Welcome to the Altisource First Quarter 2022 Earnings Call. My name is Cheryl, and I will be your operator for today's call. As a reminder, the conference is being recorded. I will now turn the call over to Michelle Esterman, Chief Financial Officer. You may begin.

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 continuing COVID-19 pandemic makes it extremely difficult to predict the future state of the economy and its potential impact on Altisource. Please review the forward-looking statements section in the company's earnings release and quarterly slides as well as the risk factors contained in our 2021 Form 10-K, which describe factors that may lead to different results. We undertake no obligation to update these statements, financial scenarios, and projections previously provided, or provided herein as a result of the change in circumstances, 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 William Shepro, our Chairman and Chief Executive Officer. I will now turn the call over to Bill.

Good morning and thank you for joining today's call. Beginning with Slide 3, I'm pleased with our first quarter financial results. We generated service revenue of $37.8 million, marking the first quarter of sequential revenue growth in 11 quarters. Our first quarter adjusted EBITDA loss of $4.1 million represents a $4.7 million improvement over the fourth quarter of 2021. We benefited from revenue growth as the default market begins to recover, a favorable revenue mix, a lower cost base, and approximately $1.8 million of nonrecurring items. We currently have a $155 million unweighted annualized sales pipeline that based on our forecasted probability of closing could translate into $50 million to $62 million in revenue on a stabilized basis. What's exciting about our probability-adjusted sales pipeline is that it represents 33% to 41% of our annualized first quarter revenue. Keep in mind that our sales pipeline only includes new business and excludes revenue growth from existing customers on existing products. We ended the quarter with $80 million in cash. We typically use more cash in the first quarter than each of the remaining quarters of the year. During the first quarter, we used approximately $10.6 million for items that we don't expect to pay for in the remaining quarters of 2022. These items include previously accrued taxes related to a large one-time repatriation of cash from certain of our subsidiaries, annual bonuses, and certain prepaid expenses that relate to the entire year. We believe our cash burn will significantly decline as the year progresses and anticipate ending the year with between $65 million and $70 million of cash, but this could fluctuate up or down based on working capital. This estimate includes the anticipated refund of approximately $5.8 million in U.S. taxes and the anticipated distribution of $3.5 million in escrow funds from the point of sale. We have two core businesses; Servicer and Real Estate and Origination. As you will see in our 10-Q, we are now reporting these two businesses as segments and are separately reporting corporate and other. We believe this new segment structure will provide additional visibility into the performance of each of our core businesses. This morning, I will discuss these businesses in greater detail. Turning first to Slide 4 in our Servicer and Real Estate segment, which is our largest business. This segment has faced environmental issues for the last couple of years as pandemic-related borrower relief measures significantly reduced revenue. With the expiration of these relief measures at the end of 2021, this business now has strong tailwinds. Compared to the fourth quarter of 2021, service revenue for this segment grew by 18% and adjusted EBITDA grew by 54%. The strength in our first quarter primarily reflects higher Hubzu revenue from the September 2021 restart of foreclosures from pre-pandemic delinquencies and higher revenue in the other default businesses from the December 31st expiration of the temporary loss mitigation measures. For the rest of the year, we expect total segment revenue to continue to grow sequentially. In the second quarter, we expect flat to a modest decline in Hubzu revenue impacting our second quarter margins, given the lag between referrals and sales. We anticipate Hubzu will resume its revenue growth in the third quarter and continue to grow into 2023 as the market stabilizes. We believe the Servicer and Real Estate segment will be much larger in the coming years. To understand this, we think it would be helpful to explain the impact that pandemic-related borrower relief measures had on our default business and how we think the market and our default business will recover. Turning to Slide 5, during the pandemic, nearly all foreclosures came to a halt. This reduced referrals to our default-related businesses by more than 80%. During this time, we continued to sell existing REO, depleting our inventory. With the restart of foreclosures on pre-pandemic delinquencies in the early fall, we began to rebuild our foreclosure auction and REO inventory. Then with the December 31st expiration of the temporary loss mitigation measures, we are continuing to rebuild our foreclosure auction inventory and grow referrals for