Q4 2022 Rocket Companies Inc Earnings Call
Also available on our website is an investor presentation.
Before I turn things over to Jay Let me quickly go over our disclaimers.
On today's call, we provide you with information regarding our fourth quarter and full year 2022 performance as well as our financial outlook. This conference call includes forward looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mention today.
We encourage you to consider the risk factors contained in our SEC filings for a detailed discussion of these risks and uncertainties. We undertake no obligation to update these statements as a result of new information or further events, except as required by law.
Call is being broadcast online and is accessible on our Investor Relations website <unk>.
A recording of the call will be posted later today.
Our commentary today will also include non-GAAP financial measures reconciliations between GAAP and non-GAAP metrics for our reported results can also be found in our earnings release issued earlier today as well as in our filings with the SEC.
And with that I'll turn things over to Jay Farner to get Us started Jay.
Thanks, Sharon good afternoon, and welcome to the rocket companies earnings call for the fourth quarter and full year of 2022 today.
Today, we're going to recap last year's achievements and highlight how we continue to innovate to enhance the rocket client experience. We will also discuss how we put key pieces of our client engagement program in place with the goal of lifting conversion and lowering our cost to acquire clients and ultimately expanding our purchase market share and extending.
Client lifetime value.
But first I wanted to take a moment to talk about the leadership transition, we announced a few weeks ago.
As you know on June 1st I will be retiring from my role as CEO for the last 27 years of rocket and in particular, the last six as CEO have been among the most rewarding experiences of my life.
We've accomplished so much together as a team and I.
Have made many lifelong friends.
With all the excellent work accomplished in 2022 and into 2023 I believe now is the right time to step aside so I can spend more time with my family. While the company continues on its journey executing on these transformational strategies.
I have to thank Dan Gilbert specifically his mentorship and friendship for nearly three decades is something I'll always appreciate.
One thing is for certain I have tremendous confidence in this team's ability to continue to execute the company's strategy we.
We have the brightest minds in the business and the depth and breadth of our leadership team has set the bar for the industry My.
My confidence also stems from the fact that Bill Emerson has taken the reins as interim CEO upon my departure.
Many of you know bill.
As he served as the CEO of rocket mortgage for 15 years.
We remain close and has continued to lend his advice and his counsel.
He is a true passion for rocket companies.
And we will work closely together to ensure a seamless transition.
Bill would you like to share any thoughts.
Thanks Jay.
Great to be here with everybody today.
They noted a dental rockets of three decades, including as Chief Executive Officer of rocket mortgage from 2002 to 2017.
We remain engaged in the business since that time from my position as Vice Chairman of Rock Holdings, which is the majority shareholder of rocket companies.
I am excited to roll up my sleeves, and digital Jay and the rest of the company phenomenal leadership team to build on our strong foundation and continue executing at a high level, while the board conducts a search for a permanent successor.
On a personal note Jay is that a great colleague and friend and I want to take a moment to thank him for his tremendous impact on this organization.
His vision for rocket future has created a pathway for success and position rocket very well.
With that I'll hand, it back to Jay Thanks Bill.
Now turning to our results 2022 was a challenging year for the housing and mortgage industry and one defined by rapid change over.
Over the past 12 months eight increases in the fed funds rate intended to rein in high inflation.
Led to a sharp rise in mortgage rates.
The 30 year fixed rate mortgage spikes from roughly 3% in January to more than 7% by the end of October .
This represents the largest and steepest rise in roughly four decades.
With the volatility and increased cost of financing demand for rate and term refinance transactions shrink significantly.
While housing affordability and consumer concerns about a looming recession weighed heavily on the home purchase market.
Despite this backdrop, we continued to invest in innovative technology and programs to serve our clients better and to capture the immense opportunity.
The mortgage industry is fragmented.
The direct to consumer channel rockets bread and butter from the beginning represents the vast majority of the mortgage market our.
Our company has a long track record of disrupting mortgage refinance in this space and growing market share and we believe we are well positioned to do the same in the home purchase market with products and ecosystem and client engagement programs that we've put in place.
We believe we can grow our purchase share by delivering an engaging and differentiated client experience with the additional programs. We've launched over the last 12 months, particularly to the millennial and first time homebuyers, who drive the industry.
In fact, we've notched several significant achievements in 2022.
We successfully integrated rocket money into the rocket family and launched rocket rewards our innovative loyalty program.
We unified our business under one rocket brand and delivered a seamless rocket accounts single sign on experience to our clients.
And we will soon be expanding our credit card program to include a rewards card tied to homeownership.
We also brought to market a broad suite of purchase focused mortgage products designed to give our clients the confidence to transact in a tough environment inflation, Buster, which reduces our homebuyers monthly mortgage payments by one percentage point in the first year of their loan and addresses today's home affordability challenges has resonated very strongly with our clients.
We then pared inflation Buster with our rate drop advantage program, which covers many of the cost to refinance in the years ahead if rates fall <unk>.
I'm also proud of our initiatives to expand access to homeownership to underserved communities in November we introduced a conventional loan option for Americans, who are interested in purchasing or refinancing a manufactured home.
