October 26, 2007 at 07:00 AM EDT
Clayton Holdings Reports Results for Third Quarter of 2007
- Gross Margin from Continuing Operations of 43.6%

SHELTON, Conn., Oct. 26 /PRNewswire-FirstCall/ -- Clayton Holdings, Inc. (NASDAQ:CLAY), a leading provider of information-based analytics, consulting and outsourced services for capital markets firms, lending institutions, fixed income investors and loan servicers, today announced a loss from continuing operations of $2.6 million on revenues of $31.3 million for the third quarter ended September 30, 2007.

    (Logo: http://www.newscom.com/cgi-bin/prnh/20070509/CLAYTONLOGO )

    Clayton's third quarter 2007 results include:

    Key Financial Highlights (amounts in millions, except per share data):

                                                     Percent
                                                     Increase
    Quarter Ended September 30,        2007    2006 (Decrease
    -----------------------------    -------  ----- ---------
      Revenue                         $31.3   $59.2  (47.1)%
      Gross Profit                     13.6    22.7  (39.8)%
      (Loss) Income from Continuing
       Operations                      (2.6)    3.8    n/a
      Net (Loss) Income                (2.8)    3.1    n/a

      (Loss) Income Per Share -
       Diluted
         Continuing Operations       $(0.13)  $0.18    n/a
         Discontinued Operations      (0.01)  (0.04)   n/a
                                     -------  ------
         Total                       $(0.14)  $0.14    n/a
                                     =======  ======
      Adjusted Net (Loss) Income -
       Continuing Operations
       (non-GAAP)*                    $(1.0)   $5.3    n/a
      Adjusted (Loss) Income Per
       Share - Continuing Operations
       (non-GAAP)*                   $(0.05)  $0.25    n/a

      Diluted Shares Outstanding       21.0    21.3   (1.7)%

      Gross Profit Margin -
       Continuing Operations          43.6%   38.3%    13.8%

                                                     Percent
                                                     Increase
    Nine Months Ended September 30,    2007    2006 (Decrease
    ---------------------------------------------------------
      Revenue                        $127.8  $173.0  (26.1)%
      Gross Profit                     51.1    59.6  (14.3)%
      (Loss) Income from Continuing
       Operations                      (0.5)    6.1    n/a
      Net (Loss) Income                (5.5)    4.3    n/a

      (Loss) Income Per Share -
       Diluted
         Continuing Operations       $(0.02)  $0.33    n/a
         Discontinued Operations      (0.24)  (0.10)   n/a
                                     -------  ------
         Total                       $(0.26)  $0.23    n/a
                                     =======  ======
      Adjusted Net Income -
       Continuing Operations
       (non-GAAP)*                     $4.2   $11.3  (62.6)%
      Adjusted Earnings Per Share -
       Continuing Operations
       (non-GAAP)*                    $0.20   $0.61  (67.2)%

      Diluted Shares Outstanding       21.4    18.6    15.4%

      Gross Profit Margin -
       Continuing Operations          40.0%   34.5%    15.9%


    *Adjusted net income from continuing operations excludes the following
     items, net of tax: acquisition-related amortization, loss on
     extinguishment of debt and the results of discontinued operations.  For a
     reconciliation of net income from continuing operations to adjusted net
     income from continuing operations, please refer to the tables on the
     following pages.

"The unprecedented credit crisis that unfolded in the third quarter caused a dramatic downturn in the nonconforming securitization market and significantly reduced our transaction management volumes. Such volumes may not increase materially until investor confidence and liquidity return to the asset-backed market," commented Frank Filipps, Chairman and Chief Executive Officer of Clayton. "One encouraging sign however, was recent Congressional testimony by the rating agencies that recommended more use of third-party due diligence and incorporating the results in the bond ratings process. We believe that adoption of these recommendations would further increase the value and demand for transaction management and surveillance services."

