SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015 |
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 1-34354
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
(Exact name of Registrant as specified in its Charter)
Luxembourg | 98-0554932 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
40, avenue Monterey
L-2163 Luxembourg
Grand Duchy of Luxembourg
(352) 24 69 79 00
(Address and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $1.00 par value | NASDAQ Global Select Market | |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of the Registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act):
Large accelerated filer þ | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2015 was $569,714,482 based on the closing share price as quoted on the NASDAQ Global Market on that day and the assumption that all directors and executive officers of the Company, and their families, are affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.
As of February 22, 2016, there were 18,839,824 outstanding shares of the registrant’s shares of beneficial interest (excluding 6,572,924 shares held as treasury stock).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement to be filed subsequent to the date hereof with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the registrant’s Annual Meeting of Shareholders to be held on May 18, 2016 are incorporated by reference into Part III of this Report. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the registrant’s fiscal year ended December 31, 2015.
TABLE OF CONTENTS
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
FORM 10-K
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and certain information incorporated herein by reference contain forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements may relate to, among other things, future events or our future performance or financial condition. Words such as “anticipate,” “intend,” “expect,” “may,” “could,” “should,” “would,” “plan,” “estimate,” “believe,” “predict,” “potential” or “continue” or the negative of these terms and comparable terminology are intended to identify such forward-looking statements. Such statements are based on expectations as to the future and are not statements of historical fact. Furthermore, forward-looking statements are not guarantees of future performance and involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially. Important factors that could cause actual results to differ materially from those suggested by the forward-looking statements include, but are not limited to, the risks discussed in Item 1A of Part I “Risk Factors.” We caution you not to place undue reliance on these forward-looking statements which reflect our view only as of the date of this report. We are under no obligation (and expressly disclaim any obligation) to update or alter any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any such statement is based.
PART I
Except as otherwise indicated or unless the context requires otherwise “Altisource,” the “Company,” “we,” “us,” or “our” refer to Altisource Portfolio Solutions S.A., a Luxembourg société anonyme, or public limited company, and its wholly-owned subsidiaries.
ITEM 1. | BUSINESS |
The Company
Altisource® is a premier marketplace and transaction solutions provider for the real estate, mortgage and consumer debt industries. Altisource’s proprietary business processes, vendor and electronic payment management software and behavioral science-based analytics improve outcomes for marketplace participants.
We are publicly traded on the NASDAQ Global Select Market under the symbol “ASPS.” We are incorporated under the laws of the Grand Duchy of Luxembourg.
2015 Highlights
Our 2015 highlights and significant items include:
• | Recognized service revenue of $940.9 million, which increased slightly compared to the year ended December 31, 2014; |
• | Recognized total revenue of $1,051.5 million, a 3% decrease compared to the year ended December 31, 2014; |
• | Selected by two top ten banks to provide services for their portfolios, including the selection by a top four bank in the fourth quarter of 2015; |
• | In the fourth quarter of 2015, recorded non-cash impairment losses of $71.8 million in our Technology Services segment primarily driven by the Company’s current projected Technology Services revenue from Ocwen and investment in technologies provided to Ocwen; |
• | Recognized diluted earnings per share of $2.02, a 64% decrease compared to the year ended December 31, 2014; |
• | Recognized adjusted diluted earnings per share(1) of $6.96, a 3% decrease compared to the year ended December 31, 2014; |
• | Generated cash flows from operations of $195.4 million, a 1% decrease compared to the year ended December 31, 2014; |
• | Repurchased 2.1 million shares of common stock at an average price of $27.60 per share; |
• | Repurchased portions of our senior secured term loan with an aggregate par value of $49.0 million at a weighted average discount of 10.3%, resulting in net gains totaling $3.8 million on the early extinguishment of debt; |
• | To strengthen the Real Estate Investor Solutions initiative, we acquired RentRange® and Investability™ for $24.8 million; and |
• | On July 17, 2015, acquired CastleLine for $33.4 million. |
(1) This is a non-GAAP measure that is defined and reconciled to the corresponding GAAP measure on page 26.
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Reportable Segments
We classify our businesses into the following three reportable segments:
Mortgage Services: Provides services that span the mortgage and real estate lifecycle and are typically outsourced by loan servicers, loan originators, home investors and other sellers and buyers of single family homes. We provide most of these services primarily for loan portfolios serviced by Ocwen Financial Corporation and its subsidiaries (“Ocwen”). We also have longstanding relationships with commercial banks, insurance companies, mortgage bankers and other companies involved in the mortgage industry. Within the Mortgage Services segment, we provide the following services:
Asset management services - Asset management services principally include property preservation, property inspection, real estate owned (“REO”) asset management, the Hubzu® and Owners.com® consumer real estate portals and real estate brokerage services. We also provide property management, lease management and renovation management services for single family rental properties. Through our recent acquisition of GoldenGator, LLC (doing business as RentRange), REIsmart, LLC (doing business as Investability) and Onit Solutions, LLC, a support company for RentRange and Investability (collectively, the “Acquired RentRange and Investability Businesses”), we provide rental home data and information to the financial services and real estate industries and an online residential real estate investor search and acquisition platform.
Insurance services - Insurance services include an array of insurance services including pre-foreclosure, REO and refinance title searches, title insurance agency services, settlement and escrow services and loss draft claims processing. Prior to the fourth quarter of 2014 discontinuation, we provided insurance program management and insurance brokerage services for REO and lender placed insurance companies. Through the recent acquisition of CastleLine Holdings, LLC and its subsidiaries (“CastleLine”), we provide financial products (including insurance) and services to parties involved in the origination, underwriting, purchase and securitization of residential mortgages.
Residential property valuation services - Residential property valuation services principally include traditional appraisal products through our licensed appraisal management company and alternative valuation products, some of which are provided through our network of real estate professionals. We generally provide these services for residential loan servicers, residential lenders and investors in single family homes.
Default management services - Default management services principally include foreclosure trustee services for loan servicers and non-legal processing and related services for and under the supervision of foreclosure, bankruptcy and eviction attorneys.
Origination management services - Origination management services include products, services and solutions utilized in the origination, underwriting and purchase of primarily residential mortgages. Through the Mortgage Partnership of America, L.L.C. (“MPA”) and our Altisource Origination Services business, which provides outsourced business services to mortgage market participants, including due diligence, fulfillment, contract underwriting and quality control services, we are focused largely on the residential mortgage market. MPA serves as the manager of Best Partners Mortgage Cooperative, Inc., doing business as the Lenders One® mortgage cooperative (“Lenders One”), a national end-to-end marketplace for mortgage bankers and other mortgage market participants that provides its members with opportunities to: (i) expand revenue, (ii) reduce loan underwriting costs, (iii) increase operational efficiency and (iv) receive critical education and training. We provide other origination related services in the residential property valuation business and insurance services businesses. In September 2014, we launched Best Partners Mortgage Brokers Cooperative, Inc., doing business as the Wholesale One® Mortgage Cooperative (“Wholesale One”) for the wholesale mortgage market. Wholesale One assists mortgage brokers and other third party originators with tools to improve their businesses and obtain better access to the capital markets. In April 2015, we launched Best Partners Residential Investor Cooperative, Inc., doing business as the Residential Investor One™ cooperative (“Residential Investor One”). Residential Investor One was formed to deliver savings and efficiencies to individual and institutional residential real estate investors.
Financial Services: Provides collection and customer relationship management services primarily to debt originators and servicers (e.g., credit card, auto lending, retail credit and mortgage) and the utility, insurance and hotel industries. Within the Financial Services segment, we provide the following services:
Asset recovery management - Asset recovery management principally includes post-charge-off debt collection services on a contingency fee basis.
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Customer relationship management - Customer relationship management principally includes customer care, technical support and early stage collections services as well as insurance call center services and administrative support.
Technology Services: Provides a portfolio of software, data analytics and infrastructure management services that support the efficient and compliant management of mortgage and real estate activities and marketplace transactions across the mortgage and real estate lifecycles. We currently provide our information technology (“IT”) infrastructure management services to Ocwen, Altisource Residential Corporation (“Residential”) and Altisource Asset Management Corporation (“AAMC”) through managed services agreements, and our other segments in a shared services model. Our software and analytics solutions primarily include the following software solutions, as described briefly below:
REALServicing® - An enterprise residential mortgage loan servicing platform that offers an efficient and compliant platform for loan servicing, including loss mitigation and loan modifications. This solution spans the loan servicing lifecycle from loan boarding to satisfaction including automation for collections, borrower communications, payment processing and reporting.
REALSynergy® - A commercial real estate and multi-family loan servicing application that provides servicing and asset management capabilities.
REALResolution™ - A technology platform that provides servicers with an automated default management and home retention solution for delinquent and defaulted loans.
REALTrans® - A patented electronic services marketplace platform that automates and simplifies vendor selection and the ordering, tracking and fulfilling of vendor provided services principally related to real estate and mortgage marketplaces. This technology solution, whether accessed through the web or integrated into existing business processing applications, connects to a marketplace of services through a single platform and delivers an efficient method for managing a large scale network of vendors.
REALRemit® - A patented electronic invoicing and payment system that provides vendors with the ability to submit invoices electronically, provides payors with the ability to automatically adjudicate invoices according to compliance rules and for electronic payments to be fulfilled subject to approval review rules and workflows.
REALDoc® - An automated document management platform that consists of three primary modules: REALDoc Capture, which converts document images into processable data, indexes documents and provides customizable workflows based on data attributes; REALDoc Correspondence, which provides a scalable correspondence generation, management and delivery platform; and REALDoc Vault, which provides a scalable and distributed storage platform and secure document viewer.
REALAnalytics™ - A data analytics and delivery platform that utilizes advanced econometric modeling and behavioral economics to assist mortgage and real estate service providers in optimizing risk management, value measurement, loss mitigation and consumer behavior outcomes across the mortgage and real estate lifecycle.
Equator® - An integrated real estate management platform consisting of the following modules: EQ Workstation®, EQ Marketplace®, EQ Midsource® and EQ Portal™ that can be used separately or together as an end-to-end solution. EQ Workstation provides comprehensive, end-to-end workflow and transaction services to manage real estate and foreclosure related activities. EQ Marketplace provides a coordinated means of purchasing a variety of real estate services from vendors including real estate brokerage, title, closing, inspection and valuation. EQ Midsource allows users of EQ Workstation to outsource all or specific components of real estate related activities. EQ Portal provides realtors direct access to process real estate transactions with secure exchange of data and documents along with realtor marketing, training and certification.
Mortgage Builder® - A loan origination platform consisting of the following modules: Architect®, Surveyance®, Colonnade® and LoanXEngine™ for mortgage banks, community banks, credit unions and other financial institutions. The Architect platform is a cloud-based, all-inclusive origination platform that manages loans from prequalification through interim servicing and delivery. The Surveyance platform is a mobile origination solution that provides originators with the ability to service their clients remotely. The Colonnade platform is a loan servicing solution and the LoanXEngine platform provides customer relationship management and product pricing and eligibility solutions.
Pointillist™ - A cloud-based customer intelligence platform that empowers marketers to identify critical customer paths to purchase, upsell and satisfaction. The Pointillist marketing analytics platform is designed to reveal how consumer
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experiences drive business outcomes and delivers a better understanding of how customer behavior drives key results across channels and over time.
Corporate Items and Eliminations: Includes interest expense and costs related to corporate support functions including executive, finance, law, compliance, human resources, vendor management, risk and sales and marketing costs not allocated to the business units, and also includes eliminations of transactions between the reportable segments. Corporate Items and Eliminations also include the cost of certain facilities.
We classify revenue in three categories: service revenue, revenue from reimbursable expenses and non-controlling interests. In evaluating our performance, we focus on service revenue. Service revenue consists of amounts attributable to our fee-based services. Reimbursable expenses and non-controlling interests are pass-through items for which we earn no margin. Reimbursable expenses consist of amounts we incur on behalf of our customers in performing our fee-based services, but we pass such costs directly on to our customers without any additional markup. Non-controlling interests represent the earnings of Lenders One, Wholesale One and Residential Investor One, consolidated entities not owned by Altisource, and are included in revenue and reduced from net income to arrive at net income attributable to Altisource.
Customers
Our customers include one of the largest servicers in the United States, a government-sponsored enterprise (“GSE”), utility companies, commercial banks, servicers, investors, non-bank originators and correspondent lenders, mortgage bankers and financial services companies. During 2015, we were selected by two top 10 banks to provide services for their portfolios in addition to several other key customer additions across our businesses as well in 2015. Our largest customer, Ocwen, accounted for 60% of our total revenue for the year ended December 31, 2015.
Revenue from Ocwen primarily consists of revenue earned directly from Ocwen and revenue earned from the loans serviced by Ocwen when Ocwen designates us as the service provider. Revenue from Ocwen as a percentage of segment and consolidated revenue was as follows for the years ended December 31:
2015 | 2014 | 2013 | |||
Mortgage Services | 63% | 67% | 70% | ||
Financial Services | 21% | 27% | 30% | ||
Technology Services | 54% | 42% | 50% | ||
Consolidated revenue | 60% | 60% | 65% | ||
For the years ended December 31, 2015, 2014 and 2013, we generated revenue from Ocwen of $631.6 million, $650.7 million and $499.3 million, respectively. Services provided to Ocwen during such periods and reported in the Mortgage Services segment included real estate asset management and sales, residential property valuation, trustee management services, property inspection, property preservation and insurance services. Services provided to Ocwen and reported in the Financial Services segment included mortgage charge-off collections. Services provided to Ocwen and reported in the Technology Services segment included IT infrastructure management and software applications including our software platforms. As of December 31, 2015, accounts receivable from Ocwen totaled $38.2 million, $20.4 million of which was billed and $17.8 million of which was unbilled.
