Doma Holdings Inc. Q1 2023 Earnings Call
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Thank you operator, good afternoon, everyone and thank you for joining Dominic first quarter 2023 earnings conference call.
Earlier today.
A press release announcing our first quarter results, which is also available in investor abdominal Dot com.
Leading today's discussion will become founder and Chief Executive Officer Maxine.
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.
Patients.
Forward looking statements.
Other information about our business.
Just on management's current expectations.
Eight of the presentation.
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Forward looking statements are subject to risks uncertainties and other factors that could cause our actual results to differ materially from historical results and more from our forecasts.
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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.
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There are two teams that I'm going to be focused on today.
First we will discuss the significant progress we've made in finalizing art.
Four go forward strategy to more efficiently and profitably deploy are proven incident underwriting technology with the end goal of making homeownership more affordable second I will provide an update on our efforts to get to profitability before turning the call over to our CFO , Mike Smith, who will discuss our financial results in more detail.
While the last several years have brought with them a number of challenges to the housing and mortgage markets. Gomez critical mission has remained focused on making the home buying process better faster and more affordable and supportive that mentioned the benefits we've proven for mortgage originators using our technology are significant and in today's market. There is now an even more important stakeholder for us to help alleviate.
<unk> for homeowners themselves.
Just the last few quarters the home affordability challenge for everyday Americans has gone from bad to severe <unk>.
The National Association of Homebuilders estimates that roughly 73% of all U S households cannot afford the current medium priced new home.
According to the Federal Reserve banks. Most recent February of 2023 data. The median American household would now have to spend 40% of their income to afford the median price house for reference U S households are considered cost burden when they spend over 30% of income on housing costs, leading less room for them to purchase necessary items.
To make matters worse homeownership is actually 18% less affordable than just a year ago, and 5% less affordable than the peak of the 2008 housing bubble.
Unfortunately, the title industry has been contributing to this challenge with title closing and settlement costs, which according to Fannie Mae are estimated to make up about 1% of the purchase price in a typical home purchase transaction, averaging upwards of $2400 per home and.
And finally eyes and finalizing our go forward strategy, it became clear that making homebuy more affordable needed to be front and center.
As discussed on prior earnings calls, we've been actively seeking ways to more efficiently and more profitably deploy are proven and patented instant underwriting technology. As we believe this is our core value proposition and the key to modernising, the greater than $29 billion title insurance market, while driving down the significant costs of homeownership.
The advances we have established.
<unk> technology show that it is the only proven asked scale tool of its content are patented decision engines multicomponent machine learning models up successfully underwritten over 85000 loans for many of the largest national mortgage originators in the country since it launched in 2017. These.
These lenders have seen that 80% of orders they send to our technology received instant approval are world class team of machine learning experts have achieved this outcome by training or models on over 20 years of brisk data through hundreds of thousands of past title policies. In summary, the technology is able to eliminate the bulk of the title search exam and curative process reduced.
Time to close by up to five days and.
And enables significantly lower fulfillment costs for mortgage originators, all while exhibiting similar claims rates as the traditional title process.
Over the past several months, we have conducted a comprehensive review of our business to evaluate the optimal organizational structure for us to successfully deliver on our mission and to maximize shareholder value we.
We have identified and are now finalizing a singular transformative core strategy for the business, where we would better harnessed the power and benefits of our instant underwriting technology via the efficient and profitable distributions.
Of our core technology by external partners.
With respect to that new strategy, we have made solid progress towards finalizing potential partnerships with some of the largest players in the national mortgage origination market to bring down refinance specific costs for and consumers associated with title and closing.
Expanding our partnership distribution channel remains one of our top priorities, but we are unable to provide further specific details today, we are excited about the profitable and impactful opportunity at hand.
As we strengthen our focus on our underwriting technology business. We are taking a hard look at everything in the business that is non core rigged.
Regarding our local division, we previously communicated that we have been moving aggressively to close unprofitable branches to refocus our efforts on more profitable opportunities leading to the closure of an additional 13% of our total branch footprint during the first quarter.
As part of our go forward strategy and refined focus on the distribution of our underwriting technology are local leadership team also finalizing implemented a strategic plan in the first quarter to ensure that the local division will accelerate the company's path to profitability for the remainder of the year.
This brings me to the second key theme of today's call I'd.
I'd like to provide a brief update on our focus on getting to adjusted EBITDA profitability by the end of this year.
We are still making steady progress toward achieving adjusted EBITDA profitability as quickly and as efficiently as possible exemplified by the cost cutting measures. We enacted in the second half of 2022. The most recent round of which we expect to be fully visible in our quarterly numbers starting in Q2 of this year.
