Good day, ladies and gentlemen. And welcome to the Altisource Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Michelle Esterman. You may begin.

Thank you, Operator. We first want to remind you that the earnings release, Form 10-Q and quarterly slides are available on our website at www.altisource.com. These provide additional information investors may find useful. Our presentation today contains forward-looking statements made pursuant to the Safe Harbor provisions of the federal securities law. Statements in this conference call, our slides and in our press release issued earlier today, which are other than historical fact, are forward-looking statements. These include financial projections and scenarios contained in our slides and described during this call. Altisource makes no representation that our actual financial results will be the same as those set out in the financial projections and scenarios. The financial projections and scenarios should not be unduly relied upon. Factors that might cause actual results to differ materially are discussed in our earnings release, as well as our public filings. The company disclaims any intent or obligation to publicly update or revise any forward-looking statements regardless of whether new information becomes available, future developments occur or otherwise. Today’s presentation also contains financial measures that are non-GAAP financial measures. A reconciliation of these non-GAAP measures to their GAAP equivalents is included in the appendix to our slides. Joining me for today’s call is Bill Shepro, our Chief Executive Officer. I would now like to turn the call over to Bill.

Good morning and thank you for joining today’s call. We have accomplished a lot since last quarter. This morning I’ll update you on the dialogue we are having with New Residential, which I will refer to you as NRZ, concerning potential long-term agreements to provide downstream services. I will briefly address Ocwen’s recent remarks regarding its planned transition to a new servicing system. I will then discuss our second quarter capital deployment and financial results, and the progress we are making on our strategic initiatives. As you probably know, Ocwen and NRZ entered into agreements last month to transfer Ocwen’s remaining interests in certain MSRs to NRZ, with Ocwen continuing to service these portfolios. Altisource has long-term agreements in place to provide various fee-based services on an exclusive basis for portfolio service by Ocwen. Nevertheless, we believe there are benefits to establishing a relationship with NRZ and are actively negotiating long-term agreements with NRZ to be the provider for downstream services. We agree with NRZ’s statements made during Q&A on its second quarter earnings call that we are very close to reaching an agreement. Although, there is no guarantee we will reach an agreement, we believe doing so would be mutually beneficial for NRZ and Altisource. Given this status, we won’t be taking questions on this topic on today’s call. With respect to REALServicing, Ocwen recently commented on its earnings call that it’s planning to transition to another loan servicing platform. REALServicing is a custom loan servicing software that we only provide to Ocwen. Ocwen is a very important and strategic customer of Altisource, and we intend to support Ocwen through this transition. From an earnings perspective other than shutdown costs, this is a non-event as we currently breakeven on this business. We expect that we will continue to support…

[Operator Instructions] And your first question is from Kevin Barker with Piper Jaffray. Your line is open.

Thank you. In regards to the REO brokerage between Ocwen and yourself, do you currently pay Ocwen a fee of roughly 1.5% for every REO brokerage that sold on the Hubzu platform right now?

Kevin, good morning. How are you?

Good.

Yeah. Yeah. Kevin we do pay a referral fee, a cooperating brokerage commission to Ocwen. I’m not sure it’s publicly disclosed but that’s in the ballpark.

Okay. And then, you obviously won’t comment on the NRZ negotiations, because they’re in flux right now. But, I mean, is it your view that the original agreement between yourself and Ocwen will no longer be utilized and you’ll renegotiate that agreement as well, and potentially have an entirely new agreement on exclusive services between yourself and NRZ?

So, Kevin, as I mentioned in my prepared remarks, we have long-term agreements in place to provide these fee-based services on an exclusive basis for portfolio service by Ocwen. We believe there are benefits to establishing a relationship with NRZ, but again given the status of our negotiations with NRZ, we’re not going to comment any further on this. And certainly, if and when we reach an agreement, we’ll provide the appropriate disclosures around the terms.

Okay. And then, in regards to the transition of the REALServicing platform, will there be other ancillary applications that Ocwen currently uses or different services that are provided that also will be transitioned over or will be purely just the REALServicing platform?

I mean, I think, what we’re primarily talking about, Kevin, is the REALServicing platform. There’s some other systems that go along with it that don’t necessarily generate any additional revenue for us that Ocwen is probably looking at, but it’s probably too early to speculate. But I don’t anticipate those having any financial impact to us.

Okay. And then, you mentioned that the multiyear transition that will occur, did you expect it to be primarily weighted in the first year or two, whereby you move over certain pools of mortgages or certain servicing pools, a larger portion of them in the first year or two or is this something that you think that’s all going to transition at one time?