We record revenue we earn from Ocwen under service agreements at rates we believe to be comparable market rates as we believe they are consistent with the fees we charge to other customers and/or fees charged by our competitors for comparable services.
We earn additional revenue related to the portfolios serviced by Ocwen when a party other than Ocwen selects Altisource as the service provider. For the years ended December 31, 2015, 2014 and 2013, we recognized revenue of $216.9 million, $256.0 million and $161.9 million, respectively, related to the portfolios serviced by Ocwen when a party other than Ocwen selected Altisource as the service provider. These amounts are not included in deriving revenue from Ocwen as a percentage of revenue in the table above.
Our services are provided to customers primarily located in the United States. Financial information for our segments can be found in Note 25 to our consolidated financial statements.
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Sales and Marketing
We have experienced sales and marketing personnel and relationship managers with subject matter expertise. These individuals maintain relationships throughout the industry sectors we serve and play an important role in generating new client business as well as identifying opportunities to expand our services with existing clients. Additional opportunities are also generated through requests for proposal processes.
Our primary sales and marketing focus is developing new relationships and expanding existing relationships and services provided to financial institutions, residential home investors and loan originators, correspondents and brokers including members of Lenders One and Wholesale One. We are also focused on attracting customers to Owners.com and Investability.com. Given the highly diverse nature of the industries we serve, the time and effort we spend in expanding relationships or winning new relationships is significant.
Intellectual Property
We rely on a combination of contractual restrictions, internal security practices, patents, trademarks and copyrights to establish and protect our trade secrets, intellectual property, software, technology and expertise. We also own or, as necessary and appropriate, have obtained licenses from third parties to intellectual property relating to our services, processes and businesses. These intellectual property rights are important factors in the success of our businesses.
As of December 31, 2015, we have been awarded one patent that expires in 2023, four patents that expire in 2024, seven patents that expire in 2025, two patents that expire in 2026, one patent that expires in 2029 and one patent that expires in 2030. In addition, we have registered trademarks, or recently filed applications for the registration of trademarks, in a number of jurisdictions including the United States, the European Union (“EU”), India and nine other jurisdictions. These trademarks generally can be renewed indefinitely, provided they are being used in commerce.
We actively protect our rights and intend to continue our policy of taking all measures we deem reasonable and necessary to develop and protect our patents, trademarks, copyrights, trade secrets and other intellectual property rights.
Industry and Competition
The industry verticals in which we engage are highly competitive and generally consist of a few national companies as well as a large number of regional, local and in-house providers resulting in a fragmented market with disparate service offerings. Our Mortgage Services segment competes with national and regional third party service providers and in-house servicing operations of large mortgage lenders and servicers. We also compete with companies providing online real estate auction services and real estate brokerage firms. Our Financial Services segment competes with other large receivables management and customer care companies as well as a fragmented group of smaller companies and law firms focused on collections and customer care. Our Technology Services segment competes with data processing and software development companies and in-house technology and software operations of other loan servicers.
Given the diverse nature of services we and our competitors offer, we cannot determine our position in the market with certainty, but we believe we represent only a small portion of very large markets. Given our size, some of our competitors may offer more diversified services, operate in broader geographic markets or have greater financial resources than we do. In addition, some of our larger customers retain multiple providers and continuously evaluate our performance against our competitors.
Competitive factors in our Mortgage Services business include the compliance, quality and timeliness of our services, the size and competence of our network of vendors and the breadth of the services we offer. Competitive factors in our Financial Services business include the ability to achieve a collection rate comparable to our competitors; the compliance, quality, timeliness and personal nature of the service; the consistency and professionalism of the service; and the recruitment, training and retention of our workforce. Competitive factors in our Technology Services business include the quality of the technology-based applications or services; compliance; application features and functions; ease of delivery and integration; our ability to maintain, enhance and support the applications or services; our ability to recruit and retain software and other technical employees; and the cost of obtaining, maintaining and enforcing our patents.
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Employees
As of December 31, 2015, we had the following number of employees:
United States | India | Philippines | Uruguay | Luxembourg | Consolidated Altisource | |||||||||||||
Mortgage Services | 480 | 2,513 | 364 | 10 | 7 | 3,374 | ||||||||||||
Financial Services | 678 | 2,105 | 335 | — | 2 | 3,120 | ||||||||||||
Technology Services | 459 | 1,400 | 10 | — | 1 | 1,870 | ||||||||||||
Corporate | 146 | 451 | 13 | 133 | 16 | 759 | ||||||||||||
Total employees | 1,763 | 6,469 | 722 | 143 | 26 | 9,123 | ||||||||||||
We have not experienced any work stoppages and we consider our relations with employees to be good. We believe our future success will depend, in part, on our continuing ability to attract, hire and retain skilled and experienced personnel.
Seasonality
Certain of our revenues are seasonal. More specifically, Mortgage Services’ revenue is impacted by REO sales and lawn maintenance, which tend to be at their lowest levels during fall and winter months and highest during spring and summer months. Financial Services’ asset recovery management revenue tends to be higher in the first quarter, as borrowers may utilize tax refunds and bonuses to pay debts, and generally declines throughout the rest of the year.
Government Regulation
Our business and the business of our customers are subject to extensive scrutiny and regulation by federal, state and local governmental authorities including the Federal Trade Commission (“FTC”), the Consumer Financial Protection Bureau (“CFPB”), the Securities and Exchange Commission (“SEC”), the Department of Housing and Urban Development (“HUD”) and the state and local agencies that license or oversee certain of our auction, real estate brokerage, mortgage and debt collection services, trustee services and insurance services. We also must comply with a number of federal, state and local consumer protection laws including, among others, the Gramm-Leach-Bliley Act (“GLBA”), the Fair Debt Collection Practices Act (“FDCPA”), Unfair, Deceptive or Abusive Acts and Practices statutes (“UDAAP”), the Real Estate Settlement Procedures Act (“RESPA”), the Truth in Lending Act (“TILA”), the Fair Credit Reporting Act (“FCRA”), the Telephone Consumer Protection Act (“TCPA”), the Homeowners Protection Act (“HPA”), the California Homeowner Bill of Rights (“CHBR”), the Fair Housing Act and the Secure and Fair Enforcement for Mortgage Licensing (“SAFE”) Act. We are also subject to the requirements of the Foreign Corrupt Practices Act (“FCPA”) and comparable foreign laws, due to our activities in foreign jurisdictions.
Requirements can and do change as statutes and regulations are enacted, promulgated or amended. One such enacted regulation is the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The Dodd-Frank Act is extensive and includes reform of the regulation and supervision of financial institutions, as well as the regulation of derivatives, capital market activities and consumer financial services. The Dodd-Frank Act, among other things, created the CFPB, a federal entity responsible for regulating consumer financial services and products. Title XIV of the Dodd-Frank Act contains the Mortgage Reform and Anti-Predatory Lending Act (“Mortgage Act”). The Mortgage Act imposes a number of additional requirements on lenders and servicers of residential mortgage loans by amending and expanding certain existing regulations. Our failure to comply with applicable laws and regulations could subject the Company to significant penalties, fines, settlements, costs and consent orders affecting us or our customers that may curtail or restrict the business as it is currently conducted and could have an adverse effect on our financial condition or results of operations.
We are subject to licensing and regulation as a provider of certain services including, among others, services as a mortgage origination underwriter, valuation provider, appraisal management company, asset manager, property manager, title insurance agent, insurance broker and underwriter, real estate broker, auctioneer, foreclosure trustee and debt collector in a number of states. Our employees and subsidiaries may be required to be licensed by various state commissions for the particular type of service sold and to participate in regular continuing education programs. Periodically, we are subject to audits and examinations by federal, state and local governmental authorities and receive subpoenas, civil investigative demands or other requests for information from such governmental authorities in connection with their regulatory or investigative authority. We are currently responding to such inquiries from governmental authorities relating to certain aspects of our business. We believe it is premature to predict the potential outcome or to estimate any potential financial impact in connection with these inquiries.
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Available Information
We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other information with the SEC. These filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room located at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.
Our principal internet address is www.altisource.com and we encourage investors to use it as a way of easily finding information about us. We promptly make the reports we file or furnish with the SEC, corporate governance information (including our Code of Business Conduct and Ethics), select press releases and other related information available on this website. The contents of our website are available for informational purposes only and shall not be deemed incorporated by reference in this report.
ITEM 1A. | RISK FACTORS |
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. If any of the following risks actually occur, our business, results of operations and financial condition could be adversely affected.
Risks Related to Our Business and Industry
Ocwen is our largest customer and the loss of Ocwen as a customer or a reduction in the size of Ocwen could adversely affect our business and results of operations.
For the year ended December 31, 2015, we generated approximately 60% of our revenue from Ocwen. Additionally, 21% of our 2015 revenue was earned related to the portfolios serviced by Ocwen when a party other than Ocwen selected Altisource as the service provider. Ocwen purchases certain services from our Mortgage Services, Financial Services and Technology Services segments under service agreements that extend through August 2025, subject to termination under certain conditions. In addition, Ocwen purchases certain origination services from Altisource under an agreement that extends through January 2017, subject to termination under certain conditions. During the fourth quarter of 2015, Altisource recorded an estimated loss in connection with an anticipated payment to Ocwen for obtaining a release of liability for Altisource related to Ocwen’s settlement of a particular case. While currently being negotiated, the ultimate resolution of the matter is not expected to result in a material loss in excess of the amount accrued.
Ocwen has been and is subject to a number of federal and state regulatory investigations, inquiries and requests for information that have or could result in adverse regulatory actions against Ocwen. For example, as a result of various regulatory actions, Ocwen is (i) subject to an independent auditor’s review of compliance with California servicing laws and has agreed not to obtain any new servicing rights in California until the regulator is satisfied with future document requests, (ii) operating under the oversight of an on-site operations monitor imposed by the New York Department of Financial Services (“NYDFS”), which is assessing the adequacy and effectiveness of Ocwen’s operations, including IT systems, (iii) required to perform benchmarking pricing studies for transactions with related parties (as that term is set forth in Ocwen’s consent order with the NYDFS), which are subject to periodic review by the monitor imposed by the NYDFS and (iv) subject to requirements under an agreement with the CFPB and various states attorneys general and agencies that imposed specific servicing guidelines and oversight by an independent national monitor. Additionally, as Ocwen has publicly disclosed, it has reached a resolution with the staff of the SEC related to an investigation of certain matters, including Ocwen’s business dealings with related party entities, including Altisource, and its amendments to its 2013 Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014, pursuant to which it will pay a civil monetary penalty and consent to the entry of an administrative order requiring that it cease and desist from violations of certain provisions of the Securities Exchange Act of 1934. In addition to these matters, Ocwen continues to be subject to other regulatory investigations, inquiries and requests for information and pending legal proceedings, and Ocwen may become subject to future federal and state regulatory investigations, inquiries and requests for information, any of which could also result in adverse regulatory or other actions against Ocwen.
On April 6, 2015, Home Loan Servicing Solutions, Ltd. (“HLSS”) completed the sale of substantially all of its assets to New Residential Investment Corp. (“NRZ”). As a result, as of September 30, 2015, NRZ owns the rights to approximately 77% of Ocwen’s non-government-sponsored enterprise (“non-GSE”) servicing rights. In connection with the sale, Ocwen and HLSS/NRZ amended their agreement to, among other things, eliminate HLSS/NRZ’s ability to transfer servicing away from Ocwen for a servicer rating downgrade for two years (unless HLSS/NRZ determine in good faith that a trustee, or other party entitled to terminate, intends to terminate Ocwen as the servicer) and extend the term of the initial six-year agreements by up to an additional
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two years. Under the amended agreement, HLSS/NRZ has the right (not necessarily the ability) to transfer servicing away from Ocwen if, among other circumstances, Ocwen fails to maintain certain minimum servicer ratings on or after April 6, 2017. As of December 31, 2015, we believe Ocwen’s servicer ratings were below the minimum rating.
If Ocwen does not achieve the minimum required servicer ratings prior to April 6, 2017, HLSS/NRZ has the right to transfer certain of Ocwen’s servicing pursuant to its contract. Further, certain bondholders of Ocwen-serviced residential mortgage-backed securities (“RMBS”) have alleged that Ocwen, as servicer of certain mortgage-backed securities trusts, defaulted on these servicing agreements. Bondholders of RMBS may attempt to replace Ocwen as servicer as a result of such ratings downgrades or the alleged defaults.
Ocwen disclosed in its 2015 Annual Report on Form 10-K that it is facing certain challenges and uncertainties that could have significant adverse effects on its business, liquidity and financial activities.
The foregoing may have significant and varied effects on Ocwen’s business and our continuing relationships with Ocwen. For example, Ocwen may be required to alter the way it conducts business, including the parties it contracts with for services (including IT and software services), it may be required to seek changes to its existing pricing structure with us or otherwise, it may lose or sell some or all of its non-GSE servicing rights or subservicing arrangements or may lose one or more of its state servicing licenses. Additional regulatory actions may impose additional restrictions on or require changes in Ocwen’s business that would require it to sell assets or change its business operations. Any or all of these effects could result in our eventual loss of Ocwen as a customer or a reduction in the number and/or volume of services they purchase from us or the loss of other customers.
