Q3 2022 Doma Holdings Inc Earnings Call
Thank you for standing by and welcome to the third quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone.
As a reminder, today's program is being recorded and now I'd like to introduce your host for today's program Beatrice Bartholomew.
Head of Investor Relations. Please go ahead.
Thank you operator good after.
Noon, everybody and thank you for joining donlin.
Quarter 2022.
Vince Com.
Earlier today, gentlemen, issued a press release announcing our third quarter results, which is also available at Investor <unk> Com.
Leading today's discussion will be done with founder and Chief Executive Officer, Matt <unk>.
And Chief Financial Officer, Mike Smith.
Following managements prepared remarks, we will open up the call for questions.
Before we begin I would like to remind you that our discussion will contain predictions expectations forward looking statements and other information about our business that is based on management's current expectation as of the date of the presentation.
Forward looking statements include but are not limited to Douglas expectations or predictions of financial and business performance and conditions and competitive and industry outlook.
Forward looking statements are subject to risks uncertainties and other factors that could cause our actual results to differ materially from historical Nicole <unk> from our forecast.
<unk> those set forth in Donuts form 8-K filed today.
For more information please refer to the risks uncertainties and other factors discussed in Dallas. Most recently filed annual report on Form 10-K, and other SEC filings.
All cautionary statements that we make during this call are applicable to any forward looking statements, we make wherever they appear.
You should carefully consider the risks and uncertainties and other factors discussed in Donuts SEC filings do.
Do not place undue reliance on forward looking statements and Selma is under no obligation and expressly disclaims any responsibility for updating altering or otherwise revising any forward looking statement, whether as a result of new information future events or otherwise except as required by law. Additionally.
Additionally, during this conference call. We will also refer to non-GAAP financial measures, including retained premiums and fees adjusted gross profit and the other measures described in our earnings release.
Our GAAP results and a description of our non-GAAP financial measures with a full reconciliation to GAAP can be found in the third quarter 2022 earnings release, which has been furnished to the SEC and is available on our investor website and with that I'll turn the call over to Matt Cox CEO of Doma.
Thank you good afternoon, everyone and thank you for joining us the third quarter was pivotal for Domo and I'm proud of the way our team executed, particularly given the continued challenges of U S housing market.
Our financial results have now begun to reflect more tangible benefits of the considerable expense actions. We took earlier this year to right size our company for the realities of the current real estate cycle.
In a short period of time, we have made meaningful strides towards our goal of delivering adjusted EBITDA profitability and because we understand the importance of delivering sustainable profits irrespective of the length and severity of the current housing market cycle today, we're committing to reaching our adjusted EBIT profitability goal, even sooner than we have previously stated.
In keeping with previous earnings calls there are three main themes I'll be focusing on today first there is no mistaking that the U S housing market is now heading towards a full fledged recession with little hope for sustained release in the near term.
Dynamic has continued to pressure our results and as such we are revising our adjusted EBIT guidance for the remainder of this year.
Second the challenging market, we're operating in now creates a unique opportunity for Delmar as we believe we are the only company in our space, who is positioned to capitalize on our proven instant underwriting technology and nationally scaled underwriting platform to deliver better faster.
And yes cheaper solutions to homeowners, who are now facing unprecedented affordability challenges.
Staying nimble in response to the highly volatile residential real estate landscape, where customer demand is rapidly shifting towards lower cost solutions across the value chain and re adapting our priority is to remain an industry innovator in this environment, we will better realize our vision of removing the friction frustration and expense from homeownership.
Third despite the adjustment we are making today in relation to the current year getting to adjusted EBIT profitability continues to be our top priority across the entire company.
And we are now working towards the faster timeline that would enable us to turn profitable sooner than what we had previously communicated as late 2023.
I am very pleased with the early returns on the areas of the business that the team address first through cost reductions in Q2, and Q3, and which are now already delivering significant improvements in adjusted EBITDA.
We believe we can build on this momentum by not only identifying new ways to more quickly roll out our proven instant underwriting capabilities as mentioned earlier, but also by more exhaustively prioritizing profitable execution in our local division.
Topic I'll give more details on in a moment.
I'll now dive into these three themes in more detail and after that I will turn the call over to Mike to cover our third quarter financial results and financial outlook.
The lead things off it seems clear that the U S housing market is entering a recession. The federal open market Committee has delivered four consecutive <unk> 75 basis point rate hikes. This year with expectations of further aggressive tightening on horizon, while stubbornly high inflation broken global supply chain and broader geopolitical concerns have all contributed in parallel to effective.
We double 30 year fixed mortgage rates versus the same time last year.
According to Morgan Stanley Research housing affordability is deteriorating at a much faster pace than in any point in the last 30 years.
These factors have exerted enormous pressure on even the most mature and profitable franchises operating and real estate.
For those companies in the earlier stages of growth many are unlikely to make it to the other side of a prolonged market downturn of this magnitude at all.
Allstate upfront with conviction that we believed alma is in a different class from these other young companies, particularly given our proactive approach to implementing a combination of measures to enable our long term operational and financial success.
We are committed to emerging from this housing cycle as a stronger and more steadfast resilient profitable company.
Our business performance in Q3, which we will continue to frame versus the prior quarter. As we did in Q2 was impacted by the aforementioned macro pressures from a mortgage market that has become extremely challenging for homebuyers.