So, Kevin, typically, when you -- anytime you transition sort of an enterprise-wide loan servicing or banking system, it takes quite a bit of prep work and time on Ocwen’s behalf and we’ll certainly be supporting them to get ready to make that transition. But then once you make the transition you would typically transfer over -- you do a cut-off and transfer over all the loans to that system. So, that process could be -- to get to the point in which they transfer is a multiyear process. So during that period of time, we would continue to generate our normal revenue from Ocwen and we’ll also be assisting with the work to make sure it’s a smooth transition. But then once that transition’s complete after a multiyear process that’s when we would lose the revenue.

Okay. When you say multiyear, are you saying this is something two years or is this something closer to four years?

I mean, look, it’s really hard for me, because I’m not driving the project, Kevin, Ocwen is. I would say, certainly, one year to three years plus -- one year to three years to do a servicing transition of this type and you could look to other banks that have done it to get a -- if you want to do some research to get a better sense as to how long it takes.

Okay. And then, in regards to the CFO transition. Could you help us understand some of the reasons why you think Mr. Chatterjee is the right person for this role? I believe he had more of a financials role with distressed debt in his previous roles at Nomura and given what Altisource is trying to achieve now with growing third-party service revenue, and be more of a tech and service provider for the mortgage industry, what makes him fit well within Altisource?

Look, we -- Kevin we believe that Indroneel brings a unique new skill set to the firm around corporate finance. He’s got a very, very strong background. We’re maintaining -- Michelle’s staying with the organization, continuing to focus on all the GAAP-related accounting work that has to get done here and also focusing on our facilities and vendor management organization, with a particular focus on driving down our costs for outside goods and services. So we view it as incremental. We’re bringing a new really solid skill set to the organization and we are maintaining the strong accounting group that we have in place today.

Okay. Thank you for taking my questions.\

Thanks.

Your next question is from Mike Grondahl with Northland Securities. Your line is open.

Hi. Thank you, guys. Hey, Bill, can you talk a little bit about the service revenue per non-delinquent GSE loan, it was up close to $900 per loan, kind of what incremental services have you added since last year when it was close to $700 per loan and how much higher can that go?

Hi. Good morning, Mike. So, I think that, what was driving that up is the growth in referrals of certain higher fee property preservation services. Also REO sales prices have been increasing and we’re selling a greater percentage of the homes through auction, which generates more fees for us, and of course, as you know, there’s a lot of seasonality to this. But, certainly, as the property values increase we would expect to generate more revenue per loan, but outside that, we think we are hitting sort of a stabilized number, keeping in mind that the number will fluctuate based on seasonality.

Got you. Okay. In terms of non-Ocwen revenues, your non-Ocwen revenues are a little lower at 37% of your midpoint, even though your investments are slightly higher at 60% of your midpoint. So is it just that it’s taking longer on the non-Ocwen side and the boarding’s taking longer as you kind of talked about, I kind of would’ve thought if you’re spending and investing more, we’d see more progress on the non-Ocwen, kind of help us understand how we…

Yeah.

… think of those two and how they’re related?

Okay. Yeah. No. Really, really straightforward, Mike. So, because it’s taking us longer to onboarding and grow some of these clients than we originally anticipated, our investments, which include sort of some of the losses we’re making on these products, are a little bit higher than we anticipated, so they should be inversely related. So as it takes a little bit longer -- as it takes longer to get these clients going, you incur some additional losses, which were in our calculation we included in the definition of investments. And so, for example, in our origination business, as we onboard this top five correspondent lender, we had some fixed costs that we’ve been incurring in that business in anticipation of onboarding this client and other smaller clients, as those clients onboard and grow, that’s going to reduce those losses in that business and ultimately we think it’s a 20% to 30% margin business, our Origination Solutions, and our investments will come down then we’ll be making money. So it’s just a product of timing, Mike.

Got it. And then, is there any way can you quantify or kind of give us a ballpark figure of what those losses are that you’re experiencing today on the non-Ocwen initiatives, because when they flip, it’s kind of a slingshot, but I’m just, give us a sense for what are we talking about today or in 2Q?

So, Mike, if you look, I think, there’s a slide, I don’t have it at my fingertips, but we talk about what the investments -- the amount of the investments we’re making, which I think you may have just referenced. So, we’re losing -- today we’re making investments in Owners.com and Investability, in our origination technologies to support the growth, what we anticipate will be very strong growth in our Origination business. So on both the technologies and that business unit right now and some of our other origination business we’re making some investments. I’d also point out that many companies would be capitalizing some of these technology investments. We don’t capitalize those investments. We run them through the income statement.

Got it. I mean, any sense is it...