If any of the following events occurred, Altisource’s revenue would be significantly lower and our results of operations would be adversely affected, including from the impairment or write-off of goodwill, intangible assets, property and equipment, other assets and accounts receivable:
• | Altisource loses Ocwen as a customer or there is a significant reduction in the volume of services they purchase from us |
• | Ocwen loses or sells a significant portion or all of its non-GSE servicing rights or subservicing arrangements and Altisource fails to be retained as a service provider |
• | Ocwen loses state servicing licenses in states with a significant number of loans in Ocwen’s servicing portfolio and Altisource fails to be retained as a service provider |
• | The contractual relationship between Ocwen and Altisource changes significantly or there are significant changes to our pricing to Ocwen for services from which we generate material revenue |
Our continuing relationship with Ocwen may inhibit our ability to attract and retain other customers.
Given our close and continuing relationship with Ocwen and the regulatory scrutiny related to the way in which Ocwen does business with Altisource, we may encounter difficulties in attracting new customers and retaining existing customers. Should these and other potential customers view Altisource as part of Ocwen or as too closely related to or dependent upon Ocwen, they may be unwilling to utilize our services and our growth could be inhibited as a result.
We have key customer relationships, other than Ocwen, the loss of which could affect our business and results of operations.
While no individual client, other than Ocwen, represents more than 10% of our consolidated revenue, we are exposed to customer concentration. Most of our customers are not contractually obligated to continue to use our services at historical levels or at all. The loss of any of these key customers or their failure to pay us could reduce our revenue and adversely affect our results of operations.
The strength of the economy and the housing market can affect demand for our services.
The performance and growth of our origination services business is dependent on the volume of loan originations by third parties. In the event of an economic slowdown, increase in interest rates or any other factor that would likely lead to a decrease in the level of origination transactions, including refinancing transactions, our origination services growth prospects could be adversely affected. Also, in a strengthening economy and housing market, reduced delinquencies negatively impact our default business. Further, in the event that adverse economic conditions or other factors lead to a decline in levels of home ownership and a reduction in the aggregate number of United States mortgage loans outstanding, our revenues from our software applications could be adversely affected.
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Our business is subject to substantial competition.
The markets for our services are very competitive. Our competitors vary in size and in the scope and breadth of the services they offer. We compete for existing and new customers against both third parties and the in-house capabilities of our customers. Some of our competitors are more established, better known and have substantial resources, and some have widely-used technology platforms which they seek to use as a competitive advantage to drive sales of other products and services. In addition, we expect the markets in which we compete will continue to attract new competitors and new technologies. These new technologies may render our existing technologies obsolete, resulting in operating inefficiencies and increased competitive pressure. There can be no assurance we will be able to compete successfully against current or future competitors or that competitive pressures we face in the markets in which we operate will not adversely affect our business, financial condition and results of operations.
Our intellectual property rights are valuable and any inability to protect them or challenges to our right to use them could reduce the value of our services or increase our costs.
Our patents, trademarks, trade secrets, copyrights and other intellectual property rights are important assets. The efforts we have taken to protect these proprietary rights may not be sufficient or effective in every case. The unauthorized use of our intellectual property or significant impairment of our intellectual property rights could harm our business, make it more expensive to do business or hurt our ability to compete. Protecting our intellectual property rights is costly and time consuming.
Although we seek to obtain patent protection for certain of our innovations, it is possible we may not be able to protect all of the innovations for which we seek protection. Changes in patent law, such as changes in the law regarding patentable subject matter, can also impact our ability to obtain patent protection for our innovations. In addition, given the costs of obtaining patent protection, we may choose not to protect certain innovations that later turn out to be important. Furthermore, there is always the possibility, despite our efforts, that the scope of the protection gained will be insufficient or an issued patent may be deemed invalid or unenforceable.
Further, as our technology solutions and services develop, we may become increasingly subject to infringement claims by others. Any claims, whether with or without merit, could:
• | be expensive and time-consuming to defend; |
• | cause us to cease making, licensing or using technology solutions that incorporate the challenged intellectual property; |
• | require us to redesign our technology solutions, if feasible; |
• | divert management’s attention and resources; and/or |
• | require us to enter into royalty or licensing agreements in order to obtain the right to use necessary technologies. |
Technology failures, defects or inadequacies, development delays or installation difficulties, security breaches, acts of vandalism or the introduction of harmful code could damage our business operations and increase our costs.
Disruptions, failures, defects or inadequacies in our technology or software we purchase from third parties, delays in the development of, or installation difficulties with, our technology, or security breaches, acts of vandalism, system attacks or the introduction of malicious code to our technology, may interrupt or delay our ability to provide services to our customers. Any sustained and repeated disruptions in these services may have an adverse impact on our and our customers’ results of operations. Further, Ocwen or other of our customers may require changes and improvements to the systems we provide to them to manage the volume and complexity of their businesses, which changes and improvements may be costly and time consuming to implement and may create disruptions in our provision of services to customers, which may have an adverse impact on our business operations and financial condition, and increase our costs. Additionally, the improper implementation or use of Altisource technology by customers could impact the operation of that technology, and potentially cause harm to our reputation, loss of customers, negative publicity or exposure to liability claims.
The Company’s databases containing proprietary information and personal information of our customers, vendors and employees could be breached, which could subject us to adverse publicity, costly government enforcement actions or private litigation and expenses.
As part of our business and operation of our technology, we maintain proprietary information in tangible and electronic forms and electronically receive, process, store and transmit personally identifiable information (“PII”) and confidential and sensitive business information of our customers, vendors and employees. We rely on the security of our facilities, networks, databases, systems and processes and, in certain circumstances, those of third parties, such as vendors, to protect our proprietary information and PII in our possession and information about our customers, vendors and employees. Hackers, criminals and others are constantly devising
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schemes to circumvent security safeguards and other large companies have suffered serious data security breaches. If unauthorized parties gain access to our networks or databases, or those of our vendors, they may be able to steal, publish, delete, or modify our sensitive proprietary information and sensitive third party information, including PII. In addition, employees may intentionally or inadvertently cause data or security breaches that result in unauthorized release of such PII, proprietary or confidential information. In such circumstances, our business could suffer and we could be held liable to our customers, vendors, other parties or employees, as well as be subject to notification requirements or regulatory or other actions for breaching privacy laws or failing to adequately protect such information. This could result in costly investigations and litigation, civil or criminal penalties, large scale remediation requirements, operational changes or other response measures, significant penalties, fines, settlements, costs, consent orders, loss of consumer confidence in our security measures and negative publicity that could adversely affect our financial condition, results of operations and reputation. Furthermore, new laws or regulations could be implemented limiting our use of data or imposing new liabilities for data breaches that could have an adverse effect on us and our results of operations.
We have long development and sales cycles for many of our services, analytics and technology solutions and if we fail to close sales after expending significant time and resources to do so, our business, financial condition and results of operations may be adversely affected.
We have long development and sales cycles for many of our services, analytics and technology solutions. We may expend significant time and resources in pursuing a particular service, technology solution or customer that does not generate revenue. We may encounter delays when developing new services or technology solutions. We may experience difficulties in installing or integrating our technologies on platforms used by our customers. Further, defects in our technology solutions, errors or delays in the processing of electronic transactions or other difficulties could result in interruption of business operations, delay in market acceptance, additional development and remediation costs, loss of customers, negative publicity or exposure to liability claims.
Delays due to the length of our sales cycle or costs incurred that do not result in sales could have an adverse effect on our business, financial condition or results of operations.
The failure of any of the insurance underwriting loss limitation methods we use could have adverse effects on our results.
Altisource, through its subsidiary Association of Certified Mortgage Originators Risk Retention Group, Inc., provides certified loan insurance to CastleLine customers. Altisource reduces a portion of its insurance loss risk through third party reinsurance. The incidence and severity of claims against insurance policies are inherently unpredictable. Although we attempt to manage our exposure to insurance underwriting risk through the use of disciplined underwriting controls and the purchase of third party reinsurance, the frequency and severity of claims could be greater than contemplated in our pricing and risk management methods.
We also face counterparty risk when purchasing reinsurance from third party reinsurers. The insolvency or unwillingness of any of our present or future reinsurers to make timely payments to us under the terms of our reinsurance agreements could have an adverse effect on us. Further, there is no certainty that we will be able to purchase the reinsurance we desire in the future or the reinsurance we desire may not be on terms we consider acceptable or with reinsurers with whom we want to do business.
Our business and the business of our customers are subject to extensive scrutiny and regulation, and failure to comply with existing or new regulations may adversely impact us.
Our business and the business of our customers are subject to extensive scrutiny and regulation by federal, state and local governmental authorities including the FTC, the CFPB, the SEC, the HUD and the state and local agencies that license or oversee certain of our auction, real estate brokerage, mortgage and debt collection services, trustee services and insurance services. We also must comply with a number of federal, state and local consumer protection laws including, among others, the GLBA, the FDCPA, UDAAP, RESPA, TILA, the FCRA, the TCPA, the HPA, the CHBR, the Fair Housing Act, the SAFE Act, the Mortgage Act, the FCPA and the Dodd-Frank Act. These requirements can and do change as statutes and regulations are enacted, promulgated or amended. We are also subject to licensing and regulation as a provider of certain services including, among others, services as a mortgage origination underwriter, valuation provider, appraisal management company, asset manager, property manager, title insurance agent, insurance broker and underwriter, real estate broker, auctioneer, foreclosure trustee and debt collector in a number of states. Our employees and subsidiaries may be required to be licensed by various state commissions for the particular type of service sold and to participate in regular continuing education programs. We incur significant ongoing costs to comply with licensing requirements and governmental regulations and to respond to government and regulatory confidential inquiries, audits, regulatory examinations and other similar matters.
Participants in the industries in which we operate are subject to a high level of government and regulatory scrutiny. This scrutiny has included review by federal and state governmental authorities of all aspects of the mortgage servicing and lending industries and the debt collection industry, including an increased legislative and regulatory focus on consumer protection practices. Our
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failure to comply with applicable laws and regulations could subject the Company to significant penalties, fines, settlements, costs and consent orders against us or our customers that may curtail or restrict our business as it is currently conducted and could have an adverse effect on our financial condition or result of operations. If governmental authorities continue to impose new or more restrictive requirements, we may incur significant additional costs to comply with such requirements which could further adversely affect our results of operations or financial condition. In addition, our failure to comply with these laws and regulations can possibly lead to civil and criminal liability, loss of licensure, damage to our reputation in the industry, significant penalties, fines, settlements, costs, consent orders and litigation, including class action lawsuits or administrative enforcement actions. Any of these outcomes could have an adverse effect on our financial condition or results of operations. Furthermore, even if we believe we complied with such laws and regulations, we may choose to settle enforcement actions or lawsuits in order to avoid the potentially significant costs of defending such actions or lawsuits and to further avoid the risk of increased damages if we ultimately were to receive an unfavorable outcome.
Periodically, we are subject to audits and examinations by federal, state and local governmental authorities and receive subpoenas, civil investigative demands or other requests for information from such governmental authorities in connection with their regulatory or investigative authority. We are currently responding to such inquiries from governmental authorities relating to certain aspects of our business. Responding to such audits, examinations and inquiries will cause us to incur costs, including legal fees or other charges, which may be material in amount. If any such audits, examinations or inquiries result in allegations of noncompliance, we could incur significant penalties, fines, settlements, costs and consent orders that may curtail, restrict or otherwise have an adverse effect on our business and results of operations. Furthermore, even if we believe we complied with applicable laws and regulations, we may choose to settle such allegations with the governmental authorities in order to avoid the potentially significant costs of defending such allegations and to further avoid the risk of increased damages if we ultimately were to receive an unfavorable outcome.
National servicing standards and federal and state government scrutiny and regulation and other requirements require very specific loan modification and foreclosure procedures that have further reduced the number of loans entering the foreclosure process and have negatively impacted our default services revenue and profit. It is unclear when or if volumes will increase in the future.
Our customers are subject to government regulation, requiring our customers to, among other things, oversee their vendors and maintain documentation that demonstrates their oversight. If our performance does not meet such requirements, our results of operations could be adversely affected.
Our customers are subject to a variety of federal, state and local government regulations, including those promulgated by the CFPB. Certain regulations require our customers to oversee their vendors and document the procedures performed to demonstrate that oversight. Altisource, as a vendor, is subject to oversight by our customers. If we do not meet the standards established by our customers or if any other oversight procedures result in a negative outcome for Altisource, we may lose customers or may no longer be granted referrals for certain services, negatively impacting our business and results of operations. Even if Altisource satisfies its contractual obligations to its clients, regulators may allege that products or services provided by Altisource fail to meet applicable regulatory requirements.
We rely on third party vendors for many aspects of our business. If our vendor oversight activities are ineffective, we fail to meet customer or regulatory requirements or we face difficulties managing our relationships with third party vendors, our results of operations could be adversely affected.
We rely on third party vendors to provide goods and services in relation to many aspects of our operations. Our dependence on these vendors makes our operations vulnerable to such third parties’ failure to perform adequately under our agreements with them. In addition, where a vendor provides services that we are required to provide under a contract with a client, we are generally responsible for such performance and could be held accountable by the client for any failure of performance by our vendors. We evaluate the competency and solvency of our key third party vendors. We perform ongoing vendor oversight activities to identify any performance or other issues related to these vendors. If our vendor oversight activities are ineffective or if a vendor fails to provide the services that we require or expect, or fails to meet contractual requirements, such as service levels or compliance with applicable laws, the failure could negatively impact our business by adversely affecting our ability to serve our customers and/or subjecting us to litigation and regulatory risk for ineffective vendor oversight. In addition, Altisource may be required by its customers or by applicable regulations to oversee its vendors and document procedures performed to demonstrate that oversight. If we fail to meet such customer or regulatory requirements, or we face difficulties managing our relationships with third party vendors, we may lose customers or may no longer be granted referrals for certain services or could be subject to adverse regulatory action, negatively impacting our business and results of operations. Such failures could adversely affect the reliability and quality of the services we provide our customers and could adversely affect our results of operations.