We also unveiled a special purpose credit program that offers credits for first time homebuyers to use toward their mortgage costs available specific census tracts in Atlanta, Baltimore, Chicago, Detroit Memphis in Philadelphia.
With home equity levels at record highs were helping existing homeowners achieve their financial goals with cash out refinance options as well as our closed and second home equity loan product for those who are looking to tap the current equity available in their house without sacrificing the favorable interest rate on their first mortgage.
Turning to the fourth quarter, we grew the number of rocket accounts to $25 4 million as of December 31.
Rocket accounts, a key north star metric represents clients, who have taken the action to create an account with us and with whom we may have the visibility on creditworthiness spending behavior finances, and home buying intent and more.
We believe that these clients are more likely to engage in that we can craft bespoke experiences for them delivering the right offer to the right client at the right time.
Rocket money drove a significant amount of growth and rocket accounts had its biggest month a premium member growth in his eight year operating history in January in.
In addition on January 2nd Rocket money took the top spot for daily downloads and the iOS App store finance category and also reached top 10, and the overall iOS App store.
In a few short months since our launch of rocket rewards in October we're seeing strong client adoption and engagement.
Rocket rewards has enrolled more than 1 million clients and approximately $600000 point value have been redeemed helping clients lower closing costs.
This proprietary loyalty program gives our clients points for taking certain actions such as downloading of $2 98 tax form completing learning activities and submitting mortgage applications ultimately helping to drive engagement across the rocket ecosystem.
While it's early we're particularly encouraged to see that the lead to closed conversion rate for rocket rewards clients is more than double that of clients, who did not use rocket rewards and our control population.
We're expanding our rewards program based on this success and we're excited to announce that just last month, we introduced rocket rewards to our $2 5 million servicing clients.
Last quarter, we also launched our home buying plan to a select group of clients and broader rollout is currently underway.
Buying plan is a guided digital experience that helps our clients prepare for homeownership and stay informed throughout their home buying journey.
Clients can set home buying milestones engage with personalized financial tools and credit building resources that can search for their dream home and receive advice on how to stay on track to be more confident homebuyers.
Home buying plan enables us to engage with clients, providing them with help and guidance as they prepare for the next transaction.
We will be launching even more rocket exclusive initiatives to make the client purchase experience smoother and easier leading into the spring buying season.
In aggregate all of these client engagement programs help us elevate the rocket client experience and keep our clients engaged until they are ready to purchase their dream home or refinance with rocket.
As I've said before we are uniquely positioned to help our clients through every step of the homeownership journey.
From a financial planning and education process, well before they apply for a mortgage to searching for and the financing of their new home as well as title and closing it's all within the rocket ecosystem.
Let me take a moment to illustrate a rocket client experience with this example, our client might begin their relationship with rocket by using rocket monies financial planning tools and creating a rocket account.
We identify their desire to become a homeowner and introduced the digital rocket dashboard with home buying plan.
The client can bank loyalty points by joining the rocket rewards program consuming content on the purchase process as well as obtaining a verified approval letter.
This is just the beginning rocket homes tools, but the power of home search into our clients' hands, making personalized recommendations on properties that meet their targeted neighborhoods price range and amenities. Additionally.
Additionally, local rocket homes real estate agents are available to provide personalized services when needed.
Utilizing data we already have through the rocket account, we can streamline the mortgage application process and help the client purchase and close on their first home.
With our industry, leading servicing and 90% retention rates, we can recapture the client through a refinance transaction when rates drop.
With the full suite of rocket products and our commitment to client service, we hope to nurture it and retain the client over the course of their journey as homeowners until they are ready for their next transaction.
We believe we have an excellent opportunity to deliver a more personalized experience to each of our $25 4 million rocket accounts.
Through our client engagement programs, we believe we can lift conversion lower our cost to acquire clients and extend client lifetime value.
Over time, we believe this will translate into substantial and sustainable market share growth, particularly in purchase and growth in revenue and profitability.
In 2020 in 2021, we demonstrated the ability to scale, our business and deliver best in class client service during the refinance heavy market.
As we entered 2023 with key pieces of our client engagement program now in place, we can tap our sizable and growing rocket account space to succeed in a purchase heavy market.
Our assets are unmatched in the industry are robust capitalization, our fortress balance sheet and our platform and ecosystem just to name a few most importantly, I'm grateful to our leadership team and our team members' dedication to always putting our clients first.
We're executing on our strategy and we remain focused on fulfilling our mission to be the best at creating certainty and life's most complex moments so that our clients can live their dreams with that I'll turn it over to Brian .
Thank you Jay and good afternoon, everyone on today's call I'll cover our financial results for the fourth quarter and full year 2022, I'll talk about the actions, we're taking to improve the cost structure and the investments we're making in our platform I'll conclude by sharing our outlook for the first quarter of 2023 and discuss what we're seeing in the current environment.
As you heard from Jay the mortgage industry faced an extremely difficult environment in 2020 to.
Rapidly rising interest rates declining consumer confidence and challenging affordability impacted demand for purchase and refinance mortgage products throughout the year.