In Q3, we delivered $43 million retained premium and fees down 13% sequentially driven by lower refinance closed orders, which fell by 25% quarter over quarter as the mortgage market continues to readjust to the sharply higher interest rate environment.
Our purchase closed orders declined 11% sequentially versus Q2, which was directionally expected.
As of Q3 purchase orders made up 42% of our direct residential volume and 74% of our direct residential retained premium and fees.
In our Q1 and Q2 earnings calls earlier this year.
We discussed the fact that we informed our own internal mortgage macro forecast for the year that we were going to plan and execute our business by and which we felt was considerably more conservative than other industry forecast that were slower are more reluctant to update their numbers. While we've continued to adapt our internal forecast ahead of other industry groups and have utilized our own independent set of circumstances to model potential.
Outcomes against no amount of conservatism baked into these forecasts could have predicted the unprecedented pace of contraction in the market that we've now seen in.
In addition to refinance volumes continuing to decline the purchase side of the market has also slowed more than anyone expected.
Home purchase is now out of reach for many U S households, given that the 30 year fixed rate has exceeded 7% threshold last seen in the early two thousands.
Additionally, the rapid pace of interest rate increases and just the past few months has driven cancellation rates higher for pending home purchase transactions was 17% of all purchase transactions in the month of September being cancelled. This is the highest share of cancellations on record aside from March of 2020.
We expect all of the existing macro factors at play to continue pressuring our ability to generate retained premiums and fees for the remainder of the year. Given these factors we are revising our adjusted EBITDA guidance for 2022, Mike will provide those details shortly.
While the dynamics of the overall housing market have made things challenging for us and many other companies our industry they've made life orders of magnitude more difficult for the individuals across the nation, who are now struggling to afford homeownership.
The average monthly payment on a conforming mortgage has increased by over 60% versus a year ago and with the average American homebuyer, having just over $5000 in disposable income every dollar they pay for value received in the mortgage transaction is now critical.
We've also seen increase in calls as of late from several of the largest stakeholders in the housing market such as Fannie Mae Freddie Mac and the FHFA to find ways of innovating to provide more equitable access to affordable housing.
This kind of environment offers a unique opportunity for domo, we are arguably the only player in our space, who has the proven technology and underwriting capabilities to help homeowners closed transactions better faster and cheaper.
Since the day, we founded the company. We have also demonstrated that we can be nimble enough to adapt our business to drive value across all types of real estate cycles and market conditions and the current time is no exception.
To best ensure that we seized this opportunity we are in the process of re adapting our priorities and our business footprint to ensure even more profitable execution of our platform.
Toward this end building on the success, we've seen in gaining share in our enterprise Division, we have identified several new potential distribution opportunities to get the power of our instant underwriting deployed across more transactions at scale.
In our local business, we've decided to pause further expansion of the domain intelligence platform for purchase transactions two additional branches. So that our team can first conduct an exhaustive review of our national branch footprint and determine what the best configuration should be going forward.
As part of the initial review of this footprint. The team recently took actions to begin closing unprofitable branches.
These decisions can attest that the key focus for US right now is to ensure that you have the right pace of investment in place for both our local and enterprise businesses, enabling both channels to reach profitability earlier in 2023 than we had previously planned.
In summary, our broader near term priorities are to make sure. We're utilizing our scaled underwriting platform with maximum efficiency and distributing our technology enabled solutions to customers in line with how the market evolves and in the most cost effective ways.
In keeping with the third theme of today's call, we will adapt our business footprint and focus while also remaining on a path to adjusted EBITDA profitability and because we know how important reaching this milestone is particularly given the structural shift and broader market conditions. We are now committed to reaching adjusted EBITDA profitability on a faster timeline than previously communicated.
Today's downward revision to the outlook for 2022 doesn't adversely impact. This trajectory, we will look to provide an exact timeline during our fourth quarter earnings call.
We are confident that we can achieve this more ambitious path to profitability because our team is now seen firsthand that it can be done after delivering a set of cost reductions in Q2, and Q3 that led to a significant improvement in our adjusted EBITDA versus the second quarter to the tune of $13 million.
While we expect this upward trajectory in adjusted EBITDA to continue in Q4 as the full benefit of those prior cost reductions continue to be realized our team is confident that by re prioritizing our focus as I mentioned earlier, we can deliver on our mission with a leaner cost structure and greater agility as we move into Q1 and Q2 next year.
Our goal is to drive significant additional margin benefit for both next year and sustainably over the long term.
Similar to our review of the branch network everything in the business is being evaluated right now with that objective in mind and we expect that we will have more updates to share on this front during our Q4 earnings call in February .
To sum it up despite another challenging quarter for the entire housing industry. We believe the strong demand in the current market for better faster and cheaper paths to homeownership presents domo with a unique opportunity to get our instant underwriting solution deployed across more transactions in a more efficient way, we have the technology the people and the momentum toward.
Faster path to EBIT profitability that will help us do this while remaining the leading provider who is changing our space for the better.
With that I will now pass the call over to our CFO , Mike Smith to provide you with further details on our recent financial performance and an update on our outlook Mike.
Thank you Max and good afternoon, everyone I will start by recapping, our financial results for the third quarter, and then I will dive into the details.
Please refer to our earnings press release filed earlier today and our 10-Q scheduled to be filed later today for full details of the quarter.
