Q3 2022 Blend Labs Inc Earnings Call
Good afternoon, and welcome to Plains third quarter 2022 earnings Conference call. My name is Crystal Salon head of legal and compliance and best for the company.
With me today, I mean look I'm, sorry, co founder and head of plan 10, Minneapolis, President and Mark Greenberg head of finance.
Mark deliver their prepared remarks, the team will take questions you have.
Can find the supplemental slides on our Investor Relations web page at Investor Dot one dot com.
During the call we will refer to certain non-GAAP measures, which are reconciled to GAAP results in today's earnings release, and they are indexed to our supplemental slides.
non-GAAP measures are not intended to be a substitute for GAAP results.
Also certain statements made during today's conference call regarding Glenn and its operations may be considered forward looking statements under federal Securities laws.
The company cautions you that forward looking statements involve substantial risks and uncertainties and a number of factors many of which are beyond the company's control could cause actual results or events or circumstances to differ materially from those described in these statements.
Please see the risk factors, we've identified in our most recent 10-K 10-Q and other SEC filings.
We are not undertaking any commitment to update these statements if conditions change except as required by law.
I'll now turn the call over to Yvonne.
Thank you Crystal.
Achieved revenue of $55 $4 million this quarter in a market environment that has continued to get more challenging.
Grew up one platform segment revenue modestly by 3% year over year to $36 1 million. Despite a 63% decline in industry mortgage volumes from Q3, 2021 to chew through 2022, according to the mortgage Bankers Association.
Three primary factors drove our performance.
The migration of software enabled title revenue to blend platform as we fully integrated Mr. Cooper onto the platform.
Second the strength of our performance in mortgage banking and related revenue relative to industry volumes.
And third roughly 50% growth in consumer banking marketplace revenue excluding software enabled title.
Our mortgage banking consumer banking marketplace performance reflects continued execution of our strategy. We are driving increased share of industry lending volumes, achieving higher pricing per funded loan doing a great job of retaining customers and leveraging product expansion to increase wallet share and utilization of our platform.
Against the backdrop of the largest annual mortgage origination declines in 30 years I'm really pleased to see our strategy working and we believe we are setting up for long term success outstanding conditions improve.
Despite this mortgage industry volume decline today, we've narrowed our guidance range for 2022 revenue to $235 million to $240 million within the range you laid out back in March.
How's your outlook demonstrates we executed on our strategy to challenging headwinds, we're able to make progress because we remain focused on what's within our control specifically our customers in its growth.
Product growth and our cost structure.
Let's start with our customers.
The headlines are that we continue to grow market share, while maintaining strong retention levels and improving our pricing.
Our gross revenue retention was 98% this quarter roughly in line with recent quarterly trends. This reflects our ability to retain our customer base, even with a modest offset from attrition of smaller independent mortgage banks, a number of which are facing unprecedented challenges to their businesses.
And we continue to deepen our partnership with our customers are market adjusted net revenue retention rate increased to 190% up from 164% last quarter. This is.
Due to the following reasons, one our ability to cross sell consumer banking products in the mortgage add ons like income and close.
Two our ability to secure price increase on contract renewals due to increased value in the platform.
Three new marketplaces like software enabled title.
Our strategy is to continue to go deeper with our customer base and create more value per unit for every one of our customers.
These retention metrics support the fact that our customers are not only staying with us, but they're also adding more products and growing with us.
We've seen over 80% of our Q3 mortgage renewals occur at higher rates in Q3.
While the remainder remained flat.
This pricing uplift during a time of decreased volumes budget constraints and pressure on operational efficiency is possible only because of the value. We continue to deliver and the need for these organizations to lean more heavily on technology. During these times of margin compression.
Now, let's dive a little deeper on market share.
Our market share of total funded mortgage originations in the first half of this year approached 20% for the first time.
This achievement of declining mortgage origination volume environment is a good indicator that we're aligned with customers who are well positioned to weather the downturn.
In a depressed origination environment, it's expected the smaller less capitalized firms really to shut their doors for emerging others to survive and we expect more consolidation in the industry going forward.