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If financial institutions at which we hold cash and cash equivalents as well as escrow and trust funds fail, it could have an adverse impact on our Company.
We hold our cash and cash equivalents at various financial institutions. In addition, we hold customers’ assets in escrow and trust accounts at various financial institutions pending completion of certain real estate activities. We also hold cash in trust accounts at various financial institutions where contractual obligations mandate maintaining dedicated bank accounts. These amounts are held in escrow and trust accounts for limited periods of time and are not included in the accompanying consolidated balance sheets. We may become liable for funds owed to third parties as a result of the failure of one or more of these financial institutions, in addition to loss of our cash and cash equivalents, and there is no guarantee we would recover the funds deposited, whether through Federal Deposit Insurance Corporation coverage, private insurance or otherwise.
We may be subject to claims of legal violations or wrongful conduct which may cause us to pay unexpected litigation costs, damages or indemnifications, or modify our products or processes.
From time to time, we may be subject to costly and time-consuming legal proceedings that claim legal violations or wrongful conduct. These lawsuits may involve clients, our clients’ customers, vendors, competitors and/or other large groups of plaintiffs and, if resulting in findings of violations, could result in substantial damages or indemnification obligations. Additionally, we may be forced to settle some claims out of court and change existing company practices, services and processes that are currently revenue generating. This could lead to unexpected costs or a loss of revenue.
Our debt makes us more sensitive to the effects of economic change; our level of debt and provisions in our debt agreements could limit our ability to react to changes in the economy or our industry.
Our debt makes us more vulnerable to changes in our results of operations because a portion of our cash flows from operations is dedicated to servicing our debt and is not available for other purposes. Our debt is secured by virtually all of our assets and from time to time trades at a substantial discount to face value. Our ability to raise additional debt is largely limited and in many circumstances would be subject to lender approval and would require modification of our current debt agreements. Additionally, increases in interest rates will negatively impact our cash flows as the interest rate on our debt is variable. The provisions of our debt agreement could have other negative consequences to us including the following:
• | limiting our ability to borrow money for our working capital, capital expenditures, debt service requirements or other general corporate purposes; |
• | limiting our flexibility in planning for, or reacting to, changes in our operations, our business or the industry in which we compete; |
• | requiring us to use a portion of our excess cash flow, as defined in the debt agreement, to repay debt in the event our debt to EBITDA ratios, as defined in the debt agreement, exceed certain thresholds; and |
• | placing us at a competitive disadvantage by limiting our ability to invest in the business. |
Our ability to make payments on our indebtedness depends, in part, on our ability to generate cash in the future. If we do not generate sufficient cash flows and do not have sufficient cash on hand to meet our debt service and working capital requirements, we may need to seek additional financing, raise equity or sell assets. This may make it more difficult for us to obtain financing on terms that are acceptable to us, or at all. Without any such financing or equity issuance, we could be forced to sell assets to make up for any shortfall in our payment obligations under unfavorable circumstances. If necessary, we may not be able to sell assets quickly enough or for sufficient amounts to enable us to meet our obligations.
In addition, our debt agreement contains covenants that limit our flexibility in planning for, or reacting to changes in, our business and our industry, including limitations on incurring additional indebtedness, making investments, granting liens and merging or consolidating with other companies. Complying with these covenants may impair our ability to finance our future operations or capital needs or to engage in other favorable business activities.
Our failure to comply with the covenants contained in our debt agreement, including as a result of events beyond our control, could result in an event of default which could adversely affect our operating results and our financial condition.
Our debt agreement requires us to comply with various operational, reporting and other covenants that limit us from engaging in certain types of transactions. If there were an event of default under our debt agreement that was not cured or waived, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be immediately due and payable. We cannot assure you that our assets or cash flows would be sufficient to fully repay borrowings under our outstanding debt instruments,
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either upon maturity or if accelerated, upon an event of default or that we would be able to refinance or restructure the payments on those debt instruments.
Our failure to maintain certain debt to EBITDA ratios contained in our debt agreement could result in required payments to the lenders of a percentage of our excess cash flows, which could adversely affect our ability to use our excess cash flows for other purposes.
Our debt agreement requires us to distribute to our lenders 50% of our consolidated excess cash flows, as defined in the debt agreement, if our net debt to EBITDA ratio, as defined in the debt agreement, exceeds 3.50 to 1.00 and 25% of our consolidated excess cash flows if our net debt to EBITDA ratio is 3.50 to 1.00 or less, but greater than 3.00 to 1.00. If we were required to distribute a portion of our excess cash flows to our lenders, we may be limited in our ability to grow our business through acquisitions or investments in technology and we may be limited in our ability to repurchase our common stock. We cannot assure you that we will maintain debt to EBITDA ratios at levels that will not require us to distribute a portion of our excess cash flows to lenders.
In preparing our fiscal 2015 financial statements, management identified a material weakness in our internal control over financial reporting related to the review of impairment indicators of long-lived assets, including premises and equipment and intangible assets, and the impairment analysis of indefinite-lived assets, primarily goodwill. If we fail to maintain proper and effective internal controls, our ability to prepare accurate and timely financial statements could be impaired, which could adversely affect investor confidence in our reported financial information.
As described under Part II. Item 9A. “Controls and Procedures” of this Annual Report, management determined that the Company has a material weakness in its internal controls over financial reporting related to the review of impairment indicators of long-lived assets, including premises and equipment and intangible assets, and the impairment analysis of indefinite-lived assets, primarily goodwill. A material weakness is a deficiency, or combination of deficiencies in internal controls over financial reporting that results in a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. While the Company is developing a remediation plan, the material weakness will not be considered remediated until improvements have been fully implemented and have operated effectively for an adequate period of time. We cannot assure you that our efforts to fully remediate this internal control weakness will be successful or that similar material weaknesses will not recur.
In addition, we may in the future discover additional areas of our internal controls that need improvement. We cannot be certain that we will be successful in implementing or maintaining adequate internal control over our financial reporting and financial processes. Additionally, the existence of any additional material weaknesses could require management to devote significant time and incur significant expense to remediate any such material weakness, and management may not be able to remediate any such material weakness in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause stockholders to lose confidence in our reported financial information, all of which could materially and adversely affect us.
The existence of material weaknesses in our internal control over financial reporting may affect our ability to timely file periodic reports under the Securities Exchange Act of 1934. The inability to timely file periodic reports would constitute a failure to comply with the listing requirements of the NASDAQ Global Select Market, which could result in the delisting of our common stock or could result in the SEC revoking the registration of our common stock, which would prevent us from listing or having our stock quoted on the NASDAQ Global Select Market or any other United States stock exchange. This could have an adverse effect on our business and stock price by limiting access to publicly available information regarding us and greatly reducing the ability of our stockholders to sell or trade our common stock.
Risks Related to our Growth Strategy
Our ability to grow is affected by our ability to execute on our strategic initiatives, retain and expand our existing client relationships and our ability to attract new customers.
Our ability to retain existing customers and expand those relationships and attract new customers is subject to a number of risks including the risk that we do not:
• | execute on our strategic initiatives; |
• | maintain or improve the quality and compliance of services we provide to our customers; |
• | meet or exceed the expectations of our customers; |
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• | successfully leverage our existing client relationships to sell additional services; and |
• | attract new customers. |
If our efforts to execute on our strategic initiatives, retain and expand our client relationships and attract new customers do not prove effective, it could have an adverse effect on our business and results of operations and our ability to grow our operations.
Our ability to expand existing relationships and attract new customers is also affected by broader economic factors and the strength of the overall housing market, which can reduce demand for our services and increase competition for each customer’s business. See “The strength of the economy and the housing market can affect demand for our services.”
If we do not adapt our services to changes in technology or in the marketplace, changing requirements of governmental authorities, or if our ongoing efforts to upgrade our technology and particularly our efforts to complete development of our technology are not successful, we could lose customers and have difficulty attracting new customers for our services, which could have an adverse effect on our business and results of operations.
The markets for our services are characterized by constant technological change, our customers’ frequent introduction of new services and evolving industry standards and government regulation. We are currently in the process of, and from time to time will be, developing and introducing new technologies and improvements to existing technologies. Our future success will be significantly affected by our ability to complete our current efforts and in the future enhance, primarily through use of automation, econometrics and behavioral science principles, our services and develop and introduce new services that address the increasingly sophisticated needs of our customers and their customers. These initiatives carry the risks associated with any new service development effort, including cost overruns, delays in delivery and performance effectiveness. There can be no assurance that we will be successful in developing, marketing and selling new and improved technologies and services. In addition, we may experience difficulties that could delay or prevent the successful development, introduction and marketing of these services. Finally, our services and their enhancements may not adequately meet the demands of the marketplace or governmental authorities and achieve market acceptance. Any of these results could have a negative impact on our financial condition and results of operations and our ability to grow our operations.
Our technology services are provided at the direction and pursuant to the identified requirements of our customers. The failure of our customers to properly identify or account for regulatory requirements applicable to such technology services could expose us to significant penalties, fines, settlements, costs and consent orders that could have an adverse effect on our financial condition or results of operations.
Our growth objectives are dependent on the timing and market acceptance of our new service offerings.
Our ability to grow may be adversely affected by difficulties or delays in service development or the inability to gain market acceptance of new services to existing and new customers. There are no guarantees that new services will prove to be commercially successful.
Some of our businesses are dependent on the trend toward outsourcing.
Our continued growth at historical rates for some of our businesses is dependent on the industry trend toward outsourced services. There can be no assurance this trend will continue as organizations may elect to perform such services themselves or may be prevented from outsourcing services. A significant change in this trend could have an adverse effect on our continued growth.
Acquisitions to accelerate growth initiatives involve potential risks.
During 2015, we acquired CastleLine and the Acquired RentRange and Investability Businesses. During 2014, we acquired certain assets and assumed certain liabilities of Mortgage Builder Software, Inc. (“Mortgage Builder”) and acquired certain assets and assumed certain liabilities of Owners Advantage, LLC (“Owners”). During 2013, we acquired fee-based businesses from Ocwen and acquired Equator, LLC (“Equator”).
When we acquire new businesses, we may face a number of integration risks, including a loss of focus on our daily operations, the need for additional management, constraints on operating resources, constraints on financial resources from integration and system conversion costs and the inability to maintain key pre-acquisition relationships with customers, suppliers and employees. In addition, any acquisition may result in the incurrence of additional amortization expense of related intangible assets, which could reduce our profitability.
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In the future, we may consider acquisitions of other businesses that could complement our business, offer us greater access in our current markets or offer us greater access and expertise in other asset types and markets that are related to ours but we do not currently serve. Our ability to pursue additional acquisitions in the future is dependent on our access to sufficient capital (equity and/or debt) to fund the acquisition and subsequent integration. We may not be able to secure adequate capital as needed on terms that are acceptable to us, or at all, and our ability to secure such capital through debt financing is limited by our current debt agreements. Our failure to effectively pursue or integrate acquisitions, and such acquisitions themselves, may have an adverse effect on our financial condition or results of operations.
Risks Related to International Business
Our international operations subject us to additional risks which could have an adverse effect on our results of operations.
We have reduced our operating expenses by utilizing lower cost labor in foreign countries such as India, the Philippines and Uruguay. As of December 31, 2015, 7,334 of our employees were based in India, the Philippines and Uruguay. These countries are subject to relatively higher degrees of political and social instability and may lack the infrastructure to withstand political unrest or natural disasters. The occurrence of natural disasters or political or economic instability in these countries could interfere with work performed by these labor sources, or could result in our having to replace or reduce these labor sources. Such disruptions could decrease efficiency, increase our costs and have an adverse effect on our financial condition or results of operations. Furthermore, the practice of utilizing labor based in foreign countries has come under increased scrutiny in the United States and, as a result, some of our customers may require us to use labor based in the United States. We may not be able to pass on the increased costs of higher-priced United States-based labor to our customers, which ultimately could have an adverse effect on our results of operations.
The FCPA and other applicable anti-corruption laws and regulations prohibit certain types of payments by our employees, vendors and agents. Any violation of the applicable anti-corruption laws or regulations by us, our subsidiaries or our local agents, could expose us to significant penalties, fines, settlements, costs and consent orders that may curtail or restrict our business as it is currently conducted and could have an adverse effect on our financial condition or results of operations.
Weakness of the United States dollar in relation to the currencies used in these foreign countries may also reduce the savings achievable through this strategy and could have an adverse effect on our financial condition or our results of operations.
Altisource is a Luxembourg company and it may be difficult to obtain and enforce judgments against it or its directors and executive officers.
Altisource is a public limited liability company organized under the laws of, and headquartered in, Luxembourg. As a result, Luxembourg law and the articles of incorporation govern the rights of shareholders. The rights of shareholders under Luxembourg law may differ from the rights of shareholders of companies incorporated in other jurisdictions. A significant portion of the assets of Altisource are owned outside of the United States. It may be difficult for investors to obtain and enforce, in the United States, judgments obtained in United States courts against Altisource or its directors based on the civil liability provisions of the United States securities laws or to enforce, in Luxembourg, judgments obtained in other jurisdictions including the United States.
