Ladies and gentlemen, thank you for standing by and welcome to the Altisource Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation there'll be a question-and-answer session. I would now like to turn the call over to your host, 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 and current economic environment make it extremely difficult to predict the future state of the economy and its potential impact on Altisource. Please review the forward-looking statements section of 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 a 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 Bill Shepro, our Chairman and Chief Executive Officer. I will now turn the call over to Bill.

Thanks, Michelle. Good morning and thank you for joining today's call. I'm pleased with our second quarter results and performance. Beginning with slide four, our servicer and real estate segment is benefiting from the restart of the default business with both sequential and year-over-year revenue and adjusted EBITDA growth. Our originations segment's year-over-year revenue decline was largely in line with a market-wide decline in origination volume. Despite the market decline, we grew our average weighted sales pipeline in the origination business to $32 million, a 54% increase since last quarter as our Lenders One members are increasingly focused on buying our solutions, which are designed to help them reduce their costs. We also continue to maintain cost discipline in corporate with costs down by 28% over the second quarter of 2021 from cost savings initiatives and the sale of the pointless business, partially offset by the assignment of sales and marketing employees to the business segments. This performance puts us on a path to generate positive EBITDA and cash flow in 2023. We ended the quarter with $71 million in cash. As expected, we significantly reduced our cash burn, compared to the first quarter. We believe our cash burn will further decline as the year progresses, and anticipate ending the year with between $60 million and $65 million of cash, with the estimate fluctuating up or down based on working capital and other factors. Our cash estimate includes the anticipated refund of approximately $5.8 million in U.S. taxes and receipt of $3.5 million in escrow funds from the point of sale. Turning to slides five and six and our servicer and real estate segment. As you can see on slide five, compared to both the second quarter of 2021 and the first quarter of this year, we grew service revenue and adjusted EBITDA and improved our adjusted EBITDA margins. Our revenue growth reflects the continuing recovery of the default market following the September 2021 restart of foreclosures on pre-pandemic delinquencies, and the December 31st expiration of most of the remaining pandemic-related borrower relief measures. Adjusted EBITDA and margin improvements reflect our greater scale, product mix, and cost savings initiatives. There are two items you should keep in mind. First, even though the default market is beginning to recover, second quarter foreclosure initiations are still 47% below the same pre-COVID 2019 period. Second, based on the typical timelines to complete a foreclosure and sell REO, we anticipate that our higher margin foreclosure and REO auction business will not fully benefit from the recovery of the default market until the middle of 2023. In addition to benefiting from tailwinds from the restart of the default market, we are focused on growing our sales pipeline and are making good progress. During the second quarter, we won and are in various stages of onboarding new business, with an estimated $8.4 million of annualized revenue on a stabilized basis. In addition, our average weighted sales pipeline is currently $33 million on an annualized and stabilized basis. Looking at longer term, we believe our countercyclical default business could benefit from a deteriorating economic environment. Today, mortgage delinquency rates are at near historical lows. With rising interest rates and inflationary risks, delinquency rates may rise, driving more business to our servicer and real estate segment. We estimate that for every 1% increase in 30-day delinquency rates, the addressable market for our default services increases by $700 million. Turning to slides seven and eight in our origination segment. Following strong growth over the last couple of years, the origination market now faces challenges with the latest MBA forecast for 2022, reflecting origination volume to decline by 41%. Our origination segment was not immune to the market impact with our second quarter year-over-year revenue decline largely in line with the origination market decline. Diving a little deeper into our second quarter results, the Lenders One business outperformed the market as we gained traction with our solutions that are designed to help members save money. This performance was offset by greater than overall market declines in some of our other origination businesses. As customers transitioned work in-house to retain their employees, a greater percentage of revenue in some of these businesses was derived from refinanced cash transactions, which declined faster than the market. There is a silver lining. Over the last couple of years, it has been very difficult for us to get originators to focus on our cost-saving solutions given their unprecedented origination volume and profitability. With a decline in origination volume and margins, originators have turned their attention to reducing costs and are increasingly looking to purchase Lenders One solutions that help them do so. As a result, we had a very strong quarter from a sales perspective. We won and are in various stages of onboarding an estimated $8.7 million a year in new business on a stabilized basis and anticipate that we will begin to generate revenue from these wins in the third quarter. We also increased our annualized weighted average sales pipeline by 54% to $32 million on a stabilized basis. Based on our sales progress, new product launches, and increasing product adoption, we believe that we will outperform the forecasted 41% decline in origination volume. We continue to gain greater insight into how the sales pipeline and sales wins for our newer solutions translate into revenue and are developing programs to help accelerate these timelines. We believe our origination business is well positioned for long-term growth and to be a significant contributor to Altisource as revenue and earnings. To conclude, we continue to execute on our strategic plan and are pleased with our second quarter results. In our servicer and real estate business, we should benefit from the market tailwinds and our strong sales pipeline. In our origination business, we believe we are building an exciting and innovative business that we anticipate will benefit from sales wins, new product launches, and our prospects' increased focus on cost savings. 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 stakeholders. I'll now open up the call for questions, operator?