We also believe that are refined strategy will bolster our profitability efforts.
Additionally, the business will continue to benefit from the healthy stability provided by our underwriting division as we remain dedicated to the continued success of the underwriter as we continue rolling out our incident underwriting technology for our independent agents.
Despite persistent macro pressures, we do feel adjusted EBITDA profitability is still attainable by the end of 2023.
Being fed we remain cautiously optimistic regarding this timeline as we understand the importance of preserving the ability for our new transformative strategy takes shape.
Given our revised plans and then we believe our market share is less than 2% of the overall title insurance market today, we foresee a long runway of opportunity ahead of us to grow our business.
In closing the almost narrowed focused on a core strategy to provide better faster and more affordable homeownership for the majority of Americans has given us a renewed energy to continue executing even amidst the set of challenging market conditions to ensure success in our mission, we will continue to reevaluate and reduce attention to anything non core to this mission.
And we remain focused on achieving adjusted EBIT profitability by the end of this year.
As we are putting the finishing touches on our new strategy, we expect will be able to provide more specific and detailed information within a few months. We look forward to updating you on our progress throughout the year.
Will now pass the call over to our CFO , Mike Smith to provide you with further details on a recent financial performance Mike.
Thank you Max and good afternoon, everyone.
Today will be providing an overview of them in the first quarter financial results. Please refer to earnings release files earlier today for full details of the quarter.
Unless otherwise specified all the comparisons cited in my remarks are quarter over quarter or sequential comparisons for the fourth quarter of last year.
Consistent with prior seasonal patterns, the fourth and first quarters tend to reflect lower activity compared to the second and third quarters, which typically show more strength.
In line with our expectations, we did see some seasonal softness coupled with challenging macro conditions that impacted our Q1 results and.
Additionally, elevated mortgage rates continue to impact refinance and purchase volumes from Donna and other industry participants.
The latest NBA mortgage finance forecasts is projecting the 30 year fixed mortgage rates will remain above 6% in the second quarter of 2023 and will improve to $5, 5% by the end of the year.
These still elevated rates will likely continue to put pressure on refinance and purchase order volumes industrywide for the foreseeable future.
That said in Q1, we did see an encouraging strengthening of both are open order pipeline as well as our conversion rates from open to closed orders, which we expect to create tailwinds for both are closed order in RPF numbers in the second quarter and into the third quarter.
Our primary measure of unity economics is adjusted gross profit, which was $4 million in the first quarter of 2023, which compared to $14 million in the fourth quarter of 2022.
Adjusted gross profit as a percentage of RPF was 18% in the first quarter compared to 40% in the fourth quarter of last year.
Joseph EBITDA, our main profitability measure was negative 2020 $22 million compared to negative $15 million in Q4 2022.
As Max mentioned, our first quarter adjusted gross profit and adjusted EBITDA did benefit from the expense actions, we took to write science our cost structure in the second half of 2022.
Wherever the decline in these measures was largely due to the fact that the full impact of the employment actions. We initiated in the fourth quarter of 2022 will not be completely realized until the second quarter of 2023.
Additionally, we had a number of one time employee benefit related reductions in a favorable reserve development in queue for which did not repeat in Q1.
Combined with some seasonal softness and continued challenging macro pressures. This led to a decline in adjusted EBITDA compared to Q4 of 2022.
In terms of our toppling performance in the first quarter, we reported revenue on a gap basis of $74 million <unk>.
23% quarter over quarter.
As a reminder, gap revenue includes the portion of third party agent premiums that dillman does not retain so we focus on goldman's retained premiums and fees or RPM F. As an important metrics, which includes which excludes the premium retained by third party agents. We believe this is a much better representation of delmas underlines toppling performance.
With this in mind RPF was $25 million in the first quarter.
29% quarter over quarter, driven by a 60% decline and refinance closed orders and a 25% decline in the purchase closed orders.
Both are actually expected as mortgage rates remain high in Q1, along with seasonal softness.
And the first quarter purchase closed <unk> orders made up 61% of our direct residential volume and 85% of our direct residents will retain premiums and fees, which compared to 46% and 78% in the fourth quarter of 2022, respectively.
As mentioned previously while we saw significant impacts to Q1 closed orders in RPF due to both expected seasonality effects and volatile mortgage rate activity and linked to foreign early Q1.
We have seen strong weak over week improvements in open order momentum in the past six six to eight weeks as we head into the spring selling season, which we believe will deliver tailwinds unclosed orders and arpino across our direct business and the second and third quarters of this year.