To put the demand headwinds in perspective, the MBA mortgage application index dropped nearly 70% in 2022, the largest intra year dropped in the history of the dataset going back to 1990 at the same time demand was following the mortgage industry faced excess capacity, we've seen players across the industry struggled to adjust to the.
A volatile environment facing liquidity issues retrenching, we're exiting the industry altogether.
Against this backdrop rocket companies continue to invest and innovate. We also took significant actions to adapt to the changing market from Q4 2021 to Q4 2022, we reduced our expenses by $3 billion.
Or 40% on an annualized basis, while protecting our platform investments and focusing on client lifetime value and a purchase heavy mortgage market.
For the full year 2022 rocket delivered positive GAAP net income and adjusted EBITDA as always we're focused on driving operational efficiency and financial profitability, while investing to position the company for sustainable long term growth.
Diving a bit further into the full year results, we delivered $133 billion in closed loan volume and $4 6 billion and adjusted revenue in 2022, our GAAP net income for the year was 700 million or <unk> 28 per share, we reported $59 million and adjusted EBITDA.
On an adjusted net income basis, we reported a loss of $137 million or <unk> <unk> per share. Our GAAP results include the $1 $2 billion Mark to market appreciation of our mortgage servicing right asset during 2022, which is counter cyclical in a rising rate environment.
Moving onto the fourth quarter results, despite challenging market conditions rockets fourth quarter adjusted revenue came in at $683 million, which was above the midpoint of our guided range as we shared last quarter. We believe the switch to revenue guidance provides the best representation of rockets businesses and most closely aligns with.
How we manage the company.
In the fourth quarter, we generated close loan volume of $19 billion net rate locks of $15 billion and our gain on sale margin was 217 basis points inflate.
Inflation Buster or promotional purchase product running through the fall and winter resignation strongly with our clients in demand for the product exceeded expectations. This higher than expected demand for inflation Buster negatively impacted gain on sale margins in the fourth quarter, it's worth noting that since the start of the <unk>.
First quarter through today, we have seen gain on sale margins improved by more than 20 basis points compared to fourth quarter levels, primarily due to a shift in promotional products.
As a reminder, these levels are what we have observed year to date and may not provide forward looking indication into the quarter.
On an adjusted net income basis, we reported a loss of $197 million or <unk> 10 per share.
Turning to expenses, we continue to execute a disciplined and prudent approach to cost management on our last earnings call. We committed to a further reduction in total expenses from the third quarter to the fourth quarter of $50 million to $100 million and we far exceeded that estimate reducing expenses by $202 million during the call.
<unk>.
As we shared with you on the previous call we have taken significant actions to reduce our overall cost structure in the fourth quarter was no different in fact, if we look at the fourth quarter of 2022 compared to the fourth quarter of 2021 on an annualized basis, we have reduced our expense base by almost $3 billion.
Or more than 40% of total costs, while monitoring our expenses closely. We're also focused on making the right investments in our platform to grow purchase market share and extend client lifetime value.
As Jay mentioned, we had several significant accomplishments in 2022 as we put foundational pieces of our client engagement program in place. We believe we have an excellent opportunity to deliver more personalized experiences to the high value clients within our $25 4 million rocket accounts.
Rocket money is a critical piece of our platform strategy.
Both has accelerated at rocket money since our initial acquisition of true Bill in December 2021, and rebranding last year. In fact January 2023 was the best month ever for rocket money premium member growth as I mentioned last quarter rocket money provides us with a distinct competitive advantage by acquiring clients for less.
<unk> than $100 per client.
In contrast, the mortgage industry acquires a close client for thousands of dollars, we see tremendous opportunity to lower our client acquisition costs by acquiring clients through rocket money clients acquired through rocket money are focused on their finances and tend to be much earlier in their home ownership journey.
We are also encouraged to see early signs of success from rocket rewards, which as Jay highlighted includes enrollment that has surpassed 1 million clients in the first few months.
<unk> point redemptions in excess of $600000 in very promising early lead to close conversion improvements.
Our goal is to engage with a large and growing base of clients, particularly potential homebuyers at a lower cost of acquisition with better conversion levels using our industry, leading net retention rates to drive higher client lifetime value ultimately positioning us to succeed in a purchase driven mortgage market.
<unk>, we believe the ability to provide these clients with a fully integrated experience early in their homeownership journey and throughout their lifetime as homeowners will be a game changer in our industry.
Turning to our balance sheet rockets financial strength is a major strategic advantage for US. We ended the fourth quarter with $3 3 billion of available cash and $6 9 billion of mortgage servicing rights together. These assets represent a total of $10 $2 billion of.
A value on our balance sheet, our $3 3 billion of available cash consists of $722 million of cash on the balance sheet and an additional $2 $6 billion of corporate cash used to self fund loan originations total liquidity stood at approximately $8 1 billion as of December <unk>.
31, including available cash plus undrawn lines of credit and our Undrawn MSR lines as of December 31, our mortgage servicing portfolio included $2 5 million clients with $535 billion in unpaid principle.
We also drive considerable recurring revenue from mortgage servicing during the fourth quarter, we generated $371 million of cash revenue from our servicing book, which represents approximately one 5 billion on an annualized basis net client retention remained over 90% in the fourth quarter well above the industry average.