Over the last couple of quarters, notwithstanding the tough environment, we've continued to grow market share across banks like PNC and continue to increase adoption among credit unions like schools first in Oregon community credit Union with member first mindset, who want the latest technology to deliver the best in class experiences to those members.
Schools first time down to the customer last month for a mortgage and home equity solutions schools versus the fifth largest credit union in the United States with 27 billion in assets, serving more than $1 2 million members.
Oregon Community credit Union came on board in September OCC, you had more than 3 billion in assets and currently serves more than 250000 members.
As banks and lenders seek to provide a full suite of services and deliver a seamless experience for their consumers will focus on operational efficiency they come to black.
And we are focused on delivering the value they need in this environment because we believed the lenders will emerge from this downturn stronger are the ones, who are investing in and adopting new technology.
Shifting to consumer banking marketplace, we continue to diversify our revenue streams even in this cycle.
Our consumer banking and marketplace revenue has grown significantly as I noted at the outset driven by the transition of Mr. Cooper to software enabled title by integrating them into our platform along with home equity and personal loan growth.
This quarter over a third of our customers use one or more of our consumer banking products.
As noted we've also seen significant growth in number of transactions year over year as customers begin to ramp up their volumes on blend for these consumer banking products.
Let's turn now to our product growth the secondary under our control.
At the end of Q3, 75% of our customers use multiple product lines, reflecting an increase from 62% a year ago, a great validation of the broad platform. We are building to transform the banking experience for our customers and the consumers they serve.
R E close home equity and income verification solutions continue to be popular Adams.
We also continue to innovate on products with high potential are a lot like our new instant home equity solution that we launched in September .
Home equity represent a huge opportunity for lenders, but unlocking that opportunity has been far from straightforward.
A typical home equity loan flow involves more than 30 steps and.
And time to close can be more than 45 days.
Our instant home equity solution makes the source of funds much more accessible enabling lenders to reach many more people and ultimately drive more revenue at a reduced cost.
Latin America credit Union is a first time customer.
Very quickly after our launch and is expected to rollout over the next year.
I believe products like interim equity are important to the future plan for three reasons.
First we believe the future of finance is real time.
Delivering value to consumers in ways that they didn't even know as possible instantly.
And so home equity is a prototypical example of that within seconds, the consumer knows their approval status because our platform because so much of the heavy lifting behind the scenes.
Second instead of equities package as a fully vertically integrated solution with the bundled pricing strategy.
The solution includes our base platform offering as well as add ons that we've been investing such as income close title and more.
By combining these features we not only offer a better real time experience.
More operational the lender, but also more revenue to blend.
Lastly, all of this is powered by blend builder, which we've been developing under the hood for the past few years.
Glen builder is a unique platform that allows us to design and configure products in shorter time frames.
Dragon dropped the major lending components instead of renting significant amounts of coke.
We started developing internal that can be several months ago delivered our first version faster and cheaper than was previously possible.
Over time, though there will be a source of continuous innovation for blend and our customers and operational leverage for blend and our customers as well.
All of that being said our biggest business is our large mortgage customer base any of these are independent mortgage banks, who are navigating economic uncertainty and the rest of our banks and credit unions, who have been loyal mortgage customers and are considering or are currently using blend in other parts of their organization.
First and foremost we must make sure that our mortgage customers are successful happy and continuing to get even more value out of plan going forward.
This is especially important as efficiency becomes front and center for them in a new margin Department technology can help automate and create productivity for their users and processes.
But then our strategy is twofold.
For the last two years, we've invested heavily in those productivity features that can drive benefits for their organizations.
We've said many times is the downside to the recent rapid volume increase and subsequent decline in mortgage volumes, rather than being too busy to invest in new capabilities for the future.
Now that has shifted.
We are focused on getting all of that functionality that we have developed life and generating real value for our customers.
The blend builder opens up a new paradigm for the long term.
As a reminder, blend builder is that low code no code platform I described around home equity.
This can give them more efficiency more automation and even more modern platform long term.
Tenuous to make us the long term debt for those banks and lenders.
We aren't ready to move our mortgage product to builder, yet we're investing in the underlying capabilities right now to ensure we can deliver this to our customers.
In the future.
We believe that doing this will continue to allow us to have strong retention and growth within our customer base. Both in the short term and the long term.