I look, by the way, Mike, so now, it’s a -- if you look at the -- you can just multiply how much we’re spending by how many shares we have, what is it, give me a second. So, Mike, if you look on slide three, it’s roughly $30 million of investments and I look at that as also R&D for Altisource. This is going to support our long-term growth of the business and I do believe while the growth in revenue for this first half of the year is not what we had hoped for, it still is pretty attractive growth, if you back out the Financial Services business, we think we’ll grow 12% to 14% over last year.

Got it. And then, hey, in the ranges you give for the year for service revenue, adjusted EPS, where you lay all that out, is there anything embedded in there for this potential agreement with NRZ?

No. Mike, we did not -- none of this takes into consideration, that’s slide three, a transaction with NRZ.

Got you.

We believe it’s just premature at this point until we have a signed agreement.

Got it. Okay. And then, lastly, has -- you’re doing some work still for RESI, has that -- directionally we know that’s declined, they’ve sold less homes, they’ve cleaned up their REOs, is that a meaningful customer for you still kind of what’s the outlook there?

Yeah. So, I think, for RESI we’re helping them dispose of their REO assets, and as George covered on his call, he hopes to have those assets sold by the end of the year. So that’s been very meaningful for us. We also provide property management work for their business. I wouldn’t say it’s very meaningful, but it generates, I don’t know, less than probably $10 million a year of revenue for the firm. And then, we’re very focused on helping George identify, we’ll buy homes, renovate them and sell them to George, essentially at a pre-established like how we focused and think we can be very helpful for George there, and clearly, his growth is good for us as a service provider and as a shareholder.

Got it. Okay. Thank you.

[Operator Instructions] Your next question is from Fred Small with Compass Point. Your line is open.

Hey. Good morning, Bill. Thanks for taking my questions.

Good morning.

The first one, I’m not sure if you’ll answer, but what happens if you don’t come to an agreement with NRZ?

So, I think, I’ve said twice, Fred. We have -- we believe we have long-term agreements with Ocwen to provide to them as the servicer on an exclusive basis the services. We think there’s a tremendous benefit to reach an agreement with NRZ, if you listen to the CEO of NRZ, Mike Nierenberg, the answer to one of the questions, I think, it was from Kevin Barker about where we stand, I think, he agrees and we agree with him that we’re very close to reach an agreement, of course, until it’s done it’s not done. But both parties are working really, really hard to reach an agreement, because both parties believe it’s beneficial to their firm and to their shareholders and so we have long-term agreements with Ocwen. We also are working very hard as is NRZ to get an agreement signed between our parties and we hope we’ll have something we could talk about in the coming weeks.

Okay. Got it. And then, it looked like in the disclosure from Ocwen’s 10-Q that they’re no longer going to be receiving the split on Hubzu sales, the REO referral commission after that portfolio transfers, is that correct?

So, look, I don’t want to comment on Ocwen’s Q, but I can tell you, we’re certainly -- that is something we’re discussing with NRZ and with Ocwen.

Okay. Great. Thanks. I’ll stop bargaining on that. The -- can you quantify the cost impact from migrating Ocwen off of REALServicing over the next few years?

So, we think that the cost, Fred, is largely going to be around severance, retention and terminating some of the software licenses that we acquire in order to support that system and we think that it will probably be somewhere between $7 million and $10 million over that period of time.

Okay. That’s helpful.

Yeah. Over time and we are still working…

Okay.

… through how the accounting for that will happen, but from a cash perspective, it will bleed in over time.

From a cash perspective bleeding over time $7 million or $10 million, are there any potential write-downs associated with Ocwen transitioning off of that?

No. If you remember, at the end of 2015, we took a very large write-down and there’s virtually nothing on the balance sheet today related to this.

Okay. Got it. And then, you mentioned some non-recurring costs that offset the debt repurchase gain in the quarter, what were those?

Sure. There was some, I think we mentioned it in both the press release and in our Q, I think, it’s some litigation-related expense, some sort of extraordinary severance and what was the third component, I think there’s three pieces we mentioned, give us one second. Yes, facilities related, Fred, we’ve subleased some facilities that we don’t need and we incurred probably $1 million or north of a $1 million of costs that went through the income statement in the quarter on top of these other matters, I mentioned to you, it virtually offset almost all the gain we got from the debt buyback.

Okay. And then, in terms of capital allocation priorities going forward, are you still seeing potential acquisition targets out there, is there any expectation for that to ramp up once the new CFO joins?

Well, look, we’re very, very focused on organic growth here. We certainly look at opportunities periodically and have done some smaller bolt-on type acquisitions. But, Fred, we’re focused on -- right now on organic growth and we’re going to look to use our excess cash to support our strategic initiatives, to buy shares back opportunistically and also to reduce our debt. I don’t want to say never, but it’s certainly something we periodically look at and we will continue to do so, but I won’t say at the highest -- of the highest priority.