We expect these tailwinds to benefit adjusted EBITDA at the same time that we realize the benefits of the cost cutting actions that we took in late 2022.
As Max mentioned, we remain highly focused on achieving our goal of becoming adjusted EBITDA profitable this year.
One last item to note for the first quarter of 2023 is that we did not incur any goodwill impairment charges.
With that thank you for joining us on the call today I will now have to call back to Max for closing remarks, before we open the call to questions.
Thanks, Mike I'm incredibly proud of how we have navigated such a volatile period not only the housing market, but in the overall economy, we held firm and our goals of providing better faster and more affordable solutions. We made significant strides in finalizing our new company strategy positioning delma for long term success and ensuring we play a pivotal role in mitigating the severe home affordability concerns.
Being experienced nationwide, we look forward to updating everyone with our priorities in progress on our next earnings call operator, we're ready for questions.
Thank you.
A reminder to ask a question. Please press start one one on your telephone too late for your name to be announced to withdraw. Your question. Please press start when one again.
Please stand by while we compiled the Q&A roster.
Our first question comes from the line up some white from da David sending company. Please go ahead.
Hey, this is Tom thanks for <unk>.
Taking our questions.
Realize you guys pause the rollout of Dharma intelligence to the local channel late last year.
For those markets that have been deployed and <unk> for awhile. There any early data are kind of maybe cohort analysis, you could share about the branches or the markets, where it got rolled out earliest.
And whether you are seeing any kind of change in the market share in that area, maybe a changing the trajectory of closed orders that would signify that the technology is really resonating and getting attention.
Sure Haywire smacks, so I would say no I think I'll kind of refer back to some things we probably also touch on the last call.
In the locations that did get deployed bond the technology throughout last year.
We saw those locations process more and more orders using the technology, we saw very positive signs that indeed, it was working and producing the desired outcomes.
We made a conscious effort as you mentioned last quarter to put that deployment on pause.
Because frankly, our primary focus on our local division is contributing as much to accelerating our path adjusted EBITDA profitability as possible I think the other thing I would point out.
Which I mentioned some of the remarks.
And his remarks earlier today as we.
We've now seen this technology deployed at national scale across.
Quite frankly, what are the largest mortgage originators in the country.
We not only know that it works, we know that it works incredibly well to speed up the process and also introduced much needed efficiencies that we think can be better harnessed to bring down the cost for the end consumer so as I mentioned with regards to this thing you out a new strategy that we're focusing on that's really where our focus is going to be.
Making sure we get that proven technology deployed on a broader scale with some partners in the broader mortgage ecosystem and ensuring with the efficiencies. We've proven can show up in the form of ultimately a lower cost to the end customer.
Great. Thank you very much.
Thank you.
Alright. Our next question comes from the line up Michael <unk> from City. Your line is now open.
Hey, guys. Thank you.
I guess, maybe just high level.
Wondering what has changed.
Change with respect to the EBITDA guide.
Sounded like maybe you're a little bit more cautious than previously so so I'm wondering if you can expand on that.
Sure.
Give a quick kind of general comment and then Michael can probably comment on some of the specific set.
We think you'd you'd see from last quarter this quarter and where are we think those are going to net out throughout the balance of the year.
I use the term cautiously optimistic.
Because I want to stress that regardless of macro conditions and this is the way that we've learned to operate our business over the last couple of years, we still intend and see a path to get adjusted EBITDA profitability by the end of this year. So and in fact, we've got multiple levers we can pull to get there.
The phrasing I used around cautious optimism just means that we are very very focused on making sure that we launch our new signaller strategy successfully.
We've seen this housing affordability issue really become front and center in such a clear period of time, and we think we are uniquely advantaged.
To drive the success of our business by solving that problem and we just wanted to make sure that we.
Balance some flexibility that we may need to launch that programs successfully with management confidence that we have several levers we can pull to ensure that we get to adjusted EBITDA profitability by the end of the year.
Mike do you want to just comment on some of the specific kind of movement from Q4 of last year to Q1 of this year and.
And how that gives us further confidence that we're we're on track for our plan Cirmac, Yes, Michael I think one of the things that we might point out here too is that if you look back at Q4, and we pointed this out at the time that we had several one time items that we pointed out that favorably impacted Q4, and then if you look at Q1 here.
Obviously, not quite the performance that we'd expected, but there was only really one item that really surprises. We did note known from like the top line basis that revenues typically soft in the first quarter.