Unless otherwise specified all of the third quarter figures cited in my remarks, our quarter over quarter or sequential comparisons.
Given our intense focus on profitability of the Max outlined during his remarks I'll start there.
We made significant expense reductions in the second and third quarters and are already seeing savings realized from these cuts.
We expect to see the full benefit of these actions in Q4 this year and continued improvement on our adjusted gross profit contribution.
And our adjusted EBITDA.
Our primary measure of unit economics, as adjusted gross profit, which was $12 million in the third quarter of 2022 up 7% sequentially.
Adjusted gross profit as a percentage of Rps was 27% and <unk> 22, compared to 22% last quarter.
Adjusted EBITDA, our main profitability measure improved $13 million in the third quarter to negative $30 million compared to negative $43 million in Q2 are.
Our quarter over quarter improvements in adjusted gross profit and adjusted EBITDA were driven by the expense actions. We took earlier this year to rightsize our cost structure.
We will continue to prioritize our investments in areas that we believe will drive the most long term value for all of our stakeholders and balance our investments with a focus on profitability and cash generation of our growth.
As we navigate an environment.
In terms of our topline performance in <unk> 'twenty, two we reported revenue on a GAAP basis of $108 million down 13% quarter over quarter.
As a reminder, GAAP revenue includes the portion of third party agent premiums that Domo does not retain so we focus on <unk> retained premiums and fees or RPF, which excludes the premium retained by third party agents.
We believe this is a much better representation of dominance underlying top line performance.
With this in mind RPF was $43 million in the third quarter down 13% quarter over quarter, driven by lower refinance and purchase closed orders.
As we mentioned on last quarter's call and as you have heard from other companies in the industry rising mortgage rates have significantly impacted refinance volume for both <unk> and other industry participants.
Today mortgage rates are at 7% and are expected to continue to rise until the fed funds rate reaches its apex in this tightening cycle.
Accordingly, refinance closed orders were down 25% and purchase closed orders were down 11%.
One other item of note during the third quarter, we recognized a goodwill impairment charge on our distribution segment of $34 million.
The triggering events for this noncash accounting charge include the sustained declines and delmas stock price coupled with the current housing and macroeconomic landscape.
We do not believe that this goodwill impairment charge impacts our expectations on future profitability or cash generation potential.
Rather as a reflection of current economic conditions and are depressed stock price.
Now turning to our outlook and updated guidance for the full year 2022, as we highlighted in our Q2 earnings call. We believed our retained premiums and fees potential for the full year was at risk as mortgage volumes for both purchase and refinance we're expected to deteriorate further in the second half of 2020 to do.
To a faster than expected rise in mortgage rates.
We are now guiding to negative $135 million to negative $140 million for a full year 2022 adjusted EBITDA.
Importantly, our revised guidance has not impacted our expectations for profitability in 2023 as.
As we previously mentioned we are now managing the business to get us to adjusted EBITDA profitability on a more accelerated timeline.
We will continue to closely watch the trends in opened and closed orders and adjust our operations and expense base Accordingly.
At a time of uncertainty in the industry, we are focusing on what we can control.
I will now pass the call back to Max for closing remarks, before we open the call to questions.
Thanks, Mike.
I would now like to take this opportunity to thank and acknowledge the ongoing contribution of our team who remain committed to our long term vision to make the experience of buying selling or owning home better faster and more affordable and to our customers for their continued support.
I will conclude my remarks by reiterating that we are laser focused on reaching adjusted EBIT profitability, even faster than we previously stated.
Despite the 2023 housing market outlook, having a wide range of potential outcomes, we're confident that the way we've rebalanced our focus keeps us in the driver seat and will enable us to emerge stronger and more steadfast on the other side of these challenging market conditions, we look forward to updating everyone on our priorities and progress in Q4.
Operator, we're ready for questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press star one one on your telephone one moment for our first question.
And our first question comes from the line of Matthew <unk> from JMP Securities. Your question. Please.
Thanks, Good afternoon.
Max I was hoping I could.
Follow up on the commentary you had about reaching EBITDA.
Profitability earlier in 2003, and I'm pretty sure previously guided.
And you obviously made some conservative statements about kind of the background housing market assumption so.
The question is just kind of what what sort of backdrop of the housing market.
Are you assuming broadly when you when you got it.
That commitment.
And how does how much does it matter what that backdrop is or have you readjusted the business such that there.
There can be some variability in that.
Guys have the flexibility to adapt.
Yes, Great question why don't I start with the second part of your question, Matt, which is how much does that backdrop matter I would say that it largely doesn't matter because we are.
Making good progress and we'll continue making good progress on developing the leaner platform and more scalable infrastructure in our business to be able to meet that timeline, regardless of the backdrop.
Yes.
You probably recall, we set earlier this year that we had formed our own conservative.
Our internal forecast for what we thought the market was going to do this year that was.
Quite a bit more conservative than the other kind of standard industry forecasts and frankly.
Despite how conservative we thought we were being with that forecast has proved not conservative enough given the.
Further significant upward movement of the 30 year fixed.
What we have learned and the actions that we've taken in the last two quarters, which the benefit youre starting to see now reflected in the adjusted EBITDA numbers this quarter, and which we expect youll see even more so next quarter.
We've learned to be leaner and more dynamically and entrepreneurial you manage the business.
As I mentioned, just a few minutes ago, we also think.