All right. And then, on the mortgage, the Origination Solutions business that you think over time can be a 20% or 30% margin business. I guess, if I look back to the MPA acquisition seven and half years ago, something like that, what sort of profitability has that generated over that time period, and I guess, what’s additive now that’s going to accelerate margins?

So, Fred, I think, over the first three years or four years after we bought the company, we probably from its earnings got back our investment and that was largely related to we had some very attractive preferred investor transactions, where as we drove volume to lenders, we got paid certain amount of basis points as did our customers and that was driving a lot of revenue and earnings for a period of time. I think we mentioned a couple of years back that when that came to an end as it came to an end they -- that firm eliminated all those affiliated relationships, that reduced the earnings at MPA. So what I’d say is really interesting and we actually have our Lenders One Conference is taking place as we speak in Minneapolis. What we’re doing today is really focused on what we’re calling a platform solution. So we have these lenders that are very, very interested in getting origination volume and we have all these mortgage bankers that are originating loans and they need to sell those loans and they like to get greater basis points for selling those loans. So we’ve put those two parties together and sort of -- and we -- as we’ve put those parties together, part of our value proposition to these correspondents is we can get you volume, we can also provide the services to you, the underwriting and the Fulfillment Service as good or better than others in the industry at the same or better cost, but you also get volume for us. So it’s a lot easier to do business with a company that’s giving you volume and not just charging you money. So we can give origination volume for that customer and in return we’re also getting a few extra basis points for all those loans that are going to that correspondent as is our members. So it’s a great value proposition for our members. And then, we can offer them the Fulfillment Services at the same time, which is a very attractive business for us, and over time, we’ll become more and more automated and more and more profitable to drive additional business to Altisource, so it’s a win for everybody. So we think that creates a pretty unique competitive advantage and we’ve been very successful at selling that product to household names.

Okay. Got it. I mean, if you had a crystal ball and you could tell us when that business starts to make money, is it 2018, ‘19, ‘20?

I think, the -- and again, it’s not -- I’m not talking of all Origination Solutions. I certainly think as we get closer to the end of the year, there’s a little bit of seasonality, the Fulfillment business, where we’ve been losing a meaningful amount of money each month will begin to turn around as we get toward the end of this year. And then some of the other investments we’re making in the origination technology will go into more maintenance mode and less investment mode, but we won’t need as many people to go into maintenance mode. So, some of those costs will begin to come down probably the middle of next year. And then on our origination system, where we’re strengthening the modules, those investments will probably continue for the next couple of years, but we see a pretty big opportunity to -- over time to cross-sell the customers of our Mortgage Builder technology to other services at Altisource and that we can provide and that we can resell. And so we think that that’s probably a little bit longer. But that’s just to give you a sense as to how we’re doing. In balance, Fred, probably looking at toward at -- toward the end -- the losses will come down throughout next year and maybe the year after we’ll be -- should be begin to get very attractive from a profitability perspective.

All right. All right. Thanks. Then just on Hubzu stuff, the transactions, Ocwen-related transactions were down quarter-over-quarter despite 2Q normally being seasonally stronger. What -- anything going on underneath the surface there that led to the sequential decline?

Yes. So, Fred, I think, actually our decline was relatively modest and is reflective of the fact that Ocwen’s portfolio is coming down and also as RESI exits its REO assets. But we’re seeing a lot of success onboarding FHA auction clients and short sale clients and we’re -- as I discussed in my prepared remarks, also adding REO asset management clients. I’m trying to find, I think, I have the data here somewhere. Our referrals -- let me see if I can find it, our referrals in the second quarter of new listings, and again, I’m talking about FHA auction, short sale and REO, unrelated to Ocwen and unrelated to RESI are up something like 67% and they’re also up something like ten-fold over last year. That’s not sales I’m talking about referrals. Our non-Ocwen, I’m trying to find the absolute number, that’s pretty attractive as well. And our non-Ocwen, non-RESI sales are also up sequentially. They’re down from last year in the second quarter primarily because of that one client we had that cut out the business where we had some run-off. But I think we’re seeing really good success of growing the non-Ocwen, non-RESI referrals and sales sequentially and hope that will continue to grow. And, Fred, as I mentioned also, the impact from the decline in Ocwen and RESI’s portfolios is not as great from a revenue perspective, because the average sales price has been going up and as we’ve been auctioning -- and we’ve been auctioning more of the homes.