A significant change of the Luxembourg tax regime or of its interpretation by the Luxembourg tax authorities or others could adversely affect our results of operations.
Altisource has a lower effective tax rate than some of its competitors. The Company received a tax ruling from the Luxembourg tax authority, which expires in 2019 unless extended or renewed. It is possible that changes in Luxembourg’s administrative taxation practices or applicable regulations may cause an increase in our effective tax rate. In addition, the European Commission (“EC”) has initiated investigations into several EU member states, including Luxembourg, to determine whether these EU member states have provided tax advantages to companies on a basis not allowed by the EU. While the EC’s investigations continue, it has concluded that certain companies in certain EU member states, including Luxembourg, have been provided such tax advantages. The EC is requiring these EU member states to recover from certain companies the prior year tax benefits they received. These EU member states have the ability to appeal the decision. Changes in the manner in which we are taxed or a challenge in the manner in which we have been taxed could have an adverse effect on our financial condition and results of operations.
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Risks Related to Our Employees
Our success depends on our directors, executive officers and key personnel.
Our success is dependent on the efforts and abilities of our directors, executive officers and other key employees, many of whom have significant experience in the real estate and mortgage, financial services and technology industries. In particular, we are dependent on the services of our Board of Directors and key executives at our corporate headquarters and personnel at each of our segments. The loss of the services of any of these directors, executives or key personnel, for any reason, could have an adverse effect upon our business, financial condition and results of operations.
Our inability to attract and retain skilled employees may adversely impact our business.
Our business is labor intensive and places significant importance on our ability to recruit, train and retain skilled employees. Additionally, demand for qualified technical and software professionals conversant in certain technologies may exceed supply as new and additional skills are required to keep pace with evolving computer technology. Our ability to locate and train employees is critical to achieving our growth objective. Our inability to attract and retain skilled employees or an increase in wages or other costs of attracting, training or retaining skilled employees could have an adverse effect on our business, financial condition and results of operations.
Risks Related to Our Relationships
We could have conflicts of interest with Ocwen, Residential, AAMC and certain members of our management, which may be resolved in a manner adverse to us.
We have significant business relationships with and provide services to Ocwen and Residential. We also provide certain services to AAMC. Our largest shareholder, William C. Erbey, owns or controls common stock in each of Altisource, Ocwen, Residential and AAMC, Residential’s external manager. As of December 31, 2015, Mr. Erbey owned or controlled approximately 31% of the common stock of Altisource, approximately 14% of the common stock of Ocwen, approximately 4% of the common stock of Residential and approximately 31% of the common stock of AAMC. Certain members of our management have equity interests in Ocwen, Residential and/or AAMC. Each of the independent members of our Board of Directors also has immaterial equity interests in Residential and/or AAMC as a result of the distribution of shares of these companies to our shareholders at the time of their separation from Altisource. Such ownership interests could create, or appear to create, potential conflicts of interest with respect to matters potentially or actually involving or affecting us and Ocwen, Residential and AAMC, as the case may be.
We believe we are able to manage potential conflicts with respect to our dealings with Ocwen, Residential and AAMC through our policies, procedures and practices, including through a management review process of the terms of transactions with these companies and through review, approval and oversight of such transactions by our independent directors (independent directors constitute a majority of our Board of Directors and our current Chairman is an independent director). There can be no assurance that such measures will be effective, that we will be able to manage or resolve all potential conflicts with these companies, and, even if we do, that the resolution will be no less favorable to us than if we were dealing with a third party that has none of the connections we have with these companies.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
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ITEM 2. PROPERTIES
Our principal executive offices are located in leased office space in Luxembourg, Grand Duchy of Luxembourg. A summary of our principal leased office space as of December 31, 2015 and the segments primarily occupying each location is as follows:
Mortgage Services | Financial Services | Technology Services | Corporate and Support Services | |||||
Luxembourg | X | X | X | X | ||||
United States | ||||||||
Atlanta, GA | X | X | X | X | ||||
Boston, MA | X | X | ||||||
Coppell, TX | X | |||||||
Endicott, NY | X | |||||||
Fort Washington, PA | X | |||||||
Irvine, CA | X | |||||||
Los Angeles, CA | X | |||||||
Plano, TX | X | |||||||
Sacramento, CA | X | |||||||
Southfield, MI | X | |||||||
St. Louis, MO | X | |||||||
Tempe, AZ | X | |||||||
Montevideo, Uruguay | X | X | ||||||
Pasay City, Philippines | X | X | X | |||||
India | ||||||||
Bangalore | X | X | X | X | ||||
Mumbai | X | X | X | X | ||||
We do not own any real property. We consider these facilities to be suitable and currently adequate for the management and operations of our businesses.
ITEM 3. | LEGAL PROCEEDINGS |
From time to time, we are involved in legal and administrative proceedings arising in the course of our business. We record a liability for these matters if an unfavorable outcome is probable and the amount of loss can be reasonably estimated, including expected insurance coverage. For proceedings where the reasonable estimate of loss is a range, we record a best estimate of loss within the range.
On September 8, 2014, the West Palm Beach Firefighters’ Pension Fund filed a putative securities class action suit against Altisource Portfolio Solutions S.A. and certain of its current or former officers and directors in the United States District Court for the Southern District of Florida alleging violations of the Securities Exchange Act of 1934 and Rule 10b-5 with regard to disclosures concerning pricing and transactions with related parties that allegedly inflated Altisource Portfolio Solutions S.A. share prices. The Court subsequently appointed the Pension Fund for the International Union of Painters and Allied Trades District Council 35 and the Annuity Fund for the International Union of Painters and Allied Trades District Council 35 as Lead Plaintiffs. On January 30, 2015, Lead Plaintiffs filed an amended class action complaint which added Ocwen Financial Corporation as a defendant, and seeks a determination that the action may be maintained as a class action on behalf of purchasers of Altisource Portfolio Solutions S.A. securities between April 25, 2013 and December 21, 2014 and an unspecified amount of damages. Altisource Portfolio Solutions S.A. moved to dismiss the suit on March 23, 2015. On September 4, 2015, the Court granted the defendants’ motion to dismiss, finding that the Lead Plaintiffs’ amended complaint failed to state a claim as to any of the defendants, but permitting the Lead Plaintiffs to file another amended complaint. Lead Plaintiffs subsequently filed second and third amended complaints with substantially similar claims and theories. Altisource Portfolio Solutions S.A. moved to dismiss the third amended complaint on October 22, 2015. On December 22, 2015, the Court issued an order dismissing with prejudice all claims against Ocwen Financial Corporation and certain claims against Altisource Portfolio Solutions S.A. and the officer and director defendants, but denying the motion to dismiss as to other claims. Altisource Portfolio Solutions S.A. intends to continue to vigorously defend this suit.
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On February 11, 2015, W.A. Sokolowski, an alleged shareholder of Ocwen Financial Corporation, filed an amended shareholder derivative complaint in the United States District Court for the Southern District of Florida against Ocwen Financial Corporation (as a nominal defendant), certain of its current or former officers and directors, Altisource Portfolio Solutions S.A. and other companies. The suit seeks recovery of an unspecified amount of damages for alleged breaches of fiduciary duty by Ocwen Financial Corporation’s officers and directors, which were allegedly aided and abetted by Altisource Portfolio Solutions S.A. and other defendants. Altisource Portfolio Solutions S.A. filed a motion to dismiss the complaint on November 9, 2015. While that motion was pending, additional lawsuits alleging similar claims for alleged breaches of fiduciary duty by current or former Ocwen Financial Corporation’s officers and directors were filed in or transferred to the Court. The Court subsequently consolidated these actions and denied Altisource Portfolio Solutions S.A.’s motion to dismiss the Sokolowski complaint without prejudice to re-file following appointment of lead counsel for the consolidated action and the filing or designation of an operative complaint. Altisource Portfolio Solutions S.A. intends to vigorously defend the lawsuit and to move to dismiss all claims against it.
On March 26, 2015, Robert Moncavage, an alleged shareholder of Ocwen Financial Corporation, filed an amended shareholder derivative complaint in the Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida against Ocwen Financial Corporation, certain of its current or former officers and directors, Altisource Portfolio Solutions S.A. and other companies. The suit seeks recovery of an unspecified amount of damages for alleged breaches of fiduciary duty by the current or former Ocwen Financial Corporation’s officers and directors, which were allegedly aided and abetted by Altisource Portfolio Solutions S.A. and other defendants. On November 9, 2015, the Court entered an order staying all proceedings in the case pending further order of the Court. If the litigation proceeds, Altisource Portfolio Solutions S.A. intends to vigorously defend the lawsuit and to move to dismiss all claims against it.
Altisource is unable to predict the outcomes of these lawsuits or reasonably estimate the potential loss, if any, arising from the suits, given the forthcoming motions to dismiss in the second and third cases have not yet been adjudicated, a stay has been entered in the third case, discovery has not occurred in any of the cases and significant legal and factual issues remain to be determined in all three cases.
In addition to the matters referenced above, we are involved in legal actions in the course of our business, some of which seek monetary damages. We do not believe that the outcome of these proceedings, both individually and in the aggregate, will have a material impact on our financial condition, results of operations or cash flows.
Our businesses are also subject to extensive regulation which may result in regulatory proceedings or actions against us. For further information, see Item 1A of Part I, “Risk Factors” above and Note 24 to the consolidated financial statements.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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PART II — OTHER INFORMATION
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
Our common stock is listed on the NASDAQ Global Select Market under the symbol “ASPS.” The following table sets forth the high and low close of day sales prices for our common stock, for the periods indicated, as reported by the NASDAQ Global Select Market:
2015 | ||||||||
Quarter ended | Low | High | ||||||
March 31 | $ | 12.48 | $ | 34.17 | ||||
June 30 | 13.26 | 32.15 | ||||||
September 30 | 23.33 | 39.54 | ||||||
December 31 | 22.93 | 33.08 | ||||||
2014 | ||||||||
Quarter ended | Low | High | ||||||
March 31 | $ | 98.38 | $ | 164.48 | ||||
June 30 | 95.36 | 125.84 | ||||||
September 30 | 83.98 | 119.95 | ||||||
December 31 | 29.44 | 101.99 | ||||||
The number of holders of record of our common stock as of February 22, 2016 was 69. The number of beneficial shareholders is substantially greater than the number of holders as a large portion of our common stock is held through brokerage firms.
Dividends
We have never declared or paid cash dividends on our common stock and we do not anticipate paying cash dividends in the foreseeable future. The provisions of our senior secured term loan agreement, as amended, limit, among other things, our ability to pay dividends. Luxembourg law also limits our ability to pay dividends, including statutory reporting requirements and dividend amount limitations based on annual net income and net income carried forward, less any amounts placed in reserve.
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Stock Performance Graph
The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return on the S&P 500 Index and the NASDAQ Composite Index for the five year period ending on December 31, 2015. The graph assumes an investment of $100 at the beginning of this period and does not include the effects of the post-distribution values of Residential and AAMC, which were distributed to Altisource shareholders in December 2012. The comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock.
12/31/10 | 6/30/11 | 12/31/11 | 6/30/12 | 12/31/12 | 6/30/13 | 12/31/13 | 6/30/14 | 12/31/14 | 06/30/15 | 12/31/15 | ||||||||||||||||||||||||||||||||||
Altisource | $ | 100.00 | $ | 128.18 | $ | 174.78 | $ | 255.07 | $ | 301.81 | $ | 328.46 | $ | 552.53 | $ | 399.09 | $ | 117.69 | $ | 107.24 | $ | 96.87 | ||||||||||||||||||||||
S&P 500 Index | 100.00 | 105.01 | 100.00 | 108.31 | 113.40 | 127.72 | 146.97 | 155.87 | 163.71 | 164.05 | 162.52 | |||||||||||||||||||||||||||||||||
NASDAQ Composite Index | 100.00 | 104.55 | 98.20 | 110.64 | 113.82 | 128.29 | 157.44 | 166.17 | 178.53 | 187.98 | 188.75 | |||||||||||||||||||||||||||||||||
Securities Authorized for Issuance under Equity Compensation Plans
The information required by this item is incorporated herein by reference to our definitive proxy statement in connection with our 2016 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.
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Issuer Purchases of Equity Securities
On May 20, 2015, our shareholders approved a new share repurchase program, which replaced the previous share repurchase program. Under the new program, we are authorized to purchase up to 3.0 million shares of our common stock, based on a limit of 15% of the outstanding shares of common stock on the date of approval at a minimum price of $1.00 per share and a maximum price of $500.00 per share. This is in addition to amounts previously purchased under prior programs. Under the existing and prior programs, we purchased 2.1 million shares of common stock at an average price of $27.60 per share during the year ended December 31, 2015, 2.5 million shares at an average price of $103.67 per share during the year ended December 31, 2014 and 1.2 million shares at an average price of $116.99 per share during the year ended December 31, 2013. As of December 31, 2015, approximately 1.4 million shares of common stock remain available for repurchase under the new program. Our senior secured term loan limits the amount we can spend on share repurchases and may prevent repurchases in certain circumstances. As of December 31, 2015, approximately $360 million was available to repurchase shares of our common stock under our senior secured term loan.