We have several potential strategies, which were now evaluating that.
Would allow us to use our technology at greater scale.
And perhaps in an even more efficient way than even what we already achieved and demonstrated our enterprise channel.
So.
Im not prepared to go into too many more specifics on that right now because again, we are evaluating several strategies to do that but I think that the organization has really demonstrated that their mentality and mindset is prepared to make sure we get to our EBITDA goal no matter what the market backdrop is.
Okay, Great and then my follow up was going to be a long kind of some of those other opportunities, but I think you covered it there. So we'll wait till till next quarter to get some more color. So thank you very much.
Great. Thanks, Matt.
Thank you.
As a reminder, if you have a question at this time, Please press star one one.
And our next question comes from the line of Tom White from D. A Davidson your question. Please.
Great.
Hey, guys. Thanks for taking my questions I guess, maybe just a follow up on the last one.
Kind of reconciling the comments about earlier EBITDA profitability.
The lowered outlook for this year it sounds like shutting down some of these local branches.
Is a big piece of it maybe maybe the biggest piece can you maybe just at least at this point to talk about how what percent of your branches do you think you might close also curious what does that mean about.
Those markets kind of long term like is it easy to reenter those or by exiting do you do you kind of.
Cede market share to somebody else that might be difficult to recapture.
And then I had a follow up.
Yeah and so.
Let me, let me take a shot at that and I might add Mike here to provide some additional detail.
Yes.
I don't think were going to go into specifics right now and just how many branches, we're going to shut down or how many markets we may exit.
Would focus on the main driver for those decisions.
Is not market share driven its profitability, driven and and I think that kind of gets to answering the first part of your question which is.
Yes, there is there is significant.
<unk>.
The headway that we can make in getting to our adjusted EBITDA profit.
<unk> faster by.
<unk>.
Exiting the parts of the business that are the least profitable and I think the team has started that work.
We're we're.
Quite confident that we can that we can gain some ground there.
I'd also say that.
<unk>.
Broadly speaking, even with the contraction in the overall mortgage market.
We've actually seen a pretty significant number of share gains across different parts of the business in the last quarter.
Our enterprise business. For example, we've had a number of larger enterprise accounts materially expand wallet share.
We've added new customers and even in our local business.
We've seen a number of markets in fact, I think in over a third of those local markets that we're in we actually experienced quarter over quarter growth. So.
I would say despite the fact that we're seeing market share gains across a lot of our business. Our main focus is making sure that we prioritize primarily against how we get to that adjusted EBITDA target faster.
And that's really what's kind of the driving factor behind those decisions I guess on the last part of your question does exiting those markets. Some cases make it harder to get back into them.
I don't I don't think so but again, it's frankly, it's not it's not the biggest driver in how we make those decisions, it's really making sure that we're going to have a profitable platform to scale off of and that will be around for the long run with our.
A great strategy to grow the business.
Yeah.
That's helpful. Thank you for that and maybe just one follow up you touched on kind of Fannie and Freddie and some other kind of industry participants in the calls to make housing.
More affordable.
I think earlier this year Fannie and Freddie.
Change some rules.
We can now give lenders I guess an option to.
Use like attorney's opinion letters instead of traditional title insurance on some loans I was just curious kind of where that fits into what you're discussing before and what that means for.
For your business.
Yes, I think.
The decision that you're referencing.
I think specific Freddie had I'm pretty sure Freddie had actually been already accepting attorney opinion letters for some time Fannie announced that they would start also accepting them.
And as you probably know Fannie Mae is the largest purchaser of single family residential mortgages in the country and so that was a pretty significant deal and I think what I would point out about it is it's a great example of the kinds of things that we're seeing greater urgency and a call to action around from those industry participants.
The Bottomline is that this product as it's traditionally been offered title insurance and I would say even broader title and closing.
<unk> is a really expensive part of the mortgage process.
And as I mentioned, a few minutes ago, we're now talking about homeownership being completely out of reach for a lot of people and.
And some of those people becomes out of reach I mean, literally just because of $1000 here or there and we're talking about a product that can cost several thousand dollars as part of the closing process. So.
<unk>.
We think there's really great alignment, both amongst the <unk> and the FHFA and frankly.
Amongst us alongside the Gse's.
FHFA about wanting to see more affordable and more expedient products in the market and the attorney opinion letters I think a great example of that.
And over the coming years I would expect for there to be a lot more innovation in that area and we're keenly interested in making sure we're part of it.
Okay.
Great. Thanks, one last one I'll slip in sorry.
The company made about a third of your local market has seen growth quarter over quarter I'm. Just curious how does that lineup with the local markets that had.
The film intelligence platform.
Rolled out like was that a factor in the growth.
Was there something else happening.
Yes, I think I think it is actually safe to say now because we've now seen more progress on that.
And that part of the business I E, where we've rolled out the dome intelligence platform too and local business I think it would be fair to say that that was a part of driving share growth.
I would say that because our escrow officers in that part of the business, who are really critical part of making sure that.
That were successful in building and managing customer relationships have had.
They have now really embraced the technology that we've rolled out there. We've now heard from a number of them in this past quarter that it's added meaningful selling advantage and servicing advantage. So I think it would be fair to say that that is helping drive some of that growth advantage.
Okay. Thank you.