    Other Third Quarter Highlights:
    -- Centralized underwriting volume represented 77% of the due diligence
       business, continuing the shift towards the centralized due diligence
       delivery channel.
    -- As of September 30, 2007, Clayton Surveillance was monitoring
       approximately $457 billion in assets primarily for investment banks and
       for institutional investors in mortgage-backed securities.  This
       represents an increase of $70 billion, or 18%, since September 30,
       2006. Revenues from our Surveillance business increased by almost 16%
       to $10.3 million in the quarter, accounting for 33.0% of total
       revenues, up from 15.1% a year ago.
    -- Gross margin from continuing operations was 43.6% for the three months
       ended September 30, 2007, as compared to 38.3% in the third quarter of
       2006. This was the result of a shift in the business mix to higher
       margin product offerings and implementation of cost containment
       efforts.  Expenses in the quarter included over $1 million of non-
       recurring charges for employee severance costs and lease termination
       fees.
    -- As previously announced, $5 million of debt was prepaid in July, 2007.
       Cash generated from operations was $17.3 million in the third quarter
       and Clayton had $27.9 million of cash as of September 30, 2007.

Management will hold a conference call today at 10:00 a.m. EDT. A live webcast of the conference call will be available online at http://www.clayton.com. Web participants are encouraged to go to Clayton's website at least 15 minutes prior to the start of the call to register, download and install any necessary audio software. Listening to the webcast requires speakers and RealPlayer(TM) software, downloadable without charge at http://www.real.com. Those without Web access can access the call by phone and should plan to dial in approximately 10 minutes prior to the call. The dial-in numbers are (866) 825-3308 for domestic callers and (617) 213-8062 for international callers. The participant passcode for both is 77958147.

A recording of the conference call will remain available for 90 days, on Clayton's website and via telephonic replay. The replay dial-in number is (888) 286-8010 for domestic callers and (617) 801-6888 for international callers. The participant passcode for both is 56411240.

About Clayton Holdings, Inc.

Clayton Holdings, Inc., headquartered in Shelton, Connecticut, is an information and analytics company serving leading capital markets firms, lending institutions, fixed income investors and loan servicers with a full suite of information-based analytics, specialty consulting and outsourced services. Clayton's services include due diligence analytics, conduit support services, professional staffing, compliance products and services, credit risk management and surveillance and specialized loan servicing services. Additional information is available at www.clayton.com.

Safe Harbor Statement

Certain items in this press release may constitute forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Clayton can give no assurance that expectations will be attained. Factors that could cause actual results to differ materially from Clayton's expectations include, but are not limited to, adverse changes in the mortgage-backed securities market, the mortgage lending industry or the housing market; the level of competition for Clayton's services; the loss of one or more of Clayton's largest clients; Clayton's ability to maintain its professional reputation; management's ability to execute Clayton's business strategy; Clayton's ability to recruit and retain additional qualified independent loan review specialists; and other risks detailed in Clayton's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 23, 2007 and other reports filed with the Securities and Exchange Commission. Such forward-looking statements speak only as of the date of this press release. Clayton expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in Clayton's expectations with regard thereto or change in events, conditions, or circumstances on which any such statement is based.

Reconciliation of Non-GAAP Measures

This earnings release contains non-GAAP financial measures. For purposes of Regulation G, a non-GAAP financial measure is a numerical measure of a registrant's historical or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statement of operations, balance sheet or statement of cash flows of the issuer; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented. In this regard, GAAP refers to generally accepted accounting principles in the United States. Pursuant to the requirements of Regulation G, the Company has provided a reconciliation of the adjusted (non-GAAP) financial measures to the most directly comparable GAAP financial measures.

Adjusted net income from continuing operations and adjusted earnings per share from continuing operations are discussed in this earnings release because management uses this information in evaluating the results of the continuing operations of the business and believes that this information provides the users of the financial statements a valuable insight into the operating results. Additionally, management believes that it is in the best interest of its investors to provide financial information that will facilitate comparison of both historical and future results and allows greater transparency to supplemental information used by management in its financial and operational decision making. Management encourages investors to review the reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures that are provided within the financial information attached to this release.