Our first question from Mike Grondahl with Northland Capital. Your line is open.

Thanks. This is Mike Pochucha on for Mike Grondahl. Maybe just first on the sort of foreclosure timing ramp. Are you seeing much geographical difference versus period cycle here?

Hey, Mike. Good morning. No, I don't think we're not seeing anything from a geographical perspective at least not that I'm aware of. I think what we're seeing though is that while the markets are recovering, it's still is 47% down in terms of new foreclosure initiations from where it was last year. I mean, so I think we're still in the very early innings. And as I mentioned, some of our most attractive businesses won't benefit until the market not only recovers but also stabilizes toward the middle of next year.

27% lower than in '19.

That's right. Thank you, Michelle.

Got it. And then just based on originations, is it fair to say that with a softer environment there that there's an opportunity with maybe some competitors going back to take share there?

We manage the Lenders One Cooperative, and members join to enhance their profitability, improve execution on loan sales, and lower costs. In recent years, they had such high volumes that our assistance with execution was less critical, as they were busy managing their existing volume. However, in the current environment, our members are now more focused on saving money. We launched several new products in December and earlier last year that have significantly reduced the costs of loan production for our members. We are effectively building our pipeline and are making progress in converting this pipeline into revenue, which is promising so far.

Thanks. I'll pause, thank you.

Great. Thanks, Mike.

One moment for our next question. Our next question comes from Ramin Kamali from Credit Suisse. Your line is open.

Hi, good morning. Thanks for taking my calls. I wanted to get a better sense of your cash flow trajectory. I guess Bill, you said that right now you're sitting at about $70 million of cash, expect to end the year at $60 million. But you also do have some money coming in from Pointillist and from federal tax refund. So if not for that, it would have been probably close to $20 million of cash burn. So help me understand kind of the cash flow trajectory for Q3 and Q4. And when do you now expect to be breakeven from a cash flow standpoint?

Yes. We believe we will finish the year with between $60 million and $65 million in cash. We slightly reduced our earlier estimate from last quarter, which takes into account the anticipated tax refund and the release of the Pointillist escrow. We have received confirmation that the IRS is processing one of our previous tax returns, and we expect to receive part of that amount hopefully within the next month or two. So our outlook has improved. Regarding the business itself, we expect to achieve positive EBITDA and cash flow in 2023. Much depends on the speed of the default market's recovery. Currently, we are taking a cautious approach to how this market operates. If conditions improve, it could speed up our timelines, but at this moment, we are being careful.

Can you give us a little more color on a quarterly basis in ’23? I mean any particular quarter that you think you'll be breakeven from a cash flow standpoint?

We are not breaking out the numbers for next year at this point, but we do expect that earnings will continue to improve and cash burn will decrease, ultimately reaching a positive state as the year progresses next year.

Got it. And then one more question just kind of on the core business. I guess, foreclosure starts are certainly picking up. Can you kind of comment on your share of those initiations relative to what you were seeing pre-COVID?