And now more than ever we are focused on making sure that our customers loved one and come out the other side of this mortgage volume decline stronger than ever due to use of technology.
Now turning to the third thing in our control our cost structure.
Last quarter, we outlined a plan to reduce our non-GAAP net operating loss by 50% by the end of 'twenty, three and three and execution is underway.
With our release today, we announced a further reduction in our head count primarily within our title business. Following a substantial headcount reductions we made in April and August we will continue to evaluate the scale and scope of our title operation and seek to rightsize this business as the market environment evolves.
We also set targets for our key operating expense lines as a percentage of revenue G&A sales and marketing and R&D.
Those targets remain intact, and we are making progress against them Mark will talk more about that later.
Bigger picture the goal is to get that blended profitability and that's where we're focused we have a strong customer base, a great product growing market share and our leading platform to drive digital transformation.
We'll do whatever is necessary to manage our capital and exercise discipline with our cost structure through the current downturn in service of building a profitable company for the long term.
Lastly, while we remained focused on optimizing our cost structure, we do not want to sacrifice the innovation we're building towards transformation.
For example, our platform offering on builder has been years been taking and will play a key role in enabling us to meet those goals in an efficient way.
It was created in house and instant home equity offering described earlier is our first substantive new product that's come out of builder. This.
It was developed end to end vertically integrated months instead of years.
Because building on this platform is primarily dragon drop instead of code imagine new solutions like into home equity requires significantly fewer engineers to build and manage.
This creates operational leverage for us as well as increase speed of delivery for our customers.
Blend builder will help us get to the target of high teens to low twenties and R&D as a percentage of revenue as described last quarter without sacrificing the most important items on our innovation roadmap.
With that I want to thank everyone and turn it over to Mark to talk through our financial strategy.
Thanks, Neil good afternoon, everyone.
I'll walk through our financial results and I'll provide context in the following order first I'll start with a recap, including how we're performing in this market cycle.
I'll expand on name his comments surrounding our efforts to reduce our cost structure as part of our broader capital management strategy and last I'll provide context around our guidance update and how we expect to see trends unfolding for the rest of the year then we'll open it up for questions.
Start with the highlights from Q3 total revenues for the quarter were $55 4 million blend platform segment revenue was $36 $1 million slightly up by 3% year on year.
Title III 65 segment revenue was $19 $3 million.
With inbound platform, our mortgage revenue declined by 27% year over year in Q3 to $19 $9 million amidst a 63% mortgage market volume declined in the same period.
Our consumer banking and marketplace revenue totaled $15 3 million this quarter up from $6 $6 million or up 132% as compared to the prior year period.
This includes $6 $1 million of software enabled title revenue that has migrated to the <unk> platform.
Year on year total non mortgage length consumer banking transactions grew by approximately 145000 to approximately 229000 in Q3, driven by additional home equity and personal loans as well as credit cards and deposit account openings being processed on our platform.
Closing up the revenue discussion, we recognized $865000 and professional services revenue.
<unk> to gross profit Q3, non-GAAP gross profit was approximately $21 6 million.
Down from $40 $6 million in the prior year period.
Current period non-GAAP gross profit includes $19 8 million attributable to blend platform and $1 $8 million to title III 65.
Our change in gross profit is primarily the result of lower contribution from our mortgage business as well as lower order volume and unfavorable product mix within our title business of note in this quarter.
Our platform margins reflect the migration of software enabled title revenue, which is contributing lower margins our blend platform non-GAAP gross margin for the quarter was 55% but.
But if we exclude the effects of the migration our blended platform gross margin would have been in the mid to upper sixties up from the low Sixty's from Q2 'twenty two.
The improvement is being driven by a combination of our focus on managing cost of revenue and layering in higher per funded loan pricing as we execute on our customer contract renewals in the medium term, we remain committed to managing our entire platform business to low to mid 60 percentage range inclusive of software enabled title as we improve.
And that area of the business.
non-GAAP operating expenses for the third quarter totaled $58 7 million compared.
Compared with $61 7 million in the prior year.
The decrease reflects our continued progress in right sizing our operating model for the current market environment.