Looking at the trends, we're seeing in the first quarter consumers remain concerned about a potential recession and rates continue to be volatile insensitive to economic indicators. Despite this for the first quarter. We expect adjusted revenue to be in the range of $700 million to $850 million driven by an increase in <unk>.
Production and improved margins compared to the fourth quarter.
Regarding operating expenses, we expect Q1 to be relatively consistent with Q4 with a slight increase on an absolute basis, primarily as a result of seasonal items, such as payroll taxes, and 401, K resetting and higher variable expenses associated with increased production in revenue it is worth.
Noting that the expense total for Q1 2023 is expected to be roughly 30% less than the Q1 2022 figure looking ahead, we will continue to be diligent in managing expenses as we continue to monitor the macro environment with an eye towards profitability as always our forward looking guidance.
Is based on our current outlook and visibility.
Despite a challenging environment in 2022, we are proud of what we achieved as an organization and advanced our ability to serve our clients better in 2023 with key pieces of our platform in place to gain share in the purchase market and extend client lifetime value with that we're ready to turn it back over to the operator.
For questions.
Yeah.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad as a reminder to allow everyone an opportunity to ask a question. We ask that you. Please limit yourself to one question and one follow up we'll pause for a moment to compile the Q&A roster will.
We will take our first question from Kevin Barker with Piper Sandler Your line is open.
Thanks for taking my questions.
I wanted to follow up on.
You, obviously have been impacted by the refi market and rates and everything associated with it.
Really really tough across the industry as well.
Are you doing that is going to really accelerate the diversification of revenue, particularly.
In the next six to 12 months.
Given we've seen gain on sale in mortgage volumes come under quite a bit of pressure.
Just given the rate environment.
Thanks, Kevin It's Jay.
And certainly that's something that we think about each and every day and we have been thinking about it, especially the last 12 months and I think if I'll point back to a lot of our prepared remarks.
We have been focused on strengthening our ability to cut through what is a very challenging marketing and.
Acquisition model in mortgage so you might say well diversify even more into other products, but actually what we're seeing right now is because so many others are coming out of this space. We can go through Wells Fargo JP Morgan Chase USAA blend compass, Mr. Cooper Flagstar in there.
Mortgage company and bank after bank has pulled back from the mortgage space. So there is an opportunity to actually grow market share in the mortgage space and purchase in particular, but you've got to bring down the cost to acquire the client you've got to win.
Increased conversion rate and so as we went through the prepared remarks, the work with our home buying plan. The work with the inflation Buster I think I referenced that there are other very unique products that will be launched here shortly the launch or the mentioned I made up of a credit card that will help.
Homeowners.
Particular with rewards the strong growth of our rewards program over 1 million clients already signed up early tests showing that with doubling the conversion rate. There all of that will allow us to grow market share in the purchase category as others come away and when we prioritize where our tech.
Resources, our sales resources in our marketing resources should be we feel very strongly that grabbing that purchase market share is our best place to focus because as we know.
A 90% retention rate as rates move around tick up tick down people take cash out will recapture that client again and maximize lifetime value. So it doesn't mean, we're not focused on rocket loans doing great stuff with rocket loans when it comes to personal loans.
Solar financing auto financing, but we see a very big opportunity right now.
As the mortgage market seems even more fragmented than it's been in the past to lead in and grab that market share.
Yes, it seems like quite a bit of opportunity just given.
The headwinds across the industry.
I mean do you feel I.
I mean, some of the things that you are putting in place obviously take time to develop.
As you start to build out and deploy into your customer base and others, but do you feel like there is an opportunity.
To accelerate some of that diversification.
Via.
M&A or some other type of strategic initiative.
Well as you mentioned I think some of the things do take time and Thats why we have prioritized the work to be so focused and I'm. So proud of the team and how much they've rolled out in the last six months.
And that was a decision do you go into other non mortgage products are do we redirect our tech resources into these areas that can help accelerate mortgage and thats. The decision that we've made.
That will reduce the timeframe for us in particular.
Yeah.
But youre right purchase we could be doing a lot of great work right now with purchase clients at the top of the funnel build and rewards and it may take 456 months for those clients to actually work their way through the funnel to buy a home.
We can see that progress we can track that progress and the more they bank those rewards the more that we know they are going to be a client that will close with us.
I think as we get into the spring, we'll probably be able to provide even more visibility as we watch clients kind of work their way through that funnel.
And M&A.
<unk>.
We're very active there we're always looking.
We always want to make sure we're making the right investments that provide a unique opportunity to grow market share and not just kind of buy something that we already have quite honestly under our own umbrella.
Thank you Jerry and I wish you the best of luck in retirement. Thank you.
Thanks, so much.
Next we'll go to James Faucette with Morgan Stanley . Your line is open.
Hi, This is Blake matter on the line for James Thanks for taking my questions.
So one thing we're interested in drilling down into is how do you size the benefits some of the investments you've been making to the platform to drive client engagement, such as rocket money market roll or.
So far are you seeing any tangible improvements in customer retention.
New customer acquisition rates.
Yes, I think we touched on before some of the improvements we've made to rocket money in particular I.