Clayton is providing its current quarter GAAP results as well as financial results that have been adjusted for the impact of acquisition-related amortization, loss from extinguishment of debt and discontinued operations. The Company believes that these non-GAAP measures supplement its consolidated GAAP financial statements as they provide a consistent basis for comparison between reporting periods that are not influenced by certain non-cash or non- recurring items and are, therefore, useful to investors in helping them to better understand the Company's operating results.

    CONTACT:
    Rick Herbst
    Chief Financial Officer
    (203) 926-5600



                     CLAYTON HOLDINGS, INC. AND SUBSIDIARIES

                   Condensed Consolidated Statements of Income

                      (in thousands, except per share data)

                                   (unaudited)

                                        Three Months Ended  Nine Months Ended
                                           September 30,      September 30,
                                        ------------------  -----------------
                                          2007     2006      2007      2006
                                        -------- --------  --------  --------
    Revenue                              $31,318  $59,172  $127,824  $173,014

    Cost of services:
      Compensation expense                15,255   28,061    61,181    85,671
      Travel and related expenses          1,299    6,301    10,389    20,181
      Other direct costs                   1,121    2,156     5,133     7,524
                                        -------- --------  --------  --------
         Total cost of services           17,675   36,518    76,703   113,376

    Gross profit                          13,643   22,654    51,121    59,638

    Operating expenses:
      Salaries and benefits                5,563    5,423    16,759    15,538
      Other selling, general and
       administrative expenses             6,165    4,655    17,195    13,818
      Depreciation and amortization        2,362    2,069     6,850     5,435
      Amortization of intangibles          2,573    2,542     7,642     7,626
                                        -------- --------  --------  --------
         Total operating expenses         16,663   14,689    48,446    42,417

    (Loss) income from operations         (3,020)   7,965     2,675    17,221

    Interest expense, net                    884    1,746     3,098     6,471
    Loss from extinguishment of debt          44      -         134       746
    Other income                               5      -           5       -
                                        -------- --------  --------  --------
    (Loss) income from continuing
     operations before income taxes       (3,943)   6,219      (552)   10,004
    Income tax (benefit) expense          (1,323)   2,419       (29)    3,878
                                        -------- --------  --------  --------
    (Loss) income from continuing
     operations                           (2,620)   3,800      (523)    6,126

    Loss from discontinued operations,
     net of tax of $0, $0.2, $0.8 and
     $1.0, respectively                     (140)    (740)   (1,543)   (1,792)
    Loss on disposal, net of tax of $0
     and $1.9, respectively                  (73)     -      (3,404)      -
                                        -------- --------  --------  --------
    Net (loss) income                    $(2,833)  $3,060   $(5,470)   $4,334
                                        ======== ========  ========  ========

    Basic (loss) income per share:
      Continuing operations               $(0.13)   $0.19    $(0.02)    $0.34
      Discontinued operations              (0.01)   (0.04)    (0.24)    (0.10)
                                        -------- --------  --------  --------
      Total                               $(0.14)   $0.15    $(0.26)    $0.24
                                        ======== ========  ========  ========

    Diluted (loss) income per share:
      Continuing operations               $(0.13)   $0.18    $(0.02)    $0.33
      Discontinued operations              (0.01)   (0.04)    (0.24)    (0.10)
                                        -------- --------  --------  --------
      Total                               $(0.14)   $0.14    $(0.26)    $0.23
                                        ======== ========  ========  ========

    Weighted average number of shares of
     common stock outstanding:
      Basic                               20,957   20,537    20,893    17,777
      Diluted                             20,957   21,312    20,893    18,578

    Reconciliation of non-GAAP measures:

    Net (loss) income from continuing
     operations as reported              $(2,620)  $3,800     $(523)   $6,126
      Add amortization of
       intangibles(1)                      2,498    2,542     7,494     7,626
      Add loss on extinguishment
       of debt(2)                             44      -         134       746
      Less income tax impact of these
       adjustments(3)                       (958)    (998)   (2,899)   (3,245)
                                        -------- --------  --------  --------
         Adjusted net (loss) income -
           continuing operations         $(1,036)  $5,344    $4,205   $11,253
                                        ======== ========  ========  ========

    Adjusted (loss) income per share -
     continuing operations:
      Basic                               $(0.05)   $0.26     $0.20     $0.63
      Diluted                             $(0.05)   $0.25     $0.20     $0.61

    Weighted average number of shares of
     common stock outstanding:
      Basic                               20,957   20,537    20,893    17,777
      Diluted                             20,957   21,312    21,437    18,578

      (1) amount represents amortization expense associated with intangible
          assets as a result of assets acquired in certain business
          acquisitions, including amounts primarily related to acquired
          customer relationships, technology, noncompetition agreements and
          client backlog.

