Ocwen Beats Estimate - Analyst Blog

Ocwen Financial Corporation(OCN) reported adjusted second quarter 2010 earnings of 24 cents per share, substantially higher than the Zacks Consensus Estimate of 13 cents.

Results in the quarter showed an improvement mainly due to a rise in total revenue and interest income. However, an increase in operating costs and interest expense were the downside.

Including one-time pre-tax charges of $33.9 million related to the HomEq acquisition and $20.1 million of litigation expenses related to the Cartel judgment, Ocwen reported a loss of 9 cents, up 82.4% compared with a loss of 51 cents in the prior-year quarter.

Quarter in Detail

Ocwen's net loss improved to $8.8 million from a net loss of $42.0 million in the year-ago quarter. Results were better than the prior-year quarter mainly due to absence of one-time income tax expense of $56.5 million recognized in the third quarter of 2009.

Total revenue rose 13.5% year over year to $95.6 million. However, total revenue significantly missed the Zacks Consensus Estimate of $104.0 million. The year-over-year improvement in total revenue was mainly due to a 50.2% rise in servicing and sub-servicing fees which was partly offset by a 67.8% fall in process management fees and 40.8% decline in other revenues.

Operating expenses increased 72.2% year over year to $93.4 million. The hike was due to a substantial rise inexpenses related to compensation and benefits as well as professional services. This was partly offset by a fall in servicing and origination costs.

Interest income increased 48.7% year over year to $2.96 million. Interest expense also rose 49.8% year over year to $24.2 million.

As of September 30, 2010, Ocwen recorded cash of $163.9 million compared with $90.9 million as of December 31, 2009. Debt securities totaled $82.6 million as of September 30, 2010, compared with $95.6 million recorded as of December 31, 2009.

Business Updates

On September 1, Ocwen completed the acquisition of $22.4 billion HomEq servicing portfolio and platform from Barclays Bank.

During the quarter, Ocwen completed 15,928 modifications, which was at the upper end of the company's guidance of 14,000−16,000 modifications.

Our Take

Although the near-term outlook remains cautious considering market volatility and weak housing loan payment, Ocwen remains committed to new business acquisition and increase of loan modifications. These are expected to gradually convert into increased profitability.

Ocwen currently retains a Zacks #4 Rank, which translates into a short-term ‘Sell' rating, indicating no directional pressure on the shares over the near term. However, considering the fundamentals, we are maintaining our Neutral recommendation on the stock for the long term.