Got it. And the new business, the new FHA and short sale business, that’s still 50%, 60% pre-tax margin, is that the right context?

Yeah. Yeah. I mean, we don’t break out the margins there, but it’s very attractive, yes. I would point out also in the revenue for loan in the, sorry, the revenue per homes sold in the slide, that doesn’t -- that includes more than just the commission and auction fee, there’s some other charges included in there, some other revenue included in there, I am sorry.

In the Hubzu revenue?

No. In the slide where we referenced how much revenue we’re generating from Hubzu, that includes auction revenue, brokerage revenue and some other fees that we earn related to those services.

Is that the, so, I mean, I know, I think that when I backed into it before that includes like the RHSS 1.5 transaction fee and then a technology fee, is that what you mean or are these different fees you’re talking about?

Yeah. It’s some closing fees is my recollection, Fred, some fees we get for closing the transaction.

Okay. And then, just if I look at, I mean, I did some math on estimating Hubzu profitability in the past, just is all of Altisource profitable or can you sort of talk at all about the profitability of Altisource excluding Hubzu?

Yeah. Let’s, Fred, if you take a step back, right, just covered origination, where it’s growing quite nicely. It’s not making money today. In our Real Estate Investor Solutions business, it’s making a little bit of money, as we continue that pivot to the buy renovate sell program, we think we’ll improve its earnings. Inside Servicer Solutions, and again, the work we perform for other clients is as profitable or more profitable than the work we do for Ocwen on like services, think about what we’re providing there, property inspection and preservation. It’s lower margin but it’s a very attractive business and we do that work for Ocwen and we do that work for others. We do title insurance and escrow work. That’s a very attractive business, nice margins. We do title, sorry, we do valuations. It’s a lower margin business but we do that work for Ocwen and we do it for others and that’s lower than Hubzu, but it’s still an attractive margin. So, yes, virtually across the Servicer Solutions business, in fact, we’re making money in all those businesses. So, while REO is certainly an important component, we generate attractive earnings in those other businesses as well, although, at lower margins.

Okay. Right. I mean, I was just asking for Altisource overall as a company, I mean, what sort of level or profitability if you back out Hubzu, do you have any estimates for that?

No. We don’t and we don’t break it out, Fred.

All right. Well, thanks for taking my questions.

Thank you.

We do have a follow-up from Kevin Barker with Piper Jaffray. Your line is open.

I had a quick question on the tax accrual adjustment, could you quantify what your effective tax rate would have been in the quarter and your expectations going forward for the tax rate?

Sure. So, it would’ve been about 24%, 25% in the quarter and our projection for the year is 24% to 27%.

Okay. And then, do you have any updates on the expiration of the tax credit agreement that you have with Luxembourg in 2019 or is that still in place and your expectation that that will stay in place?

Kevin, we are not going to comment on that on the call, but, yeah, we believe we have an attractive tax rate. It’s gone up a little bit based on the mix of our earnings across jurisdictions, but over time we believe we’re going to continue to have an attractive tax rate. And as our earnings go up -- as our GAAP earnings go up, our tax rate should be -- should come down over the next couple of years.

Okay. And then, in regards to the -- your capital allocation, you bought back a little bit of stock this quarter, but the majority, obviously, was due to the pay down of debt, when you go forward from here, can you update us on your priorities on whether to repay debt or to pay down or to buy back stock and…

Yeah. So…

… some of the decisions around that?

Yeah. I think, I covered that in my prepared remarks, but our plan is to continue to take a balanced approach. We will look to opportunistic -- to invest in our initiatives, to opportunistically buy back stock and we’ll also look to reduce the debt. We’ve got plenty of term left on our debt but we will continue to look for opportunities to pay that down.

It looks like the amount of capital that you deployed this quarter was close to the amount of free cash flow that was generated from operations, is that a fair way to look at, how much capital you’re going to deploy in the future?

No. I’m not sure I’m following you. We deployed a couple million dollars in capital, if you’re talking about like for facilities and equipment, things like that.

I think, $26 million…

Okay.

… of that in the share repurchase.

No. No. Not -- that’s not necessarily the best way to look at it, it’s -- if that’s what you’re asking, Kevin.

Okay. I was just trying to get quantification on how much you will look to...

I mean, I think, from a capital perspective like facilities, equipment, technology, et cetera. We’re looking at spending $16 million, $17 million this year. In terms of the deployment of cash toward debt pay down and stock repurchases, I think, that’s more opportunistic and hard to quantify for you.

Okay. Thanks for taking my questions.

Thanks.

And I’m showing no further questions. I would now like to turn the conference back to Michelle Esterman for any further remarks.

Thank you for joining the call. We look forward to talking to you next quarter.