The following table presents information related to the repurchases of our equity securities during the three months ended December 31, 2015:
Period | Total number of shares purchased(1) | Weighted average price paid per share | Total number of shares purchased as part of publicly announced plans or programs(2) | Maximum number of shares that may yet be purchased under the plans or programs(2) | |||||||||
Common stock: | |||||||||||||
October 1 — 31, 2015 | — | $ | — | — | 1,811,525 | ||||||||
November 1 — 30, 2015 | 178,000 | 27.56 | 178,000 | 1,633,525 | |||||||||
December 1 — 31, 2015 | 201,945 | 25.06 | 201,945 | 1,431,580 | |||||||||
Total shares of common stock | 379,945 | $ | 26.23 | 379,945 | 1,431,580 | ||||||||
(1) | May include shares withheld from employees to satisfy tax withholding obligations that arose from the exercise of stock options. |
(2) | On May 20, 2015, our shareholders authorized a new share repurchase program that replaced the prior program and authorized us to purchase up to 3.0 million shares of our common stock in the open market. |
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ITEM 6. | SELECTED FINANCIAL DATA |
The following selected financial data as of and for the years ended December 31, 2015, 2014, 2013, 2012 and 2011 has been derived from our audited consolidated financial statements.
The historical results presented below may not be indicative of our future performance.
The selected consolidated financial data should be read in conjunction with the information contained in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto in Item 8 of Part II, “Financial Statements and Supplementary Data.”
For the years ended December 31, | ||||||||||||||||||||
(in thousands, except per share data) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
Revenue | $ | 1,051,466 | $ | 1,078,916 | $ | 768,357 | $ | 568,360 | $ | 423,687 | ||||||||||
Cost of revenue | 687,327 | 707,180 | 492,480 | 366,201 | 275,849 | |||||||||||||||
Gross profit | 364,139 | 371,736 | 275,877 | 202,159 | 147,838 | |||||||||||||||
Selling, general and administrative expenses | 220,868 | 201,733 | 113,810 | 74,712 | 62,131 | |||||||||||||||
Impairment losses | 71,785 | 37,473 | — | — | — | |||||||||||||||
Change in the fair value of Equator earn out liability | (7,591 | ) | (37,924 | ) | — | — | — | |||||||||||||
Income from operations | 79,077 | 170,454 | 162,067 | 127,447 | 85,707 | |||||||||||||||
Other income (expense), net: | ||||||||||||||||||||
Interest expense | (28,208 | ) | (23,363 | ) | (20,291 | ) | (1,210 | ) | (85 | ) | ||||||||||
Loss on sale of HLSS equity securities, net of dividends received | (1,854 | ) | — | — | — | — | ||||||||||||||
Other income (expense), net | 4,045 | 174 | 557 | (1,588 | ) | 288 | ||||||||||||||
Total other income (expense), net | (26,017 | ) | (23,189 | ) | (19,734 | ) | (2,798 | ) | 203 | |||||||||||
Income before income taxes and non-controlling interests | 53,060 | 147,265 | 142,333 | 124,649 | 85,910 | |||||||||||||||
Income tax provision | (8,260 | ) | (10,178 | ) | (8,540 | ) | (8,738 | ) | (7,943 | ) | ||||||||||
Net income | 44,800 | 137,087 | 133,793 | 115,911 | 77,967 | |||||||||||||||
Net income attributable to non-controlling interests | (3,202 | ) | (2,603 | ) | (3,820 | ) | (5,284 | ) | (6,855 | ) | ||||||||||
Net income attributable to Altisource | $ | 41,598 | $ | 134,484 | $ | 129,973 | $ | 110,627 | $ | 71,112 | ||||||||||
Earnings per share: | ||||||||||||||||||||
Basic | $ | 2.13 | $ | 6.22 | $ | 5.63 | $ | 4.74 | $ | 2.92 | ||||||||||
Diluted | $ | 2.02 | $ | 5.69 | $ | 5.19 | $ | 4.43 | $ | 2.77 | ||||||||||
Transactions with related parties included above: | ||||||||||||||||||||
Revenue | N/A(1) | $ | 666,800 | $ | 502,087 | $ | 338,227 | $ | 245,262 | |||||||||||
Cost of revenue | N/A(1) | 38,610 | 19,983 | 13,469 | 5,180 | |||||||||||||||
Selling, general and administrative expenses | N/A(1) | (268 | ) | 569 | (542 | ) | (166 | ) | ||||||||||||
Other income | N/A(1) | — | 773 | 86 | — | |||||||||||||||
Non-GAAP Financial Measures(2) | ||||||||||||||||||||
Adjusted net income attributable to Altisource | $ | 143,475 | $ | 169,141 | $ | 156,458 | $ | 115,304 | $ | 75,914 | ||||||||||
Adjusted diluted earnings per share | $ | 6.96 | $ | 7.16 | $ | 6.25 | $ | 4.62 | $ | 2.96 | ||||||||||
(1) Through January 16, 2015, William C. Erbey served as our Chairman as well as the Executive Chairman of Ocwen and Chairman of each of HLSS, Residential and AAMC. Effective January 16, 2015, Mr. Erbey stepped down as the Executive Chairman of Ocwen and Chairman of each of Altisource, HLSS, Residential and AAMC and is no longer a member of the Board of Directors for any of these companies. Consequently, these companies are no longer related parties of Altisource, as defined by Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) Topic 850, Related Party Disclosures. The disclosures in the table above are limited to the periods that each of Ocwen, HLSS, Residential and AAMC were related parties of Altisource and are not necessarily reflective of current activities with these former related parties. See Note 4 to the consolidated financial statements for more details.
(2) Theses are non-GAAP measures that are defined and reconciled to the corresponding GAAP measures on page 26.
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December 31, | ||||||||||||||||||||
(in thousands) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
Cash and cash equivalents | $ | 179,327 | $ | 161,361 | $ | 130,324 | $ | 105,502 | $ | 32,125 | ||||||||||
Accounts receivable, net | 105,023 | 112,183 | 104,787 | 88,955 | 52,005 | |||||||||||||||
Premises and equipment, net | 119,121 | 127,759 | 87,252 | 50,399 | 25,600 | |||||||||||||||
Goodwill | 82,801 | 90,851 | 99,414 | 14,915 | 14,915 | |||||||||||||||
Intangible assets, net | 197,003 | 245,246 | 276,162 | 56,586 | 64,950 | |||||||||||||||
Loan to Ocwen | — | — | — | 75,000 | — | |||||||||||||||
Total assets | 727,982 | 788,221 | 730,052 | 429,226 | 224,159 | |||||||||||||||
Long-term debt, net (including current portion) | 534,362 | 588,614 | 395,256 | 198,027 | — | |||||||||||||||
Capital lease obligations | — | — | — | 233 | 836 | |||||||||||||||
Total liabilities | 675,712 | 746,778 | 572,311 | 269,397 | 58,216 | |||||||||||||||
Significant events affecting our historical earnings trends from 2013 through 2015, including acquisitions, are described in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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NON-GAAP MEASURES
Adjusted net income attributable to Altisource and adjusted diluted earnings per share are non-GAAP measures used by management, existing shareholders and potential shareholders to measure Altisource’s performance. Adjusted net income attributable to Altisource is calculated by adding intangible asset amortization expense (net of tax) and impairment losses (net of tax) and deducting gains associated with reductions of the Equator earn out liability (net of tax) to GAAP net income attributable to Altisource. Adjusted diluted earnings per share is calculated by dividing net income attributable to Altisource plus intangible asset amortization expense (net of tax) plus impairment losses (net of tax) less gains associated with reductions of the Equator earn out liability (net of tax) to GAAP net income attributable to Altisource by the weighted average number of diluted shares. Reconciliations of the non-GAAP measures to the corresponding GAAP measures are as follows:
For the years ended December 31, | ||||||||||||||||||||
(in thousands, except per share data) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
Net income attributable to Altisource | $ | 41,598 | $ | 134,484 | $ | 129,973 | $ | 110,627 | $ | 71,112 | ||||||||||
Intangible amortization expense, net of tax | 38,187 | 35,076 | 26,485 | 4,677 | 4,802 | |||||||||||||||
Impairment loss, net of tax | 70,630 | 34,884 | — | — | — | |||||||||||||||
Gain on Equator earn out liability, net of tax | (6,940 | ) | (35,303 | ) | — | — | — | |||||||||||||
Adjusted net income attributable to Altisource | $ | 143,475 | $ | 169,141 | $ | 156,458 | $ | 115,304 | $ | 75,914 | ||||||||||
Diluted earnings per share | $ | 2.02 | $ | 5.69 | $ | 5.19 | $ | 4.43 | $ | 2.77 | ||||||||||
Intangible amortization expense, net of tax, per diluted share | 1.85 | 1.48 | 1.06 | 0.19 | 0.19 | |||||||||||||||
Impairment loss, net of tax, per diluted share | 3.43 | 1.48 | — | — | — | |||||||||||||||
Gain on Equator earn out liability, net of tax, per diluted share | (0.34 | ) | (1.49 | ) | — | — | — | |||||||||||||
Adjusted diluted earnings per share | $ | 6.96 | $ | 7.16 | $ | 6.25 | $ | 4.62 | $ | 2.96 | ||||||||||
Calculation of the impact of intangible amortization expense, net of tax | ||||||||||||||||||||
Intangible amortization expense | $ | 41,135 | $ | 37,680 | $ | 28,176 | $ | 5,030 | $ | 5,291 | ||||||||||
Tax benefit from intangible asset amortization | (2,948 | ) | (2,604 | ) | (1,691 | ) | (353 | ) | (489 | ) | ||||||||||
Intangible asset amortization expense, net of tax | 38,187 | 35,076 | 26,485 | 4,677 | 4,802 | |||||||||||||||
Diluted share count | 20,619 | 23,634 | 25,053 | 24,962 | 25,685 | |||||||||||||||
Intangible asset amortization expense, net of tax, per diluted share | $ | 1.85 | $ | 1.48 | $ | 1.06 | $ | 0.19 | $ | 0.19 | ||||||||||
Calculation of the impact of impairment loss, net of tax | ||||||||||||||||||||
Impairment loss | $ | 71,785 | $ | 37,473 | $ | — | $ | — | $ | — | ||||||||||
Tax benefit from impairment loss | (1,155 | ) | (2,589 | ) | — | — | — | |||||||||||||
Impairment loss, net of tax | 70,630 | 34,884 | — | — | — | |||||||||||||||
Diluted share count | 20,619 | 23,634 | 25,053 | 24,962 | 25,685 | |||||||||||||||
Impairment loss, net of tax, per diluted share | $ | 3.43 | $ | 1.48 | $ | — | $ | — | $ | — | ||||||||||
Calculation of gain on Equator earn out liability, net of tax | ||||||||||||||||||||
Gain on Equator earn out liability | $ | (7,591 | ) | $ | (37,924 | ) | $ | — | $ | — | $ | — | ||||||||
Tax provision from the gain on Equator earn out liability | 651 | 2,621 | — | — | — | |||||||||||||||
Gain on Equator earn out liability, net of tax | (6,940 | ) | (35,303 | ) | — | — | — | |||||||||||||
Diluted share count | 20,619 | 23,634 | 25,053 | 24,962 | 25,685 | |||||||||||||||
Gain on Equator earn out liability, net of tax, per diluted share | $ | (0.34 | ) | $ | (1.49 | ) | $ | — | $ | — | $ | — | ||||||||
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is a supplement to the accompanying consolidated financial statements and is intended to provide a reader of our financial statements with a narrative from the perspective of management on our businesses, current developments, financial condition, results of operations and liquidity. Significant sections of the MD&A are as follows:
Overview. This section, beginning below, provides a description of recent developments we believe are important in understanding our results of operations and financial condition as well as understanding anticipated future trends. It also provides a brief description of significant transactions and events that affect the comparability of financial results and a discussion of the progress being made on our growth initiatives.
Consolidated Results of Operations. This section, beginning on page 31, provides an analysis of our consolidated results of operations for the three years ended December 31, 2015.
Segment Results of Operations. This section, beginning on page 35, provides an analysis of each business segment for the three years ended December 31, 2015 as well as Corporate Items and Eliminations. In addition, we discuss significant transactions, events and trends that may affect the comparability of the results being analyzed.
Liquidity and Capital Resources. This section, beginning on page 44, provides an analysis of our cash flows for the three years ended December 31, 2015. We also discuss restrictions on cash movements, future commitments and capital resources.
Critical Accounting Policies, Estimates and Recent Accounting Pronouncements. This section, beginning on page 47, identifies those accounting principles we believe are most important to our financial results and that require significant judgment and estimates on the part of management in application. We provide all of our significant accounting policies in Note 2 to the accompanying consolidated financial statements.
Other Matters. This section, beginning on page 50, provides a discussion of off-balance sheet arrangements to the extent they exist. In addition, we provide a tabular discussion of contractual obligations, discuss any significant commitments or contingencies and customer concentration.
OVERVIEW
Our Business
We are a premier marketplace and transaction solutions provider for the real estate, mortgage and consumer debt industries. Altisource’s proprietary business processes, vendor and electronic payment management software and behavioral science-based analytics improve outcomes for marketplace participants.
Our business segments are based upon our organizational structure, which focuses primarily on the services offered, and are consistent with the internal reporting used by our Chief Executive Officer to evaluate operating performance and to assess the allocation of our resources.
We classify our businesses into three reportable segments. The Mortgage Services segment provides services that span the mortgage and real estate lifecycle and are typically outsourced by loan servicers, loan originators, home investors and other sellers and buyers of single family homes. The Financial Services segment provides collection and customer relationship management services primarily to debt originators and servicers (e.g., credit card, auto lending, retail credit and mortgage) and the utility, insurance and hotel industries. The Technology Services segment provides a portfolio of software, data analytics and infrastructure management services that support the efficient and compliant management of mortgage and real estate activities and marketplace transactions across the mortgage and real estate lifecycles. In addition, Corporate Items and Eliminations include interest expense and costs related to corporate support functions including executive, finance, law, compliance, human resources, vendor management, risk, sales and marketing costs not allocated to the business units and eliminations of transactions between the reportable segments.