I think Brian mentioned is our cost to acquire a client has now dropped to a $100 far different than where most people sit to acquire a mortgage clients and so tying that pipe into the home buying planned awards plan will help bring them through the funnel. We've touched on the fact that here in January rocket money was rated the number one app in the iOS system.
Something we've been focused on achieving for quite some time, but it's the heavy focus on making that product special making a great that allowed us to achieve that actually got top 10 overall for app downloads in January .
So we're seeing the top of the funnel widened.
And then we're starting to see more kind of middle of that funnel, we referenced the rewards program.
The early tests, we've now done show a doubling of conversion.
And as I mentioned before there'll be additional programs, we're rolling out here in the spring and probably the next call, we'll be able to share more information around how we're seeing those conversion rates increased all of that will allow us to rethink the cost to acquire a client in particular a purchase client.
And I think what one other exciting thing that we're watching is the pairing up of our rocket homes preferred agents with our rocket mortgage program.
And how that's assisting in conversion rate increase and will probably touching on that more here in the future as well.
Okay, Great and just a quick follow up for me.
How much success have you guys had in adding new partners to the GPO network.
Some of the competitive pricing dynamics, we're seeing in the wholesale space.
The irrational pricing behavior.
Some competitors.
Yes, that's a very interesting space as you know, Mike <unk> and team have done a wonderful job really proud of his work the last few months, it's resonating with brokers.
And it's a very fluid space.
We track how many partners are coming in we track how many partners are leaving others.
And as you are really articulated those brokers are very price sensitive and so you'll watch kind of partners move from from partner to partner, we've talked about this Bob Walters.
The CEO of the mortgage business has talked about this a lot. That's the superpower of a mortgage broker the ability to pick and choose who they work with to give themselves an advantage and as you know we stand firmly behind providing that superpower. So we're onboarding new GPO partners all the time and we think that's the right way to approach that market.
Great.
Okay. Thanks, we'll go to Ryan Nash with Goldman Sachs. Your line is now open.
Hey, good evening everyone.
Yes.
Maybe start off Brian So I would say, even despite outstanding expense performance seems the business still losing a few hundred million dollars a quarter and Brian based on the revenue guide and the color you provided on expenses. It sounds like that's likely to continue. So maybe you can just talk about the strategy in place to return to.
Profitability when do you foresee this happening and Jay maybe just talk a little bit about how you think about the tradeoff on.
<unk> to lose money and continuing to make investments in the business versus further rationalization.
In terms of improving the profitability of the company and I have a follow up yes.
Yeah look I think the team has done an incredible job.
This year of reducing expenses, it's easier to say on these calls and talk about expense reduction the real work is the hundreds and hundreds of leaders inside the organization to have to go through that process and when Brian talked about taking billions and billions of expenses out.
Accomplish that in nine months.
And so.
My hats off to him into the entire team in achieving that.
I think if we go back and listen to 27 years I've been here, especially.
When I took over as CMO and CEO , our focus was the direct to consumer channel and our focus was doing something different that no. One had done before being excellent in every category from marketing to outreach to conversion our banker force being the best of the best and that worked and we scaled refinance in particular.
To levels that no one has ever seen when you hear us talking about the rewards program and the home buying program and the rocket dashboard and the servicing and the rocket money and rocket homes and these are a lot of moving parts far more complicated than refinance absolutely.
On one side, its taking us longer to achieve it because it's far more complicated on the other side the barrier to entry for anyone else to do this type of work I don't see it happening.
That work, it's those inches, it's the 110th of a conversion rate increase over here and 120th of a conversion increase over there, but they all add up to allow us to have the same success in purchase direct to consumer that we hadn't refinance and so yes, we've invested some money. These last six seven months.
In particular to achieve that but I have all the confidence that that will result in our ability to scale purchase the same way that we've scaled refinance and will lead to a very profitable and successful organization. So that's where our focus is and we're just.
We're taking the same scientific approach that we took to refinance and we're applying it now to purchase more complicated taking longer but.
It's a proven thing that can work.
And Brian I may jump in.
Ryan I think to Jay's point profitability is a priority.
And you can see it in the expense numbers, but we're not here to sacrifice long term results.
You know you've been with US a long time, we've been a private company long before we were a public company and we're not interested in sacrificing to hit a short term number 40% of the expenses came out last year. If you need any more proof that we're focused on it we more than doubled what we said we'd do in the fourth quarter, we accelerated some of our expense.
Items. So it's definitely something the management team is focused on but as we sit here in the first quarter with the guide that you mentioned and we're on the forefront of the home buying season, we feel really good what we've done in terms of the cost structure.
Got it I appreciate the color and then maybe just as a follow up I think you mentioned in the prepared remarks that you expect volumes are improving in the first quarter, maybe just talk about what is driving that and then more broadly can you maybe just talk about you've touched on purchased a couple of different ways can you maybe just talk about the actual.
Strategies in place that you think youre going to inevitably drive purchase volume and how do you think about some of these newer products, whether it's inflation Buster home equity and some of the others.
When do we start to see these things, having a meaningful impact on the volumes in the actual mortgage business. Thanks.