      (2)  amount represents write-off of deferred financing costs associated
           with the portion of the term loan that was repaid earlier than
           scheduled.

      (3)  amount represents the income tax impact of the amortization expense
           adjustments referred to in (1) above and the loss on extinguishment
           of debt referred to in (2) above.



                     CLAYTON HOLDINGS, INC. AND SUBSIDIARIES

                      Condensed Consolidated Balance Sheets

                                 (in thousands)


                                               September 30,      December 31,
                                                   2007              2006
                                               -------------      ------------
                                                (unaudited)
                            ASSETS

    Current assets:
      Cash                                         $27,902           $22,882
      Restricted cash                                  -              11,739
      Accounts receivable, net                      23,616            37,452
      Unbilled receivables                           7,225            14,950
      Prepaid and other current assets               2,319             3,252
      Prepaid income taxes                           5,276             1,791
      Deferred tax assets                              605               572
      Assets of discontinued operations                -               5,015
                                               -------------      ------------
        Total current assets                        66,943            97,653

    Property and equipment, net                     16,991            19,621
    Goodwill                                        70,011            69,843
    Intangible assets, net                          69,288            74,294
    Other assets, net                                1,329             1,502
                                               -------------      ------------
        Total assets                              $224,562          $262,913
                                               =============      ============

                 LIABILITIES AND STOCKHOLDERS'
                           EQUITY

    Current liabilities:
      Long term debt and capital lease
       obligations, current portion                   $668              $929
      Accounts payable and accrued
       expenses                                     15,323            22,832
      Servicer escrow liability                        -              11,739
      Liabilities of discontinued
       operations                                      -                  19
                                               -------------      ------------
        Total current liabilities                   15,991            35,519

    Long term debt and capital lease
     obligations, net of current portion            48,903            64,423
    Deferred tax liabilities                         1,333             4,089
    Deferred revenue                                   266               204
    Deferred rent                                    1,567               949
    Other long-term liabilities                      2,664               -
                                               -------------      ------------
        Total liabilities                           70,724           105,184

    Commitments and contingencies
    Stockholders' equity:
      Common stock                                     211               207
      Additional paid-in capital                   144,516           141,256
      Retained earnings                              8,997            16,266
      Accumulated other comprehensive
       loss                                            114               -
                                               -------------      ------------
        Total stockholders' equity                 153,838           157,729
                                               -------------      ------------
        Total liabilities and
         stockholders' equity                     $224,562          $262,913
                                               =============      ============



    Supplementary Data

    Domestic Loan Volumes (unaudited)

                                           Three Months Ended September 30,
                                           --------------------------------
                                                                 Increase/
                                                                (Decrease)
                                                                ----------
                                           2007     2006     Amount      %
                                         -------- --------  --------  --------
    Due Diligence:
         Traditional file reviews:
            Field                          15,000  137,000  (122,000) (89.1)%
            CU                             63,000   69,000    (6,000)  (8.7)%
         Other file reviews                 4,000   32,000   (28,000) (87.5)%
                                         -------- --------  --------
                                           82,000  238,000  (156,000) (65.5)%
    Conduit                                 3,000   25,000   (22,000) (88.0)%
                                         -------- --------  --------
         Total                             85,000  263,000  (178,000) (67.7)%
                                         ======== ========  ========