We classify revenue in three categories: service revenue, revenue from reimbursable expenses and non-controlling interests. In evaluating our performance, we focus on service revenue. Service revenue consists of amounts attributable to our fee-based services. Reimbursable expenses and non-controlling interests are pass-through items for which we earn no margin. Reimbursable expenses consist of amounts we incur on behalf of our customers in performing our fee-based services, but we pass such costs
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directly on to our customers without any additional markup. Non-controlling interests represent the earnings of Lenders One, Wholesale One and Residential Investor One, consolidated entities not owned by Altisource, and are included in revenue and reduced from net income to arrive at net income attributable to Altisource.
We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Altisource’s Vision and Growth Initiatives
Altisource provides a suite of mortgage, real estate and consumer debt services, leveraging our technology platform and global operations. Altisource is focused on becoming the premier provider of real estate and mortgage marketplaces and related services to a broad and diversified customer base. Within the real estate and mortgage markets, we facilitate transactions and provide products, solutions and services related to home sales, home purchases, home rentals, home maintenance, mortgage origination and mortgage servicing.
Strategically, we are focused on (1) our four key business initiatives, (2) continuing to strengthen our compliance management system and (3) maintaining strong performance and relationships with our strategic customers.
Each of our four key business initiatives position Altisource to grow and diversify our customer and revenue base. We believe these initiatives address very large markets and directly leverage our core competencies and distinct competitive advantages. Our four strategic growth initiatives and a brief description of each are as follows:
Mortgage market:
1. | Continue to grow our Servicer Solutions business (the products, services and technologies typically used or licensed by loan servicers): We are focused on growing our Servicer Solutions business by expanding services purchased by our existing customer base and attracting new customers. Even as delinquencies return to historical norms, we believe there is a very large addressable market for the services we provide, as well as a strong and increasing customer focus on regulatory compliance and operational quality. We are one of only a few service providers with a comprehensive offering of services and technologies on a national scale. We believe we are well positioned to gain market share as customers consolidate to larger, full-service vendors and continue to outsource services that have historically been performed in-house. |
2. | Continue to grow our Origination Solutions business (the products, services and technologies typically used or licensed by participants in the loan origination market): We are focused on building an industry leading, integrated origination services platform that provides end-to-end solutions (products, services and technology) to our customers. We plan to grow our Origination Solutions business by expanding our product offerings to our existing client base and actively adding new customers. We are leveraging our enterprise wide sales organization to offer our origination services to larger bank and non-bank originators and correspondents and plan to expand our middle market sales organization to address other prospects. We believe we are well positioned to gain market share as customers consolidate to larger full-service vendors and by offering our existing customers (e.g., the members of Lenders One, the customers of Mortgage Builder and CastleLine and our preferred vendors and partners) an attractive suite of products and services that meet their growing needs. |
Real estate market:
3. | Continue to grow Owners.com, our consumer real estate offering (the products, services and technologies typically used by self-directed home buyers and sellers): Owners.com provides self-directed consumers with a full suite of real estate services from which to choose. We are focused on growing Owners.com by building brand awareness, driving customer engagement and increasing consumer adoption of our buy side brokerage services. With a growing segment of the population demonstrating a desire to engage in self-directed transactions, we believe Owners.com is well positioned to become a market leader. |
4. | Continue to grow our Real Estate Investor Solutions business (the products, services and technologies typically used by participants in residential real estate investments): We are focused on growing our Real Estate Investor Solutions business by supporting the growth of our existing customers, expanding services purchased by our existing customer base and attracting new customers. With our national real estate brokerage operation, vendor network, property management and renovation footprint, existing customer base and growing suite of technologies, we believe we are well positioned to grow. |
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Share Repurchase Plan
On May 20, 2015, our shareholders approved a new share repurchase program, which replaced the previous share repurchase program. Under the new program, we are authorized to purchase up to 3.0 million shares of our common stock, based on a limit of 15% of the outstanding shares of common stock on the date of approval at a minimum price of $1.00 per share and a maximum price of $500.00 per share. This is in addition to amounts previously purchased under prior programs. Under the existing and prior programs, we purchased 2.1 million shares of common stock at an average price of $27.60 per share during the year ended December 31, 2015, 2.5 million shares at an average price of $103.67 per share during the year ended December 31, 2014 and 1.2 million shares at an average price of $116.99 per share during the year ended December 31, 2013. As of December 31, 2015, approximately 1.4 million shares of common stock remain available for repurchase under the new program. Our senior secured term loan limits the amount we can spend on share repurchases and may prevent repurchases in certain circumstances. As of December 31, 2015, approximately $360 million was available to repurchase shares of our common stock under our senior secured term loan.
Factors Affecting Comparability
The following items may impact the comparability of our results:
• | The average number of loans serviced by Ocwen on REALServicing was 2.0 million for the year ended December 31, 2015 compared to 2.2 million and 1.2 million for the years ended December 31, 2014 and 2013, respectively. The average number of delinquent non-GSE loans serviced by Ocwen on REALServicing was 279 thousand for the year ended December 31, 2015 compared to 352 thousand and 296 thousand for the years ended December 31, 2014 and 2013, respectively; |
• | In the fourth quarter of 2015, we recorded non-cash impairment losses of $71.8 million in our Technology Services segment primarily driven by the Company’s current projected Technology Services revenue from Ocwen and investment in technologies provided to Ocwen; |
• | During the year ended December 31, 2015, we repurchased portions of our senior secured term loan with an aggregate par value of $49.0 million at a weighted average discount of 10.3%, resulting in net gains totaling $3.8 million on the early extinguishment of debt; |
• | On October 9, 2015, we acquired the Acquired RentRange and Investability Businesses for $24.8 million, composed of $17.5 million in cash and 247 thousand shares of restricted common stock of the Company with a value of $7.3 million as of the closing date; |
• | On July 17, 2015, we acquired CastleLine for $33.4 million. The purchase consideration was composed of $12.3 million of cash at closing, $10.5 million of cash payable over four years from the acquisition date and 495 thousand shares of restricted common stock of the Company with a value of $14.4 million as of the closing date. Of the cash payable following acquisition, $3.8 million is contingent on certain future employment conditions of certain of the sellers, and therefore excluded from the purchase price; |
• | Effective March 31, 2015, we terminated the Data Access and Services Agreement with Ocwen; |
• | On November 21, 2014, we acquired Owners for an initial purchase price of $19.8 million plus contingent earn out consideration of up to an additional $7.0 million over two years, subject to Owners achieving annual performance targets; |
• | In the fourth quarter of 2014, we discontinued our lender placed insurance brokerage line of business; |
• | On September 12, 2014, we acquired Mortgage Builder for an initial purchase price of $15.7 million plus contingent earn out consideration of up to an additional $7.0 million over three years, subject to Mortgage Builder achieving annual performance targets; |
• | Bad debt expense was higher in 2014, driven primarily from the default management services business. A change in many of our default management services customers’ business models and fourth quarter of 2014 discussions with these customers led us to believe that a portion of the accounts receivable balance was no longer collectible; |
• | On November 15, 2013, we acquired Equator for an initial purchase price of $63.4 million plus contingent earn out consideration of up to an additional $80 million over three years (“Equator Earn Out”), subject to Equator achieving annual performance targets. During 2014, the fair value of the Equator contingent consideration was reduced by $37.9 million with a corresponding increase in earnings. As a result of the adjustment in the fair value of the Equator contingent consideration, we determined that the Equator goodwill was impaired and recorded an estimated impairment loss of $37.5 million in 2014. In 2015, we paid the former owners of Equator $0.5 million to extinguish any liability for the Equator Earn Out. In connection with this settlement, we reduced the liability for the Equator Earn Out to $0 and recognized a $7.6 million increase in earnings; |
• | On April 12, 2013, we completed the Residential Capital, LLC (“ResCap”) fee-based business transaction with Ocwen for an aggregate purchase price of $128.8 million; |
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• | On March 29, 2013, we completed the acquisition of the Homeward Residential Capital, Inc. (“Homeward”) fee-based businesses from Ocwen for an aggregate purchase price of $75.8 million; and |
• | During 2013, we increased our borrowings under the senior secured term loan to $400.0 million and refinanced the loan which included, among other changes, lowering the interest rate of the term loans. On August 1, 2014, we amended our senior secured term loan agreement and increased our borrowings by $200.0 million to $594.5 million. |
Material Weakness
In connection with the assessment and recording of the non-cash impairment losses described above, we identified a material weakness in our internal controls over the review of impairment indicators of long-lived assets, including premises and equipment and intangible assets, and the impairment analysis of indefinite-lived assets, primarily goodwill. We intend to implement remediation measures to address this material weakness, but currently do not have an expected timetable for the completion of the remediation. See Part II. Item 9A. “Controls and Procedures” of this Annual Report for additional information.
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CONSOLIDATED RESULTS OF OPERATIONS
Summary Consolidated Results
Following is a discussion of our consolidated results of operations for the years ended December 31, 2015, 2014 and 2013. For a more detailed discussion of the factors that affected the results of our business segments in these periods, see “Segment Results of Operations” below.
The following table sets forth information on our results of operations for the years ended December 31:
(in thousands, except per share data) | 2015 | % Increase (decrease) | 2014 | % Increase (decrease) | 2013 | |||||||||||||
Service revenue | ||||||||||||||||||
Mortgage Services | $ | 676,222 | 4 | $ | 653,093 | 32 | $ | 493,500 | ||||||||||
Financial Services | 88,328 | (10 | ) | 98,312 | 6 | 92,479 | ||||||||||||
Technology Services | 215,482 | (5 | ) | 227,300 | 126 | 100,724 | ||||||||||||
Eliminations | (39,112 | ) | (2 | ) | (40,026 | ) | 62 | (24,644 | ) | |||||||||
Total service revenue | 940,920 | — | 938,679 | 42 | 662,059 | |||||||||||||
Reimbursable expenses | 107,344 | (22 | ) | 137,634 | 34 | 102,478 | ||||||||||||
Non-controlling interests | 3,202 | 23 | 2,603 | (32 | ) | 3,820 | ||||||||||||
Total revenue | 1,051,466 | (3 | ) | 1,078,916 | 40 | 768,357 | ||||||||||||
Cost of revenue | 687,327 | (3 | ) | 707,180 | 44 | 492,480 | ||||||||||||
Gross profit | 364,139 | (2 | ) | 371,736 | 35 | 275,877 | ||||||||||||
Selling, general and administrative expenses | 220,868 | 9 | 201,733 | 77 | 113,810 | |||||||||||||
Impairment losses | 71,785 | 92 | 37,473 | N/M | — | |||||||||||||
Change in the fair value of Equator earn out liability | (7,591 | ) | (80 | ) | (37,924 | ) | N/M | — | ||||||||||
Income from operations | 79,077 | (54 | ) | 170,454 | 5 | 162,067 | ||||||||||||
Other income (expense), net: | ||||||||||||||||||
Interest expense | (28,208 | ) | 21 | (23,363 | ) | 15 | (20,291 | ) | ||||||||||
Loss on sale of HLSS equity securities, net of dividends received | (1,854 | ) | N/M | — | N/M | — | ||||||||||||
Other income (expense), net | 4,045 | N/M | 174 | (69 | ) | 557 | ||||||||||||
Total other income (expense), net | (26,017 | ) | 12 | (23,189 | ) | 18 | (19,734 | ) | ||||||||||
Income before income taxes and non-controlling interests | 53,060 | (64 | ) | 147,265 | 3 | 142,333 | ||||||||||||
Income tax provision | (8,260 | ) | (19 | ) | (10,178 | ) | 19 | (8,540 | ) | |||||||||
Net income | 44,800 | (67 | ) | 137,087 | 2 | 133,793 | ||||||||||||
Net income attributable to non-controlling interests | (3,202 | ) | 23 | (2,603 | ) | (32 | ) | (3,820 | ) | |||||||||
Net income attributable to Altisource | $ | 41,598 | (69 | ) | $ | 134,484 | 3 | $ | 129,973 | |||||||||
Margins: | ||||||||||||||||||
Gross profit/service revenue | 39 | % | 40 | % | 42 | % | ||||||||||||
Income from operations/service revenue | 8 | % | 18 | % | 24 | % | ||||||||||||
Earnings per share: | ||||||||||||||||||
Basic | $ | 2.13 | (66 | ) | $ | 6.22 | 10 | $ | 5.63 | |||||||||
Diluted | $ | 2.02 | (64 | ) | $ | 5.69 | 10 | $ | 5.19 | |||||||||
Non-GAAP Financial Measures (1) | ||||||||||||||||||
Adjusted net income attributable to Altisource | $ | 143,475 | (15 | ) | $ | 169,141 | 8 | $ | 156,458 | |||||||||
Adjusted diluted earnings per share | $ | 6.96 | (3 | ) | $ | 7.16 | 15 | $ | 6.25 | |||||||||
(1) These are non-GAAP measures that are defined and reconciled to the corresponding GAAP measures on page 26
N/M — not meaningful.
