Operator
Good day, and welcome to the Altisource Portfolio Solutions First Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Michelle Esterman, Chief Financial Officer. Please go ahead.
Thank you, Operator. We first want to remind you that the earnings release 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. 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 2024 Form 10-K and first quarter 2025 10-Q. These describe some factors that may lead to different results. We undertake no obligation to update statements, financial scenarios or 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'll now turn the call over to Bill.
Thanks, Michelle, and good morning. I'll begin on Slide 4. We're pleased with our first quarter performance as we continue to drive year-over-year and sequential service revenue and adjusted EBITDA growth, primarily from the ramp of our renovation business, stronger foreclosure starts, and sales wins. Compared to the first quarter of last year, we grew total company service revenue by 11% to $40.9 million and adjusted EBITDA by 14% to $5.3 million. Adjusted EBITDA growth outpaced service revenue growth from scale benefits and favorable revenue mix. On February 19, we closed the exchange and maturity extension transaction with our lenders, significantly strengthening our balance sheet and reducing interest expense. We ended the quarter with $30.8 million in unrestricted cash. Turning to our financial performance on Slide 5. For the first quarter, we generated $40.9 million of service revenue, an 11% increase over the first quarter of 2024. The service revenue increase was driven by growth in both business segments. First quarter 2025 total company adjusted EBITDA of $5.3 million represents a 14% increase over the first quarter of 2024. The improvement was largely from the business segment service revenue growth and higher adjusted EBITDA margins in the Servicer and Real Estate segment, partially offset by an increase in the Corporate segment's adjusted EBITDA loss. The business segments generated $12.5 million of adjusted EBITDA at 30.5% adjusted EBITDA margins, representing a 14.5% or $1.6 million improvement in adjusted EBITDA and a 100 basis point improvement in adjusted EBITDA margins compared to the first quarter of 2024. The Corporate segment's adjusted EBITDA loss increased by $900,000 or 15% to $7.2 million, primarily due to certain non-recurring benefits in the first quarter of 2024. First quarter service revenue marked the highest level since the third quarter of 2021 and first quarter adjusted EBITDA was the strongest quarter since the third quarter of 2020. Slide 6 provides a summary of the exchange and maturity extension transaction and $12.5 million Super Senior credit facility that we closed on February 19. These transactions significantly strengthened our balance sheet and reduced interest expense. We reduced our long-term debt by over $60 million from $232.8 million to $172.5 million. At today's SOFR rate, the annual cash interest cost on this debt is approximately $13 million, which is a reduction of cash and PIK interest of approximately $18 million per year compared to our prior facility. For the first quarter of this year, our GAAP interest expense was $4.9 million compared to $9.5 million in the first quarter of 2024. Beginning with the second quarter, we will receive the full run rate benefit of the lower principal balance and interest rate from the exchange and maturity extension transaction. At today's SOFR rate and debt balances, we estimate annual GAAP interest expense on the new debt to be approximately $9.5 million. The transactions put the company on a much stronger financial footing and should be accretive to pre-transaction shareholders in the medium to long-term. Moving to Slide 7, and our countercyclical Servicer and Real Estate segment. First quarter 2025 service revenue of $32.9 million was 13% higher than the first quarter 2024, primarily from the launch and growth of our innovation business, stronger foreclosure starts, and sales wins. First quarter 2025 adjusted EBITDA of $12 million for the segment was $1.6 million or 15% higher than the first quarter of 2024. Adjusted EBITDA margins improved to 36.5% from 35.8%. Adjusted EBITDA growth and margin improvement primarily reflects service revenue growth. Slide 8 provides a summary of our Servicer and Real Estate sales wins and pipeline. For the quarter, we won new business that we estimate will generate $4.7 million in annual service revenue on a stabilized basis over the next couple of years. We had significant sales wins in our Granite business. We ended the quarter with the Servicer and Real Estate segment's total weighted average sales pipeline of $26.1 million of annual service revenue on a stabilized basis, most of which we anticipate will impact 2026 and beyond. Moving to our Origination segment on Slide 9. First quarter 