Yes, well it is.
It's an interesting market that we're in.
You've watched a lot of folks trying a variety of things, especially the second half of 2022.
When I think about the purchase market I've touched on this a few times already.
I think.
About the entire funnel if you were to walk into my office should see on a whiteboard, a giant funnel I'm always kind of adjusting and <unk>.
Rethinking, but it starts with all of the marketing partnerships, we've got but it's also our opportunity to market directly to consumers. It works through our rocket homes network of agents, which is incredibly strong and getting stronger. The reason that's happening is because when purchases were so strong in 2021 and 2002, the beginning of 'twenty two.
Most agents had enough business to to kind of deal with now agents are hungry for verified clients. We are the provider of those verified clients. So the dynamic between.
The mortgage business and agents is changing which will benefit us greatly.
Youll kind of watch the different solutions, we can offer to allow people to get prepared to buy one of the one of the complexities of a purchase lead thats different than a refinance late is it.
It's hard to help someone find the perfect house.
And so we can be there we can be engaging with the client, but we've got to be there on that Saturday afternoon, when they see that house and if you look back over time, usually who they are they're with us their agent and so their agent may have a mortgage company that they like to work with so with this network of agents that are.
Team, Doug Seabolt, Sam Vida had been growing out and solidifying these last six months.
And then the rewards program. So now our clients look and say wait a second I've already built $850 towards my closing fees with rocket.
I've got a verified approval and I'm working with a preferred rocket agent Theyre sitting there on a Saturday now the only call or text or E mail comes directly to us not to another mortgage company and so.
I imagine as we get into the spring and summer we're going to see the continued increase in conversion and all of that ties back both rocket in rocket home's ability to market, but also rocket mortgage's ability to market and the last thing I'll say and I can only touch on a little bit now imagine a credit card where everyday you are spending.
And doing things and that spending allows you to build rewards to help you by your next home all of these factors working together really gives us a strategic advantage I know you wanted to Hey, Jay tell me in what months.
All I'm, saying is all these things working together.
We feel very confident will allow us to apply the same marketing spend the same creativity to drive this engagement and really grow purchase market share significantly.
I appreciate all the color and best of luck in retirement.
Thank you we'll go to we'll go to Mark Devries with Barclays. Your line's open.
Yeah.
Yes. Thanks.
Had a follow up question from Brian <unk>.
Question around expenses.
Look I mean.
I'm trying to get a better sense of how you're thinking is evolving and may continue to evolve for the environment here.
Clearly you did even more than you guided to.
Take outs this quarter, but it's also a very deeply cyclical business. So I appreciate it.
Not necessarily managing to getting to breakeven or profitable at what might be the trough of the cycle.
Fear that you cut so much that you don't participate as much as you would like on the upside so how.
Should we think about it.
Mortgage rates remain really high in volumes persistently muted.
What else you can do or should we expect you to continue.
This level of activity.
To lose money and not take out more expenses.
Okay, I guess, mark the way I think about that as revenue in the production of the business are going to be the north star and we try to structure the cost basis around that but in any particular quarter, that's not necessarily what we're focused on we're focused on setting up the business for success over the long term.
As we think about capacity, we feel like we're in a good spot right now we feel like we're ready for the home buying season.
That doesn't cooperator, if the macroeconomic backdrop doesn't do what we expected to do there are other levers that we can pull but the way we think about it internally and the way we spend our time focused on it as we planned for multiple scenarios and the acceleration.
Ration of that expense take out in Q4 was really because the revenue and the backdrop wasn't cooperating like.
Like we had hoped so we will continue to revisit that on a quarterly and monthly basis, but the decisions we make will be for the long term.
Yes.
To add something to that I think is important bill sitting here to my left but.
Bill and I have worked together for over a quarter of a century.
And for a long period of time as CEO and President of the company and we did a nice job of kind of dividing and conquering around.
Innovation creativity marketing and execution.
And so Brian is doing a wonderful job of thinking about the expenses.
But it all comes with this backdrop of we have we have now are thousands of people have been building and building. These programs that are so important to us to capture purchase market share.
And you can run the numbers.
A few percentage points increases and we really like where the company is at and Bill Emerson specializes in execution. We have ism here. The innovation is rewarded but execution is were shipped.
And so my confidence level of bill stepping in rallying the team in executing on these these final components of what we've spent so much time investing in.
It's exciting it's just I've seen them do it for 27 years and.
And I just know what he is capable of and we've laid these great kind of all the tracks have been laid to achieve this now so.
I appreciate the concern around the expenses those are all good questions and <unk>, who do a wonderful job of managing them, but I'm, where I'm more excited about the opportunity for revenue growth because of the hard work that the team's been doing here.
One thing to get distracted by a very tough markets nothing to put your hands.
Operator, please take the next question. Okay. We will take our next question from Kyle Joseph with Jefferies. Your line is now open.
Hey, good afternoon, and thanks for taking my questions.
I just wanted to focus on margins and the outlook for 'twenty three obviously it sounds like <unk>.
<unk> was pressured by inflation loss share, but as we as we think about kind of the supply and demand dynamics in the industry.
Kind of the mix shift towards purchase.
