Blend Labs Inc. Q1 2023 Earnings Call
Good afternoon, and welcome to Glenn's Best quarter of 2023 earnings Conference call. My name is Winnie Lang and I'm the head of legal for the company.
Leading today's call I mean, like I'm, sorry, co founder and head of plan in EMEA Jafari, our head of finance and administration.
The Nemo on them you have to live with their prepared remarks, the team will take questions you.
You can find the supplemental slides on our Investor relations webpage at Investor Doc blend dotcom.
During the call we will refer to certain non-GAAP measures, which are reconciled to GAAP results in today's earnings release and in the appendix to our supplemental slides non.
non-GAAP measures are not intended to be a substitute for GAAP results.
Certain statements made during today's conference call regarding blend in its operations in particular its guidance for 2023 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 events or circumstances to differ materially from those described in these statements.
Please see the risk factors with identified in our most recent 10-K 10, Qs and other SEC filings, we're not undertaking any commitment to update these statements if conditions change except as required by law I will now turn the call over to Nemo.
Yeah.
Hello, everyone and thank you for joining.
I want to start by briefly summarizing the quarter.
The headline is we came in well ahead of our revenue and cost saving targets.
It's one of our largest platform deals in Q1, which was also one of our highest revenue deals in our history.
We are focused we have a sense of urgency and we are getting leaner and stronger.
We've been building the muscles necessary to execute at this quarter is a testament to the work we have done and we will continue to do.
To elaborate on our results our platform revenue came in at $27 $9 million based on our prior segment structure on which our guidance was based.
Amir will walk through our new presentation that better aligns with our business focus moving forward, but the headline for Q1 is that our performance is well ahead of our expectations largely driven by the strength of our mortgage customer base we.
We expect Q2 platform revenue to be even better than Q1.
We've always said our customers will be best positioned in the downturn given their position in the market and the cost saving benefits of our technology.
And we're seeing that play out in practice.
Our mortgage market share grew to 23, 2% in the second half of 2022 up from 14, 5% in the second half of 2021 based on third party market origination data.
In addition to that we signed one of our largest consumer banking suite deals ever which we believe is a major validation of our blend builder platform and now have close to 20 active customer projects going live on blend builder solutions.
This part of our business is growing and blend builder will be the foundation platform for all aspects of our business over time, including our mortgage customer base.
We came in well ahead of our expectations on operating expenses with a sequential improvement of $11 million and that's down $21 million from the same period last year.
This was driven by a concerted efforts to continue to optimize our cost structure.
We expect this to continue to trend in this direction going forward.
As a result of all of the above our net operating loss came in at $31 million also well ahead of our expectations, but it's still a big area of focus for us to continue to improve.
This is a sign of us ushering in a new era blend, we are leaner and more intentional than ever.
Even more focus on our customers all while driving meaningful innovation with blend builder.
This is what you can expect from us going forward, we won't stop until every aspect of the way banks originate products becomes digital and data driven and we'll take it one step at a time starting now.
Now that I've shared some highlights let me deep dive into our results.
To remind everyone of our three key priorities for the year. We're focused on one continued improvement of our cost structure building towards profitability, despite a tough mortgage macro environment.
Two driving success in our mortgage customers. So they can grow market share and lower their cost and a lower margin environment.
And three proving out our blend builder platform with key customers to serve as the foundation for the future of Glen mortgage as well as expanding our total addressable market across every line of business within banking.
First let's talk about our cost improvements and path to profitability.
I want to start with the Punch line. We are ahead of schedule on our path to profitability Amir.
Amir will go into detail on this so I won't spend too much time, but here the key facts.
Our operational cost improvements in January are making a big impact on our profitability targets.
We're breaking out our software gross margins, which is tied to our products not including professional services or title for the first time this quarter.
There are 75% up from 72% last period, and we expect to continue to improve these over time.
As a result, our gross profit came in ahead of our expectations, we view ourselves as a software company first and foremost and this is why we decided to share this information starting now.
Between that and our outlook for sequential revenue growth throughout the year, we expect our net loss will continue to decline each quarter from here forward.
On the debt our debt is due in July of 2026 more than three years out we expect to be free cash flow positive well before then.