2025 service revenue of $8 million was 3% higher than the first quarter of 2024. Adjusted EBITDA of $500,000 was roughly flat to the same quarter last year. Service revenue growth primarily reflects sales wins in certain of our Origination segment businesses. Industry-wide origination volume decreased by 1% in the first quarter compared to the first quarter of last year, with purchase origination volume down by 11%, partially offset by a 25% increase in refinance activity. The flat adjusted EBITDA reflects stronger margins for certain business units, partially offset by higher professional services expenses. Slide 10 provides a summary of our Origination segment sales wins and pipeline. During what continues to be a difficult origination market, our focus on helping our Lenders One members save money and better compete drove substantial interest in our solutions. On an annualized stabilized basis, we won an estimated $4.7 million in new business in the first quarter. Our weighted average sales pipeline at the end of the quarter was $11.9 million. Turning to our Corporate segment on Slide 11. We continue to maintain cost discipline. While first quarter 2025 corporate adjusted EBITDA loss of $7.2 million was $900,000 more than the first quarter 2024, the increase primarily reflects certain one-time benefits we received last year. Moving to Slide 12 and the business environment. Starting with the residential mortgage default market, 90-plus day mortgage delinquency rates remained low at 1.3% in March compared to a historical low of 1.1% in May 2024. Despite the low delinquency rate environment, foreclosure starts increased by 25% in the first quarter of 2025 compared to the same period in 2024. We believe the increase in foreclosure starts is largely related to the December 31, 2024, termination of the VA targeted foreclosure moratoriums. First quarter 2025 foreclosure starts were 18% lower than the same period in 2019. Foreclosure sales for the first quarter of 2025 declined by 2% compared to last year and are 53% lower than the same period in 2019. While foreclosure starts and sales remain low compared to historical pre-pandemic periods, there are several environmental factors that we believe could drive these higher. One of those factors is the rise in delinquency rates for FHA mortgages, which are typically granted to lower and moderate income Americans with more favorable terms, including lower down payment requirements. According to a recent article, the 30-plus day delinquency rate on FHA mortgages recently reached 11%, the highest level since 2013. A second factor is HUD's recently announced updates to the FHA servicer guidelines. In April, HUD issued updates and replacements of certain servicer requirements that limit borrowers to new permanent loss mitigation option every 24 months from every 18 months, subject to certain limited exceptions. This change could reduce repeated borrower loss mitigation attempts and lead to more properties entering the foreclosure process. In addition, effective October 1, 2025, the temporary COVID-19 loss mitigation options will be replaced with new permanent loss mitigation options. While the new options have many similarities to the temporary COVID options, the implementation of certain additional borrower requirements and limitations could reduce the number of modifications granted, potentially increasing foreclosure starts and subsequently foreclosure sales. A third factor is the risk of a weakening U.S. economy from, for example, tariff changes and the resumption of collection activities on defaulted federal student loans. Should there be a deterioration of the U.S. economy, inflation or unemployment could rise, likely driving higher loan delinquencies, foreclosure starts, and eventually foreclosure sales. The origination market also continues to have challenges. First quarter 2025 mortgage origination volume was relatively flat to the first quarter of 2024. For the full year, forecasts project there will be 5.8 million loans originated. This is down by 4% from the previous forecast. In closing, we are pleased with our first quarter results and believe we are positioned to diversify our revenue base and ramp the business we have won while maintaining cost discipline and significantly reducing corporate interest expense. To support longer-term growth, we are focusing on accelerating the growth of certain of our businesses that we believe have tailwinds. It also appears that the U.S. economy and consumer are facing pressure, which could drive higher mortgage delinquency rates, foreclosure starts, and eventually foreclosure sales. Should loan delinquencies, foreclosure starts, and foreclosure sales increase, we believe we are well-positioned to benefit from stronger revenue and adjusted EBITDA growth in our largest and most profitable countercyclical businesses. I'll now open up the call for questions.