Yes. It's hard to tell. I listened to Mr. Cooper's call yesterday, and they talked about their market share in Xome. They think they're going to be at, I think, close to 40%. Our inventory today is sitting at one-third of theirs. So if you sort of extrapolate, that could give you a sense perhaps of where our market share is. I'm not sure how they're calculating that. I think what's really interesting, Ramin, is, environmentally, the default business is recovering, and we've really found the right product market fit with our origination products and are gaining great traction, and so you wouldn't have expected that in a market where origination volumes are declining. There's actually a lot more interest in these products. And so we're learning how long it takes to onboard them, but we're making tremendous progress. And then on the default side, clearly, we're only at half, 47% of where foreclosure initiations were in the second quarter of 2019. Some of that may be related to the government. The federal government put a sort of mini moratorium, if you will, and Michelle reminded me, I think it was April, for two months around GSE mortgages where if the borrower was applying for one of these government programs, the lenders had to hold off on the foreclosure. We suspect that that resulted in servicers, sort of, scrubbing their portfolios and making sure there was none of that activity before they foreclosed. So that could have impacted foreclosure starts in the second quarter as well. We are seeing a pickup in July of our REO and foreclosure auction referrals compared to June. So we'll see. But I think the point being it still has not even recovered to where we were. We're having tremendous benefit in that segment, even though it hasn't even recovered to where we were in the same quarter in 2019. And in a deteriorating economic environment like it appears that we're experiencing, the opportunities continue to improve for the default business.

All right. Thanks, Bill.

Thanks, Ramin.

One moment for our next question. Our next question comes from Raj Sharma with B. Riley, your line is open.

Thank you for addressing my questions. I wanted to clarify your comments on the Hubzu marketplace regarding the REO business; you mentioned that you wouldn't see improvements until the middle of next year. Is that a shift from what you previously anticipated? A few quarters ago, you projected certain service revenue figures by mid-next year. I'm looking to understand the timing of the REO flow and the starts of foreclosures.

That's a good question, Raj. So if you think about it, the foreclosure starts are roughly 47% of the pre-pandemic 2019 numbers in the same quarter. If it is going to get back to those pre-pandemic or close to those pre-pandemic numbers, then that would push out the stabilization a little bit beyond the middle of '23. But we certainly expect that all these new foreclosures that have been initiated this year, those will stabilize in the middle of 2023. If the volumes increase due to the market getting back to pre-pandemic levels or because delinquency rates go up, it would push out the time it takes to stabilize. But of course, it would stabilize at an even higher number. The other thing I'd point out is in the second quarter of 2019, and Michelle, correct me if I'm wrong, how much in revenue did we generate in Hubzu?

$28 million.

$28 million. So you compare that to the roughly $8 million we did in the second quarter of this year, and you could see or get a sense as to what the opportunity is for that business as the market recovers and as we stabilize.

Got it. That's helpful. And then on the origination side, could you comment a little bit on the lower metrics and your new product launches? You had indicated earlier that you should be doing better in the Origination business relative to the overall market, which is going to be in massive decline. Has anything changed in that? Or can you talk about the new product launches and how those are faring?

Yes, I'm happy to share. We have introduced several new products in the verification and tri-merge credit reporting areas, and these products are gaining significant traction. We regularly review our pipeline and the timelines for onboarding customers. Much of the growth in our Origination business is driven by these new offerings, which enable our customers to save a notable amount of money. We are learning about the duration from when we provide a pricing analysis and proposal to a customer until a contract is signed, the onboarding is completed, and the customer's branches are fully operational and using our services. This has adjusted our timelines a bit. Additionally, origination volumes have decreased further, and market forecasts for origination volume continue to decline, impacting us. Nevertheless, we still anticipate a modest improvement in the third quarter and expect to see a more substantial enhancement in our Origination business by the fourth quarter, both sequentially from the prior quarter and year-over-year. That's what we are currently predicting. We believe the results will begin to reflect this improvement in the third quarter, but we expect a more pronounced impact in the fourth quarter.

Got it. Great, thank you. I'll get back.

Thank you.

Thank you.

And I'm not showing any further questions at this time. I'd like to turn the call back to Bill for any closing remarks.

Great. Thanks, operator, and thanks for joining the call. We appreciate your interest and support in the company. Have a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.