but again, this is an unpredictable situation, and we will adjust our operations based on developments over the upcoming months.

But does that flat cash assume that the current state of what happened in April continues for the duration of the year or do you expect business to gradually ramp up from April to December?

So we're not forecasting a ramp-up in the second or third quarter, beginning in the fourth quarter, we're forecasting that there is some pickup in Hubzu and in Field Services, and that makes sense because some of the foreclosure moratoriums will have expired.

So if I have to think about the segments, so marketplace is down about 75%, particularly related to Hubzu, Field Service is down, let's say 10% from capacity, and then Mortgage Real Estate Solutions, I guess the lift from origination offset to declines in other parts of the business are relatively flat. Is that how to think about it?

I believe the mortgage and real estate solutions will see a decline, but not as significant, and we will gain from the expanding origination business. Hubzu will experience the largest percentage decrease for the year, while Field Services will also decline but not by as much percentage-wise.

All right. Thanks, guys. Stay safe.

I'm showing no further questions at this time, I would now like to turn the conference back to Bill Shepro.

Thanks for joining the call. Thanks for your support. Please stay safe and healthy. Thank you very much.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation, have a wonderful day.