Our non-GAAP loss from operations was $37 1 million versus $21 1 million in the prior year.
<unk> highlighted our focus on our cost structure and I Wonder if you want some details regarding our progress overall, our non-GAAP quarterly operating expenses are down from Q2 'twenty two to Q3 dollars 22 by approximately $7 million in Q1 to Q3 by over $10 million for Q2 to Q3 progression includes just over $4 million per quarter.
The lower G&A $1 million, and lower R&D, and just under $2 million in sales and marketing.
Macroeconomic conditions remain challenged our goal to reduce our quarterly non-GAAP net operating loss by 50% by the end of next year remains unchanged.
We are still in the early days here and our progress will not be linear, but we are committed to meeting the targets we laid out on our last call.
We'll continue to manage the cost structure to align with market realities.
Earlier today, we announced that we further reduced our head count by just under 100 positions.
Within our title business, reflecting anticipated lower origination in refi volume for the rest of the year and into 2023.
As rates have continued to rise this year since may we have in aggregate eliminated nearly a quarter of our beginning of the year head count totaling over 500 positions, including the elimination of backfill.
These actions combined are expected to yield $69 million in annualized savings as stated in our last call. We expect the bulk of cost savings associated with our workforce reductions excuse me over the course of the last several months to materialize starting in Q1 2023.
As <unk> mentioned, we will continue to evaluate the scale and scope of our title operations and seek to rightsize. This business as the market environment evolves looking ahead. The strategies were executing on include offshoring certain functions.
<unk>, our resources on products that contribute to near term ROI driving down vendor spend and reducing supporting head count.
Now turning to our balance sheet. This quarter. We also recognized an approximately $57 $9 million noncash GAAP charge to reflect the impairment of title 365, goodwill and intangible assets driven by a decline in the fair value of the title 365 reporting unit.
As a result of this and the impairment charge recognized last quarter, the goodwill and intangible assets have now been fully written off our cash cash equivalents in marketable securities on September 30th totaled a little over $400 million.
Our $25 million revolving line of credit remains undrawn.
I'll wrap up now with 2022 guidance and our near term outlook.
We continue to make good progress on the growth drivers that are within our control amidst the challenging macro environment.
Based on our year to date performance and current projections for the fourth quarter. We are narrowing our full year 2022 revenue guidance. We now expect annual blended platform revenue of between 134 and $136 million in title III 65 segment revenue of between 101 and 104 million.
<unk>.
This brings our full year 2022 consolidated revenue guidance range to between 235 and $240 million within the range.
$230 million to $250 million originally provided in March 2022.
Our outlook reflects the strength of our product and our execution for our customers during their historic mortgage origination downturn for perspective at the time, we issued our 2022 guidance in March industry forecast call for a 35% decline in origination volumes versus the 56% now predicted we have remained within our <unk>.
Forecast range throughout this period.
Although economic conditions remain highly uncertain, our blended platform revenue expectations reflect lower expected mortgage volumes offset somewhat by continued growth in consumer banking, our marketplace revenue, including the migration of software enabled title revenue.
With that let me turn the call back to NEMA for his closing remarks.
Thanks Mark.
The macroeconomic environment is out of our control, but something we're approaching prudently.
And we are doing so by adapting the things that are within our control and.
And to recap what we're focused on is one our execution within our customer base.
Two our ability to deliver not just one but a suite of products on our platform to our customers and three our ability to decisively manage our cost structure.
We are managing the business to weather this cycle and some are stronger on the other side.
We're planning for mortgage industry unit volumes to remain at or near historic lows through 2025.
And we're doing this all in a way that allows us to continue to innovate because one thing that we all know his script.
<unk> industry will continue to transform and that transformation is driven by technology.
To deliver real time experiences that will benefit consumers and financial institutions alike.
With that thank you again for joining crystal we're now ready for questions.
Thank you Mark for your remarks, we'll now turn to Q&A. Our first question comes from David Unger from Wells Fargo. Please feel free to go ahead.
Yeah.
Yes.
Yeah.
Okay.
Hi, Gary.
Yes, we can sorry about that.
Yes.
Our retention ratio.
It's improved by a lot and I mean here, we had 109% I'd like to know how that compare.