Thank you. This does conclude the question and answer session as well as today's program. Thank you ladies and gentlemen for your participation you may now disconnect. Good day.
[music].
[music].
[music].
Thank you for standing by and welcome to the <unk> third quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone as a reminder, today's program is being recorded.
Now I'd like to introduce your host for today's program Beatrice Bartholomew.
Head of Investor Relations. Please go ahead.
Okay.
Thank you operator, good afternoon, everybody and thank you for joining Donlin third quarter 2022 earnings conference call.
Earlier today <unk> issued a press release announcing its third quarter results, which is also available at Investor <unk> Com.
Leading today's discussion will be done with founder and Chief Executive Officer, Matt <unk>, and Chief Financial Officer, Mike Smith.
Following managements prepared remarks, we will open up the call for questions.
Before we begin I would like to remind you that our discussion will contain predictions expectations forward looking statements and other information about our business that is based on management's current expectation as of the date of the presentation.
Forward looking statements include but are not limited to <unk> expectations or predictions of financial and business performance and conditions and competitive and industry outlook.
We're looking statements are subject to risks uncertainties and other factors that could cause our actual results to differ materially from historical nickel and walk from Aqua.
Including those set forth in download form 8-K filed today.
For more information please refer to the risks uncertainties and other factors discussed in Dallas. Most recently filed annual report on Form 10-K, and other SEC filings.
All cautionary statements that we make on this call are applicable to any forward looking statements, we make wherever they appear.
You should carefully consider the risks and uncertainties and other factors discussed in Donuts SEC filings.
Do not place undue reliance on forward looking statements and Selma is under no obligation and expressly disclaim any responsibility for updating altering or otherwise revising any forward looking statements, whether as a result of new information future events or otherwise except as required by law.
Additionally, during this conference call. We will also refer to non-GAAP financial measures, including retained premiums and fees adjusted gross profit and the other measures described in our earnings release.
Our GAAP results and a description of our non-GAAP financial measures with a full reconciliation to GAAP can be found in the third quarter 2022 earnings release, which has been furnished to the SEC and is available on our investor website and with that I'll turn the call over to Matt Cox CEO of Delta.
Thank you good afternoon, everyone and thank you for joining us the third quarter was pivotal for Domo and I'm proud of the way our team executed, particularly given the continued challenges in the U S housing market.
Our financial results have now begun to reflect more tangible benefits of the considerable expense actions. We took earlier this year to right size our company for the realities of the current real estate cycle.
The short period of time, we have made meaningful strides towards our goal of delivering adjusted EBITDA profitability and because we understand the importance of delivering sustainable profits irrespective of the length and severity of the current housing market cycle today, we're committing to reaching our adjusted EBIT profitability goal, even sooner than we have previously stated.
In keeping with previous earnings calls there are three main themes I'll be focusing on today first there is no mistaking the U S housing market is now heading towards a full fledged recession with little hope for sustained release in the near term.
This dynamic has continued to pressure our results and as such we are revising our adjusted EBIT guidance for the remainder of this year.
Second the challenging market, we're operating in now creates a unique opportunity for Delmar as we believe we are the only company in our space, who is positioned to capitalize on our proven instant underwriting technology and nationally scaled underwriting platform to deliver better faster.
And yes cheaper solutions to homeowners, who are now facing unprecedented affordability challenges.
By staying nimble in response to the highly volatile residential real estate landscape, where customer demand is rapidly shifting towards lower cost solutions across the value chain and re adapting our priority is to remain an industry innovator in this environment, we will better realize our vision of removing the friction frustration and expense from homeownership.
Third despite the adjustment we are making today in relation to the current year getting to adjusted EBIT of profitability continues to be our top priority across the entire company.
And we are now working towards a faster timeline that would enable us to turn profitable sooner than what we had previously communicated as late 2023.
I am very pleased with the early returns on the areas of the business that the team address first through cost reductions in Q2, and Q3, and which are now already delivering significant improvements in adjusted EBITDA.
We believe we can build on this momentum by not only identifying new ways to more quickly rollout our proven instant underwriting capabilities as mentioned earlier, but also by more exhaustively prioritizing profitable execution in our local division.
I will give more details on in a moment.
I'll now dive into these three themes in more detail and after that I will turn the call over to Mike to cover our third quarter financial results and financial outlook.
The lead things off it seems clear that the U S housing market is entering a recession. The federal open market Committee has delivered four consecutive <unk> 75 basis point rate hikes. This year with expectations of further aggressive tightening on the horizon, while stubbornly high inflation broken global supply chain and broader geopolitical concerns have all contributed in parallel to effective.
We double 30 year fixed mortgage rates versus the same time last year.
According to Morgan Stanley Research housing affordability is deteriorating at a much faster pace than in any point in the last 30 years.
These factors have exerted enormous pressure on even the most mature and profitable franchises operating and real estate.
For those companies in the earlier stages of growth many are unlikely to make it to the other side of a prolonged market downturn of this magnitude.
Allstate upfront with conviction that we believe <unk> is in a different class from these other young companies, particularly given our proactive approach to implementing a combination of measures to enable our long term operational and financial success.
We are committed to emerging from this housing cycle as a stronger and more steadfast resilient profitable company.
Our business performance in Q3, which we will continue to frame versus the prior quarter. As we did in Q2 was impacted by the aforementioned macro pressures from a mortgage market that has become extremely challenging for homebuyers. In Q3, we delivered $43 million retained premium and fees down 13% sequentially driven by lower refinance closed.