And I would guess that there's still ongoing demand for inflation, lesser but just how youre thinking about.
Margins in 'twenty three from a high level basis, maybe versus the fourth quarter of 2002, and then the full year of 2002.
Yeah, so margins at $2 17 in Q4 to your point there was really two things going on one is it's important to note that the 10 year peaked I think in October . So affordability was clearly a concern. So there is no doubt that when rates are moving and whipsawing back and forth that impacts the consumer.
<unk> sentiment that impacts consumer confidence.
And in some cases, that's the right thing to do at that point is to get that client in the loan in the budget that they can afford so that impacts gain on sale margin and then the second thing which is related is the promotional product inflation Buster and it's a great product for this market.
The good news inflation muster performed better than we had expected which added to some of that pressure, but as we look forward to Q2, where we're seeing margins through the first call. It two thirds of the quarter as we mentioned in the prepared remarks 20 basis points more than 20 basis points better some of that due to the shift in mix.
Some of that is due to inflation buster continuing to perform well, but as Jay has talked a lot about we launched rewards we're seeing clients redeem rewards, we're seeing more diversification and purchase products. We have some things on the horizon that we're excited to talk about and we've seen some relief from a price competitive standpoint to Jay mentioned, all the people that have.
Exiting mortgage recently and we're starting to see that flow through and gain on sale margins I'm not going to comment much beyond the first quarter here, but all of that is considered in the guide when we guided up in revenue that was largely because of an improvement in margins and an improvement in production.
That's helpful. Thank you and then a follow up just on rocket money and kind of the acceleration of growth Youre seeing there.
That too is that a function of the rebranding or is that a function of kind of more macro pressures and kind of the consumer looking to get their budget.
Budget in order.
Yes, I think there is a variety of things I, certainly think that there is a renewed focus from the consumer and thinking about their budget and rocket money is.
Probably not probably is the best App as far as I'm concerned for for consumers to use to achieve those goals.
I think we have an incredible team over at rocket money their ability to understand.
Where the consumer is going add product features that really resonate with the consumer the marketing group there the performance marketing group is excellent.
Just.
Top shelf across the board and so that group is executing right now and as they start thinking about tying in.
Their work to the whole buying plan we're.
We're rocket money is attracting someone who is just starting to think about getting their finances in the right spot to buy things like cars and homes. So it dovetails perfectly into our rocket or home buying plan, our rewards program credit card and down to mortgage I mean all of these.
<unk> are coming together to allow that to.
To happen. So that's those are a lot of reasons for the growth over there, but all good for our business.
Got it thanks very much for answering my questions.
Next we'll go to Doug Harter with credit Suisse. Your line is open.
Given your current liquidity picture I guess, how are you thinking about return of capital versus investment into the business.
Yeah. Thanks, Doug So no change in terms of how we think about the capital structure and returning money to shareholders first and foremost it's capitalizing the business. This is a great time to clearly identify the differences between us and other companies in the space in terms of the robust capitalization that we have reinvest.
Being in the business is of course, the second prong of that capital waterfall in these platform strategies like rewards.
Home buying plan and the things that we've launched recently are great. Examples of that to Jay's point, we're always opportunistic on the <unk>.
M&A front.
And Thats something we will continue to be and then finally after that it'll be returning capital to shareholders through either share buybacks, which of course, we've done a lot of and then special dividends.
I guess along that how are you thinking about.
As to potentially add more current coupon mortgages to the servicing book.
Yeah.
Potentially fuel future refinance opportunities.
Well, we just we just touched on a lot of that which is we've got to continue to grow purchase market share and that's the best way to get a current coupon as you call. The mortgage on the book and then make sure that we capture this value later.
And as we think about returning capital.
The unique thing that we've got when we think when we think about an overall purchase transaction you got the mortgage revenue we participate at rocket companies in the rocket homeless real estate revenue if.
If we do things right. There is an opportunity to participate in title revenue an appraisal revenue and so.
As we move forward, you'll you'll probably see us talk about the full package, which can create a better experience for the consumer but also have greater revenue opportunities for us.
Which is different than most of our competitors, allowing us to bring more of those purchase plants onboard at a higher interest rate and then giving number rocket dashboard the rocket.
Proposed credit card a rewards program that keep them in our servicing funnel our refinance retention is excellent our purchase retention is good but when we talk about all of these additional touch points, we can drive that retention rate up as well.
That's a lot of great work is being done to ensure that that happens.
Great. Thank you.
Yes.
Next we'll go to Erin <unk> with Citi. Your line is open.
Thanks, I was wondering if you could talk about just high level.
What you think about the mortgage industry outlook, given the underlying dynamics are pretty challenging.
Folks that have very low mortgages are not likely to go don't want to move to a to a larger home they'll just stay in their home and.
Obviously with the rates here the refi market is pretty tough what are you what are you thinking about for me.
An outlook perspective on the origination side.
I know that I have been.
Tossed out the last call or two calls ago, something like a $1 eight ish.
The trillion dollar market I think some of the <unk>.
Fannie and Freddie and the others are kind of triangulating more around that number as well Brian talked about it earlier.