our other default businesses that support earlier stage delinquencies. For those loans that are just entering foreclosure, it takes time to work through the process. Some of these delinquent loans will re-perform or pay off. Others will go through foreclosure. Of those that go through foreclosure, some will sell to a third party at the foreclosure auction and some will become REO and ultimately sold. Depending on the state and other factors, this process could take approximately six months to several years. Based on this default process, Hubzu, one of our higher-margin businesses, will likely be our last business to fully benefit from the recovery of the default market. As the foreclosure auction and REO auction market fully recovers, we anticipate Hubzu will experience tremendous revenue and earnings growth. To illustrate this, please refer to Slide 6, which shows Moody Analytics, historical and forecasted REO acquisitions and Hubzu's historical revenue. As you can see, National REO acquisitions and Hubzu's revenue are closely correlated with both declining from the first quarter of 2019 through the fourth quarter of 2021. Beginning in the first quarter of 2022, Moody's Analytics forecasts that REO acquisitions will begin to grow, reaching a high in the fourth quarter of 2025 that is more than 70% higher than the first quarter of 2019, a quarter in which Hubzu generated $32 million of revenue. If Hubzu's revenue maintains its strong correlation to Moody's forecasted REO acquisitions, Hubzu's revenue growth would grow from $8 million in the first quarter of this year to over $50 million per quarter when fourth quarter 2025 REO acquisitions become sales. In periods of REO acquisition growth, revenue growth typically lags by a couple of quarters, reflecting the average time to market and sell REO. In addition to benefiting from tailwinds in the servicer and real estate business, we're also focused on adding new customers and are making good progress. Our unweighted annualized sales pipeline is currently $90 million on a stabilized basis. We estimate this could translate into $31 million to $39 million in annual revenue on a stabilized basis based upon our forecasted probability of closing. Turning to Slide 7 and our origination business, this business experienced strong growth over the last couple of years from high origination volume in a low interest rate environment, customer growth, and new product launches. The origination market now faces challenges with the MBA forecasting 2022 market origination volume to decline by 36%. We anticipate stronger than market performance for our origination business because we believe we can offset the impact of the market declines with newer product launches and higher product adoption. As expected, service revenue in our origination business declined compared to the fourth quarter, but at a much lower rate than the overall market decline. This reflects flat sequential revenue in our Lenders One business and revenue declines in our origination title, valuation, and fulfillment businesses. Lenders One demonstrated resiliency in a very difficult origination market as market declines were offset by member adoption of our newer product launches. The revenue declines in our other origination businesses reflect lower market origination volumes as well as customers bringing certain services in-house to retain their employees. From a sales perspective, our unweighted annualized pipeline is currently over $65 million on a stabilized basis. This represents $18 million to $23 million in anticipated annual revenue based upon our forecasted probability of closing. In a very difficult origination market, our Lenders One members are focusing on reducing costs and are looking to us to help them improve their profitability and competitive position. We believe our solutions are well-suited to achieve their objectives. Based on our progress in launching new products and increasing product adoption, we believe that our 2022 origination revenue will be roughly flat compared to 2021 in a market that the MBA forecast will decline by 36%. We have moderated our expectations to reflect our recent experience with longer-than-anticipated customer onboarding and revenue stabilization timelines for our newer solutions as well as for some of our origination businesses, due to changing customer behavior to move work in-house to retain their staff. We continue to believe the origination business is well-positioned for long-term growth and will be a significant contributor to Altisource's revenue and earnings. To conclude, we are pleased with our first quarter results and are executing well in our strategic plan. In our origination business, we believe we are building an exciting and innovative business that we anticipate will benefit from new product launches, membership growth, and a strong sales pipeline. In our servicer and real estate business, we should benefit from the market tailwinds and our strong sales pipeline. As we continue to execute on our plan and win more business, we anticipate we will return to a growth company and create substantial value for our customers and shareholders. I'll now open up the call for questions.

We have a question from Mike Grondahl from Northland Securities.