Orders, which fell by 25% quarter over quarter as the mortgage market continues to readjust to the sharply higher interest rate environment.
Our purchase closed orders declined 11% sequentially versus Q2, which was directionally expected.
As of Q3 purchase orders made up 42% of our direct residential volume and 74% of our direct residential retained premium and fees.
In our Q1 and Q2 earnings calls earlier this year we.
We discussed the fact that we informed our own internal mortgage macro forecast for the year that we were going to plan and execute our business by and which we felt was considerably more conservative and other industry forecast that were slower are more reluctant to update their numbers.
While we continue to adapt our internal forecast ahead of other industry groups and have utilized our own independent set of circumstances to model potential outcomes against no amount of conservatism baked into these forecasts could have predicted the unprecedented pace of contraction in the market that we've now seen in.
In addition to refinance volumes continuing to decline the purchase side of the market has also slowed more than anyone expected.
Home purchase is now out of reach for many U S households, given that the 30 year fixed rate has exceeded 7% threshold last seen in the early two thousands.
Additionally, the rapid pace of interest rate increases and just the past few months has driven cancellation rates higher for pending home purchase transactions with 17% of all purchase transactions in the month of September being cancelled. This is the highest share of cancellations on record aside from March of 2020.
We expect all of the existing macro factors at play to continue pressuring our ability to generate retained premiums and fees for the remainder of the year.
Given these factors we are revising our adjusted EBITDA guidance for 2022, Mike will provide those details shortly.
While the dynamics of the overall housing market have made things challenging for us and many other companies our industry they've made life orders of magnitude more difficult for the individuals across the nation, who are now struggling to afford homeownership.
The average monthly payment on a conforming mortgage has increased by over 60% versus a year ago and with the average American homebuyer, having just over $5000 in disposable income every dollar they pay for value received in the mortgage transaction is now critical.
We've also seen increase in calls as of late from several of the largest stakeholders in the housing market such as Fannie Mae Freddie Mac and the FHFA to find ways of innovating to provide more equitable access to affordable housing.
This kind of environment offers a unique opportunity for del Mar we are arguably the only player in our space, who has the proven technology and underwriting capabilities to help homeowners closed transactions better faster and cheaper.
Since the day, we founded the company. We have also demonstrated that we can be nimble enough to adapt our business to drive value across all types of real estate cycles and market conditions and the current time is no exception.
To best ensure that we seized this opportunity we are in the process of re adapting our priorities and our business footprint to ensure even more profitable execution of our platform.
Toward this end building on the success, we've seen in gaining share in our enterprise Division, we have identified several new potential distribution opportunities to get the power of our instant underwriting deployed across more transactions at scale.
Our local business, we've decided to pause further expansion of the domain intelligence platform for purchase transactions two additional branches. So that our team can first conduct an exhaustive review of our national branch footprint and determine what the best configuration should be going forward.
As part of the initial review of this footprint. The team recently took actions to begin closing unprofitable branches.
As these decisions can attest that the key focus for US right now is to ensure that we have the right pace of investment in place for both our local and enterprise businesses, enabling both channels to reach profitability earlier in 2023 than we had previously planned.
In summary, our broader near term priorities are to make sure. We're utilizing our scaled underwriting platform with maximum efficiency and distributing our technology enabled solutions to customers in line with how the market evolves and in the most cost effective ways.
In keeping with the third theme of today's call, we will adapt our business footprint and focus while also remaining on a path to adjusted EBITDA profitability and because we know how important reaching this milestone is particularly given the structural shift and broader market conditions. We are now committed to reaching adjusted EBITDA profitability on a faster timeline than previously communicated today.
Today's downward revisions to the outlook for 2022 doesn't adversely impact. This trajectory, we will look to provide an exact timeline during our fourth quarter earnings call.
We are confident that we can achieve this more ambitious path of profitability because our team is now seen firsthand that it can be done after delivering a set of cost reductions in Q2, and Q3 that led to a significant improvement in our adjusted EBITDA versus the second quarter to the tune of $13 million.
While we expect this upward trajectory in adjusted EBITDA to continue in Q4 as the full benefit of those prior cost reductions continue to be realized our team is confident that by re prioritizing our focus as I mentioned earlier, we can deliver on our mission with a leaner cost structure and greater agility as we move into Q1 and Q2 next year.
Our goal is to drive significant additional margin benefit for both next year and sustainably over the long term.
Similar to our review of the branch network everything in the business is being evaluated right now with that objective in mind and we expect that we will have more updates to share on this front during our Q4 earnings call in February .
To sum it up despite another challenging quarter for the entire housing industry. We believe the strong demand in the current market for better faster and cheaper paths to homeownership presents domo with a unique opportunity to get our instant underwriting solution deployed across more transactions in a more efficient way, we have the technology the people and the momentum.
Towards faster path to EBIT profitability that will help us do this while remaining the leading provider who is changing our space for the better.
With that I will now pass the call over to our CFO , Mike Smith to provide you with further details on our recent financial performance and an update on our outlook Mike.
Thank you Max and good afternoon, everyone I will start by recapping, our financial results for the third quarter, and then I will dive into the details.
Please refer to our earnings press release filed earlier today and our 10-Q scheduled to be filed later today for full details of the quarter.