Strategize, we kind of think about.
Two or three scenarios and ensure that we like the direction of the organization even in a more challenging scenario.
<unk>.
And so thats all the investment that we've been making this.
The end of 'twenty, two and into this year has really been how do we capture market share in a more challenging scenario certainly below two trillion dollars in mortgages.
And we're starting to see the continued reduction.
<unk> originators.
We're seeing.
The folks come out of the market I know, we touched on quite a few already I think wells Fargo said they were exiting corresponded flagstar has gotten out of retail.
Loan depot exited wholesale amerisafe exited wholesale.
So.
That's happening and will continue to happen because we look at the last 25 or so minutes of this call.
And we were to talk to a lot of these.
Competitors they don't have the.
T J opportunities to grow market share the way that we do so even in a more challenging 2023, which is Brian can chime in here I believe we will see that it was we don't anticipate any sharp rate decreases coming this year, we've set ourselves up to see growth.
Sure.
And then whether we see rates move around a bit in 'twenty four 'twenty five we can take an opportunity to refinance folks and increase the lifetime value and the only other thing I'll comment on.
The teams working on this cash out it's always surprising to me.
Regardless of interest rate mortgage in particular still is one of the best ways for people to borrow money.
Consumer spending has remained strong and people are continuing to invest in their home or adding on there making improvements and our teams done a great job maximizing cash out I don't think we'll see that change in 2023, I think the cash out market will still be pretty robust right. Now if you have any thoughts yeah and the only thing I would add I guess two things one is we still see great engagement from first time.
Homebuyers and Theyre not exchanging 3% note rate for a prevailing rate point. So when we look at it as you guys know we are one of the fast and the first time homebuyer space. When we look at it were.
Focused on two things one is the consumer sentiment.
Level of consumer confidence in to is the affordability, we're not having any problems qualifying consumers for mortgages. These days that's not the issue what is the issue is when there is volatility in rates.
It impacts refinance of course, maybe for the obvious reasons, but when the purchase lifecycle and the time to transact can take a while with inventory levels and your monthly payment can change based on a weekly basis in today's market. That's what puts the consumer on their heels.
Higher rates that are stable, we still get great engagement from from Homebuyers I'm glad you brought that up because that's been as you've noticed for us that's been where we're leaning.
We certainly can help someone who needs to sell their home and buy a new one and we've got programs coming that will even make that better but for us our focus through rocket money in particular is to get to the person who is the first time homebuyer they've already said they wanted to do the transaction with rocket they want to do it on the online they want to do it on their phone.
And so.
We're not battling some of those concerns about can I afford the next house I really moving up it's a different conversation.
And to Brian's point, we just got to we've got to be there you've got to hang Dan got what you said is they get a hang around the hoop, we've got to be present with that consumer as they go through the three to four to five months to find the right home and all of the programs that we've built allow us to hang around the hoop are helping that client until they're ready to buy and Thats re.
<unk>.
An important when we're glad you brought that our brands are very important thing to understand about us and the audience that we're reaching give them a reason to engage with us throughout the process. Okay great.
Thank you.
And we'll take our final question from Kevin <unk> with Zelman and Associates. Your line is open.
This is Kevin on for Ryan Mckenna.
From an industry wide underwriting capacity perspective, where do you estimate the industry is in removing capacity.
Still in the early innings or perhaps as the heavy lifting being done.
If we are still early what are your expectations regarding the timing and cadence of capacity reductions and our company closings for instance could it accelerate in the near term.
And lastly related to this is there perhaps a longer lag the cycle since so many companies generated outsized profitability in 2020 in 2021.
Well, yes, I think you did see a longer lag some of the work that we thought would have been done in mid two to fall of 'twenty two.
Dragged on and it's still happening today.
There are two phases. The first phase is trying to figure out what your your capacity should be as a company and mortgage in particular.
But even at that the next question is how can you can you generate lead flow.
You can only cut so much and then you have to have a plan to to generate to spend marketing dollars to generate revenue.
To bring out our bringing our lead flow and and again Thats, probably why you hear us being so much of our time talking about those plans because.
And can only capacity cut so much I can't speculate on where others are <unk>.
My focus is more on what are others doing to invest to allow themselves to retrench.
Originate again and grow market share and if not then I think that cutting has to keep going for them.
Ryan I know if you have any other thoughts I agree I mean in some cases from what we can see the most profitable loan for some of these companies is no loan.
And.
It's up to them in terms of how they want to handle that theres only so much cutting that can happen, but is taking it back to all the comments that we made were excited about these investments we believe it positions us well to grow purchase in particular in the direct to consumer channel.
Thanks for the question.
Thanks for taking my question, that's all I had.
Thank you.
A question and answer go ahead.
Go ahead go ahead, operator, I'm, sorry, I'll, just turn it back over to you Jay.
Alright, well I just want to thank everybody for joining us.
I appreciate bill being here.
I'm glad to see him getting engaged like I mentioned before very excited to watch him help us execute on all of these great things at the team members have been working on I appreciate everybody's hard work to get us to this point.
And we've got to keep going and growing in 2023.
Talk to you soon.
This concludes today's conference call you may now disconnect.
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