We also didn't have the repeat of those coupon benefits that.
Benefited the fourth quarter, we didn't have a decent size large claims for measurement did impact us in the queue. When that was somewhat unexpected and then also our conversion rates were not what we would hope they would be in the first quarter. So there was a couple of things did surprises, but otherwise we didn't expect first quarter to be somewhat.
Not quite as good as the fourth quarter.
Really helpful. Thank you.
And then maybe the the expense reduction measures from four Q X.
Expecting to sort of.
Go through two Q.
I just sort of curious if if you could address that.
Should.
Should work lay out.
Yes, Michael that's administrate question and again as we can talk during the fourth quarter again during the first quarter will reiterate that those expense actions that we took in the fourth quarter, we'll see that's full benefit fully fully reflected in the second quarter. Obviously, we continue to look at at at our cost structure.
And continued to find meaningful progress they're related laser focused on that so you will see that benefit coming through fully in the second quarter.
Okay, and maybe just sort of.
To get you guys felt sort of on like the the underlying trends.
<unk> the top line you know just curious is.
What you guys think it's driving.
<unk>, an order numbers and conversion rates.
Yes. It is a great question.
And.
You know honestly in this market, it's really difficult to say I mean, I would say two things here one is that.
Mike mentioned one.
One unexpected.
Outcome that we saw in Q1 was that the conversion rates of orders that were open in queue for that were then closing in Q1 were significantly lower than what we would have expected for that time of the year and again I wish I could give you up.
A causal versus the correlation will answer.
I'm not really sure it matters because it was an observed behavior that happened at a time when things were pretty volatile than the overall market right you had.
A lot of volatility both in both directions on 30 year fixed rate you have bank failures you had.
Some odd consumer spending behavior, you have low housing inventory.
So there were a lot of things go on there and we're not really sure how those influences us conversion rates on the flip side.
The conversion rates seem to have more of that Normalised income.
Back to what we would expect and we have seen very encouraging open border momentum.
For a really last six to eight weeks some of that is probably that we're getting into the spring selling season.
But other than that.
The I'd probably attributed to the fact that we are still in some really great markets and we've got great people out there execute in doing what they're supposed to do to ensure that they drive the revenue that's going to help us get to adjusted EBITDA profitable on the timeline that we expect.
Great. Thank you guys.
Thank you one moment please.
Our final question comes from the line up Carol Camille from JMP. Your line is now open.
Yeah, Hi, I'm I'm, calling in for Matt from JMP and one of the questions was already kind of answer then now is regarding the momentum of the open order then.
I guess the <unk>. The most recent six to eight weeks of the of the past quarter, where the.
The the drivers but is there any any additional granularity you can give us one that six to eight weeks is there anything specific to it.
I don't think.
Again.
Not really other than again I hate to sound repetitive.
I would commend our people across the business.
For really after getting through a tough second half of last year, where we did a considerable amount of expense reduction in streamlining the business and.
And navigating some some volatile mortgage rates and broader macro activity in Q1, I think they've just been executing really well.
Nathan focused on.
Delivering revenue.
Leading indicators of revenue for the business that we would expect to shop in in the form of a top line tailwind for a Q2 and ended Q3.
Alright, that's fair enough and then.
The next question is.
It was kind of answered in the past, but regarding the spread the new strategy.
And what you mentioned in the beginning of the clothes at the closing of the unprofitable branches is is there a commitment to keeping the local presents for <unk>.
Branches that are profitable.
Good question, so here's the way that we think about it.
We are confident that there are two elements of the core strategy going forward that need to be front and center right. Now. The first is as I mentioned in getting our technology more efficiently deployed through some transformative partnerships in the broader mark mortgage ecosystem to help alleviate the challenges with home affordability.
And the second is that our underwriting business, which continues to be a stable platform that we believe can deliver profitable growth going forward canoe.
Continues to execute on its objectives.
And partner within our independent agent community. So those.
Those are the two.
Top of mines areas of our poor strategy that were immediately focused on as it relates to the local business and this I think is consistent with what we said last quarter. Its primary focus is on making sure that it contributes the maximum amount of profit to the business to help us reach our goal of adjusted EBITDA profitability by the end of the year.
<unk> extraordinary proud of our local leadership team for not only.
Making a tough decision to exit some unprofitable market's very quickly, but also putting together and implementing a plan in the first quarter that is designed to help us accelerate our path to adjusted EBITDA profitability.
Alright, thank you.
Thank you and thank you everyone.
Includes today's conference call. Thank you for participating you may now disconnect.
Goodbye.
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