Unless otherwise specified all of the third quarter figures cited in my remarks, our quarter over quarter or sequential comparisons.
Given our intense focus on profitability that Max outlined during his remarks I'll start there.
We made significant expense reductions in the second and third quarters and are already seeing savings realized from these cuts.
We expect to see the full benefit of these actions in Q4 this year and continued improvement on our adjusted gross profit contribution.
And our adjusted EBITDA.
Our primary measure of unit economics, as adjusted gross profit, which was $12 million in the third quarter of 2022 up 7% sequentially.
Adjusted gross profit as a percentage of RPF was 27% and <unk> 22, compared to 22% last quarter.
Adjusted EBITDA, our main profitability measure improved $13 million in the third quarter to negative $30 million compared to negative $43 million in Q2 of.
Our quarter over quarter improvements in adjusted gross profit and adjusted EBITDA were driven by the expense actions. We took earlier this year to rightsize our cost structure.
We will continue to prioritize our investments in areas that we believe will drive the most long term value for all of our stakeholders and balance our investments with a focus on profitability and cash generation of our growth.
As we navigate an environment.
In terms of our topline performance in <unk> 'twenty, two we reported revenue on a GAAP basis of $108 million down 13% quarter over quarter.
As a reminder, GAAP revenue includes the portion of third party agent premiums that Domo does not retain so we focus on <unk> retained premiums and fees or RPF, which excludes the premium retained by third party agents.
We believe this is a much better representation of dominance underlying top line performance.
With this in mind RPF was $43 million in the third quarter down 13% quarter over quarter, driven by lower refinance and purchase closed orders.
As we mentioned on last quarter's call and as you have heard from other companies in the industry rising mortgage rates have significantly impacted refinance volume for both delta and other industry participants.
Good day mortgage rates are at 7% and are expected to continue to rise until the fed funds rate reaches its apex in this tightening cycle.
Accordingly, refinance closed orders were down 25% and purchase closed orders were down 11%.
One other item of note during the third quarter, we recognized a goodwill impairment charge on our distribution segment of $34 million.
The triggering events for this noncash accounting charge include the sustained declines in domo stock price coupled with the current housing and macroeconomic landscape.
We do not believe that this goodwill impairment charge impacts our expectations on future profitability or cash generation potential.
Rather as a reflection of current economic conditions and are depressed stock price.
Now turning to our outlook and updated guidance for the full year 2022, as we highlighted in our Q2 earnings call. We believed our retained premiums and fees potential for the full year was at risk as mortgage volumes for both purchase and refinance we're expected to deteriorate further in the second half of 2020 to do.
To a faster than expected rise in mortgage rates.
We are now guiding to negative $135 million to negative $140 million for a full year 2022 adjusted EBITDA.
Importantly, our revised guidance has not impacted our expectations for profitability in 2023 as.
As we previously mentioned we are now managing the business to get us to adjusted EBITDA profitability on a more accelerated timeline.
We will continue to closely watch the trends in opened and closed orders and adjust our operations and expense base Accordingly.
At a time of uncertainty in the industry, we are focusing on what we can control.
I will now pass the call back to Max for closing remarks, before we open the call to questions.
Thanks, Mike.
I would now like to take this opportunity to thank and acknowledge the ongoing contribution of our team who remain committed to our long term vision to make the experience of buying selling or owning home better faster and more affordable and to our customers for their continued support.
I will conclude my remarks by reiterating that we are laser focused on reaching adjusted EBIT profitability, even faster than we previously stated.
Despite the 2023 housing market outlook, having a wide range of potential outcomes, we're confident that the way we've rebalanced our focus keeps us in the driver seat and will enable us to emerge stronger and more steadfast on the other side of these challenging market conditions, we look forward to updating everyone on our priorities and progress in Q4.
Operator, we're ready for questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press star one one on your telephone one moment for our first question.
And our first question comes from the line of Matthew <unk> from JMP Securities. Your question. Please.
Thanks, Good afternoon.
Max I was hoping I could.
Follow up on the commentary you had about reaching EBITDA.
Profitability earlier in 2003 that I'm pretty previously guided.
And you obviously made some conservative statements about kind of the background housing market assumption so.
The question is just kind of what what sort of backdrop of the housing market.
Are you assuming broadly when you when you got it.
That commitment.
And how does how much does it matter what that backdrop is or have you readjusted the business such that there.
There can be some variability in that.
As have the flexibility to adapt.
Yes, Great question why don't I start with the second part of your question, Matt, which is how much does that backdrop matter I would say that it largely doesn't matter because we are.
Making good progress and we will continue making good progress on developing the leaner platform and more scalable infrastructure in our business to be able to meet that timeline, regardless of the backdrop.
You probably recall, we set earlier this year that we formed our own conservative.
Our internal forecast for what we thought the market was going to do this year that was.
Quite a bit more conservative than the other kind of standard industry forecasts and frankly.
Quite how conservative we thought we were being with that forecast has proved not conservative enough given the.
Further significant upward movement of the 30 year fixed.
What we have learned and the actions that we've taken in the last two quarters, which benefit youre starting to see now reflected in the adjusted EBITDA numbers this quarter, and which we expect youll see even more so next quarter.
We've learned to be leaner and more dynamically and entrepreneurial you manage the business.
As I mentioned, just a few minutes ago, we also think.