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Revenue
We recognized service revenue of $940.9 million, $938.7 million and $662.1 million for the years ended December 31, 2015, 2014 and 2013, respectively. The increase in service revenue for the year ended December 31, 2015 was primarily due to the revenue expansion in the asset management services businesses primarily from growth in both the number of non-Ocwen and Ocwen REO properties sold on Hubzu, increased volumes of property preservation services for Residential, higher revenue from software development and a full year of revenue from the September 2014 acquisition of Mortgage Builder. In addition, in early 2015, the pricing model to one of our customers for REO preservation services within asset management services changed. Historically, we billed (1) a fixed fee per REO asset (which was recognized as service revenue) and (2) actual vendor costs (which were recognized as reimbursable expenses revenue). For new REO referrals, effective early 2015, our pricing is on a per service basis (which is recognized as service revenue). This results in certain services that were historically reimbursable expense revenue becoming service revenue. As a result, asset management services revenue at Mortgage Services increased, partially offset by a decrease in reimbursable expenses revenue. These increases were largely offset by the discontinuation of the lender placed insurance brokerage line of business in the fourth quarter of 2014, lower Equator revenue from the full amortization of acquisition related deferred revenue in 2014, fewer property valuation services referrals, decreased property inspection volumes, lower mortgage charge-off collections and a decrease in IT infrastructure services. The growth in service revenue for the year ended December 31, 2014 was primarily driven by Ocwen’s growth, higher auction mix for houses sold on Hubzu, revenue from Equator, which we acquired in November 2013, and growth in our Financial Services business from new customers in our customer relationship management business. These increases were partially offset by a decline in the default management services business driven by lower levels of foreclosure starts and the fourth quarter of 2013 loss of an origination management services customer which eliminated its affinity relationship with Altisource and its other similar vendor partners.
Certain of our revenues are impacted by seasonality. More specifically, Mortgage Services’ revenue is impacted by REO sales and lawn maintenance, which tend to be at their lowest level during the fall and winter months and at their highest level during the spring and summer months. Financial Services’ asset recovery management revenue tends to be higher in the first quarter, as borrowers may utilize tax refunds and bonuses to pay debts, and generally declines throughout the rest of the year.
Cost of Revenue and Gross Profit
Cost of revenue principally includes payroll and employee benefits associated with personnel employed in customer service and operations roles, fees paid to external providers related to the provision of services, reimbursable expenses, technology and telecommunications costs, and depreciation and amortization of operating assets.
We recognized cost of revenue of $687.3 million, $707.2 million and $492.5 million for the years ended December 31, 2015, 2014 and 2013, respectively. The decrease in cost of revenue for the year ended December 31, 2015 was primarily attributable to the March 31, 2015 termination of the Data Access and Services Agreement with Ocwen in the Mortgage Services segment and lower technology and telecommunications costs, partially offset by an increase in compensation and benefits, outside fees and services and depreciation and amortization costs. Outside fees and services increased and reimbursable expenses declined as a result of the change in billing discussed in the revenue section above. Technology and telecommunications costs decreased due to cost savings initiatives implemented in 2015. Recognizing that our service revenue from Ocwen was not expected to grow in the near term due to challenges faced by Ocwen in late 2014 and early 2015, we developed and executed on a plan that included eliminating certain non-revenue generating businesses, reducing vendor costs and eliminating staff. Compensation and benefits costs were higher in 2015 compared to 2014 primarily due to increased United States headcount to support growth in certain of our Mortgage Services businesses. Additionally, severance costs of $4.3 million for the year ended December 31, 2015 were incurred in connection with the elimination of staff as a result of the cost reduction initiatives implemented during the first half of 2015. The increase in cost of revenue for the year ended December 31, 2014 was primarily attributable to revenue growth during the same period and the increased investment in the development of our technology.
Gross profit decreased to $364.1 million, representing 39% of service revenue, for the year ended December 31, 2015 compared to $371.7 million, representing 40% of service revenue, for the year ended December 31, 2014 and $275.9 million, representing 42% of service revenue, for the year ended December 31, 2013.
Gross profit as a percentage of service revenue declined slightly in 2015 compared to 2014 primarily due to service revenue growth in the higher margin Mortgage Services segment offset by a decline in gross profit as a percentage of service revenue in the Financial Services and Technology Services segments. Mortgage Services’ slight decline in gross profit margins was driven by service revenue growth of the lower margin property preservation and inspection business within asset management services and the November 2014 discontinuation of the higher margin lender placed insurance brokerage business within insurance services, partially offset by Hubzu revenue growth within asset management services and the March 31, 2015 termination of the Data Access
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and Services Agreement with Ocwen. The decline in gross profit as a percentage of service revenue in the Financial Services and Technology Services segments was from revenue mix and the full amortization of the Equator acquisition related deferred revenue within software services in November 2014.
Gross profit as a percentage of service revenue declined in 2014 compared to 2013 from a shift in revenue across segments with higher growth in the lower margin Technology Services segment. Margin expansion in the Mortgage Services segment was partially offset by margin decreases in the other segments. In the Mortgage Services segment, we expanded our gross profit margin by fully utilizing employees that we were carrying in 2013 in anticipation of new business and performing certain services with our employees that were previously performed by outside vendors. In the Financial Services segment, the gross profit margin decline was driven by revenue mix as the higher margin mortgage charge-off collections business within asset recovery management represented a lower percentage of revenue in the Financial Services segment in 2014. In the Technology Services segment, gross profit margin decreased primarily due to our continued investment in our technology to support our growth, partially offset by higher gross profit margin in the Equator business within software services.
Operating Expenses and Income from Operations
Operating expenses are composed of selling, general and administrative (“SG&A”) expenses, impairment losses and changes in the fair value of the Equator earn out liability. Selling, general and administration expenses include payroll for personnel employed in executive, finance, law, compliance, human resources, vendor management, risk, sales and marketing roles. This category also includes occupancy costs, professional fees and depreciation and amortization of intangible assets.
We recognized SG&A of $220.9 million, $201.7 million and $113.8 million for the years ended December 31, 2015, 2014 and 2013, respectively. The increase in SG&A in 2015 compared to 2014 was primarily driven by higher compensation and benefits costs from an expansion of certain support functions, severance costs incurred in connection with cost savings initiatives, higher legal costs related to legal and regulatory matters, increased corporate marketing expenses associated with our customer and revenue diversification initiatives, increased amortization of intangible assets related to the Homeward and ResCap fee-based business acquisitions and the Mortgage Builder acquisition and an estimated loss recorded in the fourth quarter of 2015 in connection with an anticipated payment to Ocwen for obtaining a release of liability for Altisource related to Ocwen’s settlement of a particular case. These increased costs were partially offset in 2015 by lower bad debt expense.
The increase in SG&A in 2014 compared to 2013 was primarily driven by higher marketing costs related to Hubzu within asset management services, higher compensation and benefits costs to support growth, higher occupancy costs from increased headcount to support growth and higher legal and compliance related costs. Increased amortization of intangible assets was primarily driven by the Homeward and ResCap fee-based business acquisitions and the Equator acquisition, which closed in March 2013, April 2013 and November 2013, respectively. Bad debt expense increased during 2014, driven primarily by the default management services business. A change in many of our default management services customers’ business models and fourth quarter 2014 discussions with these customers led us to believe that a portion of these accounts receivable were no longer collectible. Marketing costs were $24.1 million and $5.0 million for the years ended December 31, 2014 and 2013, respectively. Amortization expense was $37.7 million and $28.2 million for the years ended December 31, 2014 and 2013, respectively.
We recognized impairment losses of $71.8 million and $37.5 million for the years ended December 31, 2015 and 2014, respectively (no comparative amount in 2013). In the fourth quarter of 2015, we recorded non-cash impairment losses of $71.8 million in our Technology Services segment primarily driven by the Company’s current projected Technology Services revenue from Ocwen and investment in technologies provided to Ocwen. These losses are composed of an estimated $55.7 million impairment of goodwill, $11.9 million impairment of intangible assets from the 2013 Homeward and ResCap fee-based business acquisitions and $4.1 million impairment of software assets included in premises and equipment.
In 2014, as a result of the adjustment in the fair value of the Equator contingent consideration described below and based on our goodwill assessment in 2014, we determined that the Equator goodwill was impaired and recorded an impairment loss of $37.5 million for the year ended December 31, 2014.
We recognized gains on the change in the fair value of Equator earn out liability of $7.6 million and $37.9 million for the years ended December 31, 2015 and 2014, respectively (no comparative amount in 2013). The liability for contingent consideration is reflected at fair value and adjusted each reporting period with the change in fair value recognized in earnings. In 2015, we reached an agreement with the former owners of Equator to extinguish any liability for the Equator Earn Out. In connection with this settlement, we reduced the liability for the Equator Earn Out to $0 and recognized a $7.6 million increase in earnings. During 2014, the fair value of the contingent consideration related to the Equator acquisition was reduced by $37.9 million with a
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corresponding increase in earnings based on management’s revised estimates that expected earnings of Equator will be lower than projected at the time of acquisition.
Income from operations decreased to $79.1 million, representing 8% of service revenue, for the year ended December 31, 2015 compared to $170.5 million, representing 18% of service revenue, for the year ended December 31, 2014 and $162.1 million, representing 24% of service revenue, for the year ended December 31, 2013. The decrease in operating income margin is primarily driven by the non-cash impairment losses, lower gross profit margins and increases in SG&A, partially offset by gains on the change in fair value of Equator earn out liability, as discussed above.
Other Income (Expense), net
Other income (expense), net principally includes interest expense, interest income, loss on the sale of HLSS equity securities, net of dividends received, and gains on the early extinguishment of debt. Interest expense for the year ended December 31, 2015 was $28.2 million, an increase of $4.8 million compared to the year ended December 31, 2014, resulting from the additional $200.0 million senior secured term loan borrowings on August 1, 2014, partially offset by lower interest expense associated with the 2015 repurchases of a portion of our senior secured term loan with an aggregate par value of $49.0 million. Interest expense for the year ended December 31, 2014 was $23.4 million, an increase of $3.1 million compared to the year ended December 31, 2013, resulting from the additional $200.0 million senior secured term loan borrowings on August 1, 2014, and the additional $200.0 million senior secured term loan borrowings on May 7, 2013, partially offset by lower interest rates from the senior secured term loan refinancing on December 9, 2013. We recognized interest income of $0.1 million for each of the years ended December 31, 2015 and 2014. Additionally, we recognized interest income of $0.9 million for the year ended December 31, 2013, primarily from a $75.0 million loan to Ocwen, which was repaid in February 2013.
During 2015, we repurchased portions of our senior secured term loan with an aggregate par value of $49.0 million at a weighted average discount of 10.3%, resulting in net gains totaling $3.8 million on the early extinguishment of debt (no comparative amounts for 2014 and 2013).
During March 2015, we purchased 1.6 million shares of HLSS common stock in the open market for $30.0 million. On April 6, 2015, HLSS completed the sale of substantially all of its assets and adopted a plan of complete liquidation and dissolution. During 2015, we received liquidating dividends and other dividends from HLSS totaling $20.4 million and sold all of our 1.6 million shares of HLSS common stock in the open market for $7.7 million. As a result of these transactions, we recognized a net loss of $1.9 million for the year ended December 31, 2015 (no comparative amounts for 2014 and 2013) in connection with our investment in HLSS.
Income Tax Provision
We recognized an income tax provision of $8.3 million, $10.2 million and $8.5 million for the years ended December 31, 2015, 2014 and 2013, respectively. Our effective tax rate was 15.6%, 6.9% and 6.0% for the years ended December 31, 2015, 2014 and 2013, respectively. The effective tax rate in all three periods differs from the Luxembourg statutory tax rate of 29.2% primarily due to the effect of certain deductions allowed in Luxembourg pursuant to a tax ruling, which expires in 2019 unless extended or renewed, the mix of income and losses with varying tax rates in multiple taxing jurisdictions and the recognition of research and development tax credits. The higher 2015 effective tax rate is driven by impairment losses which resulted in a change in the jurisdictional mix of income. The impairment losses are related to assets owned by a subsidiary with a lower effective tax rate. Our consolidated effective income tax rate for financial reporting purposes may change periodically due to changes in enacted tax rates, fluctuations in the mix of income earned from our domestic and international operations and our ability to utilize net operating loss and tax credit carryforwards.
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SEGMENT RESULTS OF OPERATIONS
The following section provides a discussion of pre-tax results of operations of our business segments. Transactions between segments are accounted for as third party arrangements for purposes of presenting segment results of operations. Intercompany transactions primarily consist of IT infrastructure management services. We reflect these as service revenue in the Technology Services segment and technology and telecommunications costs within cost of revenue and SG&A in the segment receiving the services. Certain prior year amounts reported by the Mortgage Services and Technology Services segments have been reclassified to conform with the current year presentation.
Financial information for our segments is as follows:
For the year ended December 31, 2015 | ||||||||||||||||||||
(in thousands) | Mortgage Services | Financial Services | Technology Services | Corporate Items and Eliminations | Consolidated Altisource | |||||||||||||||
Revenue | ||||||||||||||||||||
Service revenue | $ | 676,222 | $ | 88,328 | $ | 215,482 | $ | (39,112 | ) | $ | 940,920 | |||||||||
Reimbursable expenses | 107,224 | 120 | — | — | 107,344 | |||||||||||||||
Non-controlling interests | 3,202 | — | — | — | 3,202 | |||||||||||||||
786,648 | 88,448 | 215,482 | (39,112 | ) | 1,051,466 | |||||||||||||||
Cost of revenue | 474,169 | 60,806 | 187,835 | (35,483 | ) | 687,327 | ||||||||||||||
Gross profit (loss) | 312,479 | 27,642 | 27,647 | (3,629 | ) | 364,139 | ||||||||||||||
Selling, general and administrative expenses | 105,153 | 18,707 | 29,902 | 67,106 | 220,868 | |||||||||||||||