Yes. Sorry, I got on a couple of minutes late. I had a little bit of trouble connecting. So you may have covered a little bit of this, but you saw a really significant increase in foreclosures. How long do we see a similar increase in sort of REO referrals? How do you think about or should we think about that leg?

So Mike, when the government allowed servicers to recommence or to start foreclosures on pre-pandemic delinquent loans back in the early fall, we started to receive some REO referrals and some of those foreclosures have completed and what we now saw in the first quarter, we were able to sell some of those homes. But we're not going to see the real increase in our inventory in REO until we think the middle of 2023, when it stabilizes because all those new foreclosures that are starting now, foreclosure could take anywhere from six months to a couple of years. Some of those homes will then sell at the foreclosure auction and those that become REO, we could take and start selling homes 3 months later to as long as 9, 10, 11, or 12 months later, depending on the status of that REO. A couple of years ago, our REO inventory was approximately 6,500. Currently, it stands at about 2,500. We see a chance to significantly grow that inventory as the market recovers, but this will take a few years. In the first quarter of 2020, we generated around $28 million to $32 million in revenue from Hubzu, while this year, we only made about $8 million to $8.5 million. Our highest margin business will be the last to recover in terms of revenue, but when it does, it can lead to substantial revenue and earnings for Altisource. Additionally, we are expanding our foreclosure auction portfolio. Although not all of our foreclosure auctions will generate revenue, that inventory is growing significantly as foreclosures restart.

On average, what do you make per unit on a foreclosure sale versus an REO sale?

Yes. And look, we're not going to go into all the specifics, but we generally speak in a foreclosure auction, you probably keep anywhere from 2% to 5% of the proceeds. And in an REO auction, it really depends. In some cases, we're getting a buyer's premium. That could be a couple of percent to 5%. And in some cases, we also earn by acting as the real estate agent, and we can earn anywhere from probably 50 basis points to a couple of percent.

Got it. That's helpful. Can you remind us, is there a rule of thumb for how many foreclosures, let's say 100, would end up at REO sale? Is there a way to think about that?

Yes. I mean I can give you really every customer is sort of different in terms at what point in the cycle they give us their foreclosures. So I'm going to talk very generally and customer mix can really impact this. But let's say, it's probably around 25% ultimately result in a foreclosure auction that generates revenue. Some customers who give us the foreclosure later in the process, the percentages could be much higher.

Got it. And then your Hubzu inventory has grown four quarters in a row, 6,900 units. What's the average duration, does that sell in a quarter or two? Are you seeing anything faster in this housing market?

Today, from a sales perspective, our timelines and conversion rates have been strong. The real estate market has been robust with limited supply, and average home prices have been rising over the past few years. Currently, we have approximately 2,500 of our 6,800 to 6,900 assets in inventory related to real estate owned properties.

Got it.

And with that, it does take as we get back to a normal market, where there's over 40,000 foreclosure starts industry-wide a month, it takes time for those foreclosure starts to work through the process. Some of those borrowers will work out the loan. They'll either sell their home, modify the loan, or re-perform and a percentage of those will ultimately get to the sale and some will become REO.

Got it. Maybe two more on the financials. Do you still working towards year-over-year revenue growth in the second half? Is that still sort of roughly how you're seeing the year kind of shape up in the back half?

Yes. We do expect year-over-year revenue growth in the beginning of the third quarter and also the fourth quarter. So for the full year, we anticipate our revenue this year will be more than last year.

Got it. With growth in the second half still and still roughly about $15 million to $20 million of cash usage. I know one quarter was high at 10.5%, but you kind of spell about why the year is roughly still 15% to 20%, is that fair or close?

Yes. I think, I said on the prepared remarks that we anticipate ending the year with $65 million to $70 million of cash. So it’s a little bit more than the $15 million to $20 million we’re going to use.

The next question comes from Raj Sharma from B. Riley.

So I just, Bill, wanted to talk about the REO slide, the 6 that you're talking about on the REO acquisitions and if they would track in line; I know you said it could go from $8 million in revenues to over $50 million by the end of 2025. What about this year, there seems to be a nice projection in the national REO acquisitions to the fourth quarter of this year and that shows about $30 million? With that, you still expect your $8 million a quarter in Hubzu to actually start ramping by the end of the year or...