We have several potential strategies, which were now evaluating that.
What allow us to use our technology at greater scale.
And perhaps in an even more efficient way than even what we already achieved and demonstrated our enterprise channel.
So.
Im not prepared to go into too many more specifics on that right now because again, we're evaluating several strategies to do that but I think that the organization has really demonstrated that their mentality and mindset is prepared to make sure we get to our EBITDA goal no matter what the market backdrop is.
Okay, Great and then my follow up was going to be a long kind of some of those other opportunities, but I think you covered it there. So we'll wait till till next quarter to get some more color. So thank you very much.
Great. Thanks, Matt.
Thank you.
As a reminder, if you have a question at this time, Please press star one one.
And our next question comes from the line of Tom White from D. A Davidson your question. Please.
Great.
Hey, guys. Thanks for taking my questions I guess, maybe just a follow up on the on the last one in.
Kind of reconciling the comments about earlier EBITDA profitability.
The lowered outlook for this year it sounds like shutting down some of these local branches.
Is a big piece of that maybe maybe the biggest piece can you maybe just at least at this point to talk about how what percent of your branches do you think you might close also curious what does that mean about.
Those markets kind of long term like is it easy to read.
We enter those or by exiting do you do you kind of seed.
Cede market share to somebody else that might be difficult to recapture.
And then I had a follow up.
Yeah and so.
Let me, let me take a shot at that and I might add.
Mike here to provide some additional detail.
I don't think were going to go into specifics right now and just how many branches, we're going to shut down or how many markets we may exit.
I would focus on the main driver for those decisions.
Is not market share driven its profitability, driven and and I think that kind of gets to answering the first part of your question which is.
Yes, there is there is significant.
<unk>.
Headway that we can make in getting to our adjusted EBITDA profit.
<unk> faster by.
Exiting the parts of the business that are the least profitable and I think the team has started that work in.
We're.
Quite confident that we can that we can gain some ground there.
I'd also say that.
Sure.
Broadly speaking, even with the contraction in the overall mortgage market.
We've actually seen a pretty significant number of share gains across different parts of the business in the last quarter.
Our enterprise business. For example, we've had a number of larger enterprise accounts materially expand wallet share.
We've added new customers and even in our local business.
We've seen a number of markets in fact, I think in over a third of those local markets that we're in we actually experienced quarter over quarter growth. So.
I would say despite the fact that we're seeing market share gains across a lot of our business. Our main focus is making sure that we prioritize primarily against how we get to that adjusted EBITDA target faster.
And that's really what's kind of the driving factor behind those decisions I guess on the last part of your question does exiting those markets. Some cases make it harder to get back into them.
I don't I don't think so but again, it's frankly, it's not it's not the biggest driver in how we make those decisions, it's really making sure that we're going to have a profitable platform to scale off of and that will be around for the long run with.
A great strategy to grow the business.
Yeah.
That's helpful. Thank you for that and maybe just one follow up you touched on.
Fannie and Freddie and some other kind of industry participants in the calls to make housing.
More affordable.
I think earlier this year Fannie and Freddie.
Some rules.
We can now give lenders I guess an option to.
Use like attorney's opinion letters instead of traditional credit title insurance on some loans I was just curious kind of where that fits into what you're discussing before and what that means for.
For your business.
Yeah I think.
The decision that you are referencing.
I think specific Freddie had I am pretty sure Freddie had actually been already accepting attorney's opinion letters for some time Fannie announced that they would start also accepting them.
And as you probably know Fannie Mae is the largest purchaser of single family residential mortgages in the country and so that was a pretty significant deal and I think what I would point out about it is it is a great example of the kinds of things that we're seeing greater urgency and a call to action around from those industry participants.
The Bottomline is that this product as it's traditionally been offered title insurance and I would say even broader title and closing.
<unk> is a really expensive part of the mortgage process.
And as I mentioned, a few minutes ago, we're now talking about homeownership being completely out of reach for a lot of people.
Some of those people becomes out of reach I mean, literally just because of $1000 here or there and we're talking about a product that can cost several thousand dollars as part of the closing process. So.
We think there's really great alignment, both amongst the <unk> and the FHFA and frankly.
<unk> us alongside the Gse's HFF FHFA about wanting to see more affordable and more expedient products in the market and the attorney opinion letters I think a great example of that and over the coming years I would expect for there to be a lot more innovation in that area and we're keenly interested in making sure we're part of it.
Okay.
Great. Thanks, one last one I'll slip in sorry.
You made about a third of your local market has seen growth quarter over quarter I'm. Just curious how does that line up with the local markets that had.
The film intelligence platform.
Like was that a factor in the growth.
Was there something else happening.
Yes, I think I think it is actually safe to say now because we've now seen more progress on that.
And that part of the business I E, where we've rolled out the dome intelligence platform too and local business I think it would be fair to say that that was a part of driving share growth I.
I would say that because our escrow officers in that part of the business, who are really critical part of making sure that.
That were successful in building and managing customer relationships have had.
They have now really embraced the technology that we've rolled out there. We've now heard from a number of them in this past quarter that it's added meaningful selling advantage and servicing advantage. So I think it would be fair to say that that is helping drive some of that growth advantage.
Okay. Thank you.
Thank you. This does conclude the question and answer session as well as today's program. Thank you ladies and gentlemen for your participation you may now disconnect. Good day.