So your expectations coming into the quarter.
Baseline for that what's reasonable to think going forward. Thank you.
I think part of the reason this is name of thanks for the question part of the reason for that was the.
The way that that's calculated which is described in the disclosure is the total revenue from customers. This year compared to last year adjusted for volumes and there's more detail on that in the disclosure on that and so as we add more add ons. They it tends to be pretty chunky, sometimes with customers, where they add a new big add on like software enabled title for example that number will jump in.
And we always expect our net revenue retention.
Adjusted net revenue retention to be high as long as we are investing in adding new add ons and growing within our current customer base and helping our customer base adopt new functionality.
But sometimes it'll be lumpy like this.
Our next question comes from Michael <unk> from Goldman Sachs.
Please go.
Go ahead.
Hey, good afternoon. Thank you very much for the question I just have two.
First could you talk a little bit more about your.
Your expectations for Opex and cost savings as the.
For Q Opex, good run rate to think about.
As we go into 2023 or do you think you could see further cost reductions.
And then second I was just wondering if you could talk a little bit more about.
Some of the costs related to the platform migration. It was helpful to get the context about the mid to upper <unk> X platform migration or others.
Really onetime in nature or yeah and.
When should we see.
I guess platform migration cost come off.
Are we through that now.
So thanks, Michael So in terms of Opex, we continue to look across the business and make sure that we're investing our time and energy in the REIT and the right levers you saw what we did again this quarter.
<unk> head count is down 25%.
Over 500 positions since the beginning of the year. So we're continuing to right size the business. Some of those savings still are yet to be seen in the run rate. It does take time for that to play in but we've.
If you look at Q1 to Q3, its down $10 million in Opex I think Q2 to Q3 is down $7 million in Opex and then in terms of the than the title and cost of revenue obviously that some of that is variable to the volume that we're doing but others others. We continue to look at vendor spend and opportunities for us to optimize offshore.
And right size the business overall.
And then your second question.
The gross margin gross margin.
From a total perspective.
Sorry, the software enabled title.
It's early days in that business. So, we're making some upfront investments in the costs and the costs associated with software enabled.
But.
Overall, that's something we're confident in the in the in the overall blend platform gross margins that'll be in the low <unk> as we have reiterated.
And just to add one thing to what Mark said there.
The methodology that we're using to drive margins as add more value to our customers and that's what.
Substantiates any sort of additional price per unit they are willing to pay us.
And drive down our Cogs, we have certain parts of our cost of revenue that are there and that's what's driving some of the improvements that you saw from Q2 to Q3 and that did.
Mark remarked on.
Yeah.
The next question comes from Ryan Tomasello from Katie would you. Please feel free to annual can go ahead.
Yeah.
Hi, Michael.
Yeah, Hey, Ryan.
Thanks for taking the questions.
Just based on some comments from other mortgage service vendors out there it seems like.
Volume environment is starting to trickle down into headwinds relating to the sales environment.
Given the focus on profitability I guess the distraction.
Volumes.
Have you seen any noticeable change there an appetite for employees or whatever the minimum any elongation in sales cycles.
And then regarding the customer logo count apologies if you hit on this earlier in your prepared remarks, it looks like.
Just a bit sequentially.
As to the color you provided around the drivers there. Thanks.
Yeah I'll hit the second one first I did talk about in my remarks, but just to reiterate.
Smaller independent mortgage banks in particular, the ones struggling they're less well capitalized and so.
So we expect some of those to consolidate whether it's through acquisition or if they go out of business or cut things that.
They can't afford it anymore and so that that's typically where we're seeing our churn actually in all of our churn.
And in that quarter is coming from that.
Now one thing I would add there is that gross retention is how I look at our overall churn as a business and we have maintained very high gross retention above 98%.
So we aim to continue to do that and some of that will just be continuing to focus on our existing customer base, making sure they're getting more value from our product and platform.
And the fact that technology can help transform them and be successful in this new margin environment is not a small thing they need this technology and we want to be the ones to continue to provide it to them.
I guess, that's your second question.
The longer sales cycle, and I think on the mortgage side, we're definitely watching the market and the sales cycle I don't see my particular focus is serving our existing customers first and foremost in mortgage we do have some new.