Yes. As I talked about in the prepared remarks, Raj, when your inventory is actually declining, your revenue outperforms sort of the inventory decline. And then that sort of reverses itself. When the inventory grows, your revenue is going to lag that growth by a couple of quarters because it takes time from an acquisition or a referral to a sale. And so there's going to be a lag that could be probably a couple of quarters as you grow your inventory. So the reverse happens from what took place as the inventory declined. So we do expect the second quarter, I think, I said on the prepared remarks to be roughly flat or down a little bit in Hubzu, which is going to sort of impact our revenue mix to some degree in the second quarter. But we anticipate that Hubzu will begin to grow again in the third and fourth quarters as you start to benefit from some of the foreclosure auctions that take place on the newer referrals, and ultimately, as some of the REO for the faster foreclosure states as some of those homes become REO and get sold to a lesser degree.

Got it. And then I know you introduced a new sort of metric of the pipeline, the sales pipeline and your probability of closing. So these are the new accounts that you are looking and hoping to sign on that would give you additional revenues of $31 million to $39 million?

That's right. So that's right. What we did is we gave you the total pipeline, and then we broke it out between the Servicer and Real Estate segment and the origination segment. And then we also provided a range on a weighted average basis what we think our win rate will be. And that represents either new products with existing customers or new customers with new products. So that pipeline would exclude any revenue growth we anticipate on our existing products with our existing customers as a result of the tailwinds, for example, on the default side.

Okay. And is there a timeline of when that would close within a year?

We have created a weighted average to consider, but predicting the exact timing for when it will close is more challenging. What we are sharing reflects the potential revenue once we stabilize the client. Clearly, not all of this will conclude within this year. For instance, in our origination business, the response to our newer products has been remarkable. We have a substantial pipeline for the new solutions we recently launched. However, we are finding that the contract negotiation process takes longer, and onboarding customers requires setting up all the necessary APIs. Typically, we activate these originators gradually, branch by branch. As a result, it often takes some time to stabilize revenue. Nevertheless, the feedback shows we can help our customers save a significant amount of money, which is crucial in today’s origination market as originators are keen on cost-saving solutions. The positive reception is strong, and we are currently hiring more personnel to assist with onboarding. We are also concentrating on expediting pricing proposals due to the robust demand for these products.

Got it. And then just lastly, I know you don't break out the gross margins or the gross profitability. Could you touch upon what that means for Hubzu, for example, Hubzu business? I know in that you said it's higher margin that comes to the end. And then the origination business, I know it's going to be flat last year. Can you talk a little bit about it; is it on a divisional basis? Is it losing money? Is it...

I think it lost a little bit of EBITDA in the first quarter. You can also take a look at the Q. My recollection is it just lost a little bit. But we do anticipate that business ultimately, we believe, and again, a lot depends on your mix of revenue. And as we generate more revenue, we're optimistic we can bring down some of our cost of goods as we have more scale and buying power. But I think that business could be a 20% to 25% margin business on a normalized basis as we grow it over the next couple of years. Yes, EBITDA margin.

We have a follow-up question from Mr. Mike Grondahl from Northland Securities.

Bill, can you just repeat, if you said anything in your prepared remarks about 2Q, I think I understand the back half of the year, but because Hubzu is a little slower in 2Q and maybe the origination business with rising rates, is 2Q sort of flattish to 1Q? Is that what you were saying or even down a little bit?

Yes. We think it’s going to be down a little bit because of some of the one-time benefits we got in the first quarter and the mix of revenue. So even though we believe we’re going to sequentially grow revenue in the second quarter, the mix of business is going to impact the margins and we got some one-time benefits. And then we think that will then turn around in the third and fourth quarters.

Thank you. And at this moment, I show no further questions. Do you have any other remarks?

Thank you, operator. Thank you for joining the call, and we appreciate everyone's support. Take care.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.