                                            Nine Months Ended September 30,
                                           --------------------------------
                                                               Increase /
                                                               (Decrease)
                                                               ----------
                                           2007     2006     Amount      %
                                         -------- --------  --------  --------
    Due Diligence:
         Traditional file reviews:
            Field                         166,000  412,000  (246,000) (59.7)%
            CU                            193,000  178,000    15,000     8.4%
         Other file reviews                22,000   53,000   (31,000) (58.5)%
                                         -------- --------  --------
                                          381,000  643,000  (262,000) (40.7)%
    Conduit                                27,000   58,000   (31,000) (53.4)%
                                         -------- --------  --------
         Total                            408,000  701,000  (293,000) (41.8)%
                                         ======== ========  ========



    Revenue by Product (unaudited)

                       Three Months Ended September 30,
                      ---------------------------------
                            2007            2006         Increase/(Decrease)
                      ---------------- ----------------  -------------------
                                % of              % of
    (in thousands)    Amount  Revenues  Amount  Revenues  Amount     %
                     -------  -------- -------  -------- -------  -------
    Transaction
     Management:
      Field Due
       Diligence      $3,666     11.7% $20,986    35.5% $(17,320) (82.5)%
      Central
       Underwriting    6,760     21.6%  10,273    17.3%   (3,513) (34.2)%
      Ancillary
       Services          432      1.3%   1,619     2.7%   (1,187) (73.3)%
                     -------   ------- -------  -------  --------
        Sub-total Due
         Diligence    10,858     34.6%  32,878    55.5%  (22,020) (67.0)%

    Conduit Support
     Services          1,388      4.4%   7,097    12.0%   (5,709) (80.4)%
    Professional
     Staffing
     Services          1,802      5.8%   4,075     6.9%   (2,273) (55.8)%
    Clayton
     Euro Risk         2,279      7.3%       -     0.0%    2,279    n/a
    Other              1,648      5.3%   3,132     5.3%   (1,484) (47.4)%
                     -------   ------- -------  -------  --------
        Sub-total
         Transaction
         Management   17,975     57.4%  47,182    79.7%  (29,207) (61.9)%

    Surveillance
     Services         10,332     33.0%   8,937    15.1%    1,395   15.6%

    Special
     Servicing         3,011      9.6%   3,053     5.2%      (42)  (1.4)%
                     -------   ------- -------  -------  --------
        Total
         Clayton     $31,318    100.0% $59,172   100.0% $(27,854) (47.1)%
                     =======   ======= =======  ======= =========


                       Nine Months Ended September 30,
                      ---------------------------------
                            2007            2006         Increase/(Decrease)
                      ---------------- ----------------  -------------------
                                % of             % of
    (in thousands)    Amount  Revenues  Amount  Revenues   Amount     %
                     -------  -------- ------- --------- --------  -------
    Transaction
     Management:
      Field Due
       Diligence     $32,863     25.7%  $68,563    39.6% $(35,700) (52.1)%
      Central
       Underwriting   23,948     18.7%   25,731    14.9%   (1,783)  (6.9)%
      Ancillary
       Services        2,779      2.2%    5,628     3.3%   (2,849) (50.6)%
                     -------   -------  -------  -------  --------
        Sub-total Due
         Diligence    59,590     46.6%   99,922    57.8%  (40,332) (40.4)%

    Conduit Support
     Services          9,252      7.3%   20,321    11.7%  (11,069) (54.5)%
    Professional
     Staffing
     Services          8,028      6.3%   12,001     6.9%   (3,973) (33.1)%
    Clayton
     Euro Risk         3,433      2.7%       -      0.0%    3,433    n/a
    Other              5,635      4.4%    6,717     3.9%   (1,082) (16.1)%
                     -------   -------  -------  -------  --------
        Sub-total
         Transaction
         Management   85,938     67.3%  138,961    80.3%  (53,023) (38.2)%

    Surveillance
     Services         34,695     27.1%   24,681    14.3%   10,014   40.6%

    Special
     Servicing         7,191      5.6%    9,372     5.4%   (2,181) (23.3)%
                     -------   -------  -------  -------  --------
        Total
         Clayton    $127,824    100.0% $173,014   100.0% $(45,190) (26.1)%
                    ========   ======= ========  ======= =========

Source: Clayton Holdings, Inc.

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