Customers in the pipeline and some customers we announced even this quarter schools first the very large credit Union OCC you. It's a very large credit union those are marquee names in the credit Union space.
And then adding to that the diversification of our revenue we do have non mortgage products that are in very in demand. The particular credit card and deposits are something that we're hearing a lot from our customers and we have great products for that and builder is a good foundation for those things and so we're making sure to serve our existing customers first and foremost and continue to drive additional products.
<unk> to our customer base as they need it.
Next question comes from Matt Stotler from William Blair. Please feel free to go ahead.
Alright, Thank you for taking the questions maybe just.
Kind of a two parter for me on the.
Tumor banking.
Side of the business so I.
I think $8 7 million increase year over year, just over six of that was from from Mr. Cooper Bullock.
Good luck.
Get some some color on what youre seeing in terms of adoption outside of that customer adoption the pace of a further adoption there.
And kind of the second part of that question would be obviously, we're going through the cycle on the mortgage side are you seeing the current macro and certainly having any impact on volumes on the consumer banking side as well. Thank you.
Okay.
So on the the other aspects of why the consumer banking marketplace grew.
It was add ons like income.
Clarification, Glenn close the digital closing solution.
Home equity lending is not an add on but its an additional product that's grown and personal loans have also grown for us.
All of those product lines were working off of a pretty small base and we've grown as you can see year over year, but the volume impact.
Impacts to that if we are seeing in the market. It's much smaller than the opportunity ahead of us I mean, we're very lightly penetrated in that because you were making a marketplace space you've seen how much it's grown year over year, and we're investing heavily there too.
To continue to grow that business.
Yeah.
Next question comes from Robert <unk> from tourists, please feel free to them yet.
Great. Thanks, so much for taking the questions. You asked is Robert on for Terry Tillman just starting off here can you provide us with an operational update on offshore operations supporting the title business in India. How is that transition going and then I have one follow up thanks.
Sure so.
So hopefully 65 team came with offshore operations.
We are already happening in India. So we've been investing in those offshore operations and we think it's a critical part of our strategy going forward.
Great. Thanks, and then just as a quick follow up can you provide a little more detail around the pipeline of customers, who have signed but have not yet deployed and how does that pipeline look versus <unk>. Thank you.
Okay.
We don't I don't have the exact numbers compared to Q O Q, but we still have material.
Regional banks and smaller banks that are signed and then they might have not yet rolled out or in the process of rolling out that number is in our disclosure in the percent that's not tapped part of it is that and part of it is usage within our customer base and so we saw a material opportunity. There you can see in the disclosure that some of the untapped volume.
Has come down since Q since the last.
I guess the last disclosure on that and that's just a function of we're rolling out our customers that are signed and typically the last quarter or last half of the year is when we signed new customers like schools first and get them rolled out in the back half of the year.
Next question comes from Matt <unk> from Keybanc. Please feel free to go ahead.
Hey, guys. This is Matt on for Josh back.
I was just wondering if you guys could talk about the demand appetite that you're seeing specifically with <unk>.
Differentiations between your size of customer and how you're thinking about it budgets going into next year. Thanks.
I would say across the board, especially in the <unk> in the mortgage space a lot of the demand is around how do we drive more productivity and more automation and so some of the add ons that we have.
Can drive that and then that's all sizes of customers, but in particular, the larger ones in the banks. They are taking a multi year view at this.
And then on the on the other.
So the consumer banking marketplace.
Who are the biggest demand we're seeing through the it budgets are home equity lending.
That's in credit cards.
I would say all sizes are investing and figure out how to digitize those those areas. It doesn't there's not just one size, but we are in particular I spent a lot of time on the road with some of the larger customers, making sure that they I'm hearing, what they're saying and what.
They're hearing what I'm, saying, what we're building.
And we see a lot of appetite to continue to digitally transform their organizations. It is top of mind I had a call today about that was one of them. So it's top of mind for them and they know they have to do it and they want to have the best software platform to do a western that's blended particular blend builder is a key key centerpiece of that.
And that was our last question. The conference has now concluded. Thank you for thank you all for your participation you may now disconnect your lines.
Yeah.