Given the performance of our business in Q1, we are ahead of our previous long term plan and now show that we expect we will generate positive operating income in the fourth quarter of 2024.
In summary, we believe the company is fully funded we feel good about our balance sheet as we continue to strengthen our operations.
As we stated last quarter, we will remain diligent to protect our balance sheet, while being opportunistic to strengthen our position.
Now, let's talk about our next major your objective driving success in our mortgage customer base.
Our goal this year has been to help our customers lower their cost to originate by leveraging a more technology, including many of the expanded features and capabilities. We've built out over the past few years.
We saw that happen in Q1, our mortgage suite revenue came in at $17 $8 million. This was well ahead of our expectations as outlined above.
We believe we have significant upside in our revenue from here as market share consolidates industry volumes return and our Adams gained traction. We believe these three will compound to drive meaningful results to blends topline.
We had three major customers go live with blend mortgage in Q1.
And blend income or add on which helps customers save money on income Verifications has given us additional momentum.
However, I want to be realistic about the macro challenges, we and our customers are facing.
The mortgage margins for our customers are exceptionally challenging and a few of our smaller customers have gone out of business.
Some of our cost conscious independent mortgage banks have gone to lower cost or free solutions.
While we are not going to compromise on delivering the best and most comprehensive solution in the market. What we are doing is focusing on helping our customers take full advantage of all the cost saving features available to them from blend.
We recently saw one of our larger lenders Atlantic coast mortgage recommit to blend after briefly going to one of our competitors for lower costs.
Came back to us for a richer set of capabilities, we offer and the benefits of the platform delivers to them.
Some of our other cost saving features which are included in our base platform, such a soft credit pool capabilities and automated condition management are gaining adoption with our customers.
In aggregate these help our customers do things cheaper and better on blend than would otherwise be possible.
These are the kinds of things we are focused on ensuring our customers can benefit from <unk>.
As a result of this we believe we have a lot of upside in our mortgage group.
We are investing significantly in our customer base and our product.
Continued improvement is critically important at a time like this and we want us and our customers to grow market share and as a result come out the other side stronger.
We will continue to invest dropdown cycle and can do that simultaneously with the cost savings I outlined above to manage to profitability.
Lastly, I want to talk about our blend builder platform and the expansion possibilities that that enables.
We've taken most aspects of building financial products from data sources to verification to the user experience across every channel and made it no code drag and drop highly configurable with automated processes.
Following three years of intensive development, we started offering can puzzle origination to our customer base.
It's my belief the broader market is underappreciated part of what our long term revenue growth prospects are.
According to Idc's worldwide banking it spending guide tech spending of loan origination was $7 3 billion in 2021 expected to grow to $9 $7 billion by 2025.
Our original platform was built for English speaking countries and was only able to touch the small part of the origination tech stack blend.
Glenn builder allows us to solve worthy origination tech that stack today and allows us to solve for international originations over time.
We believe this gives us a clear opportunity to drive towards $1 billion in revenue.
Let's use our new instant home equity solution as an example.
Our original home equity solution was built on our first platform and that was a big step forward for our customers who wanted a more data driven way to take home equity applications get meaningfully helps our customers and is a leading solution in the market.
But our internal equity solution built on blend builder is a considerable leap in functionality even compared to that.
Cause we are able to drag and drop almost every aspect of the process.
Including identity verification income verification credit, scoring that consolidation flows AUM insurance verification real time pricing and decisioning and ending with digital closings.
The solution is materially more valuable to our customers.
That shows up in our unit pricing, which is a multiple of our original home equity platform pricing.
And the best part for Us and our customers is that we built the initial instant home equity version in months instead of years at a materially lower cost and can maintain and improve it faster and cheaper than before.
With builder blends addressable market will get bigger as we expand from selling a few specific financial products to enabling almost all types of financial products and deeper ways.
As already beginning to show up as of Q1.
We did $5 2 million in revenue in our consumer suite in Q1 2023 up from $3 9 million in Q1 2022.
We signed Navy federal credit Union, not yet showing up in our revenue to our deposit account solution.
This is one of our largest deals ever at a critical time for bank institutions driving to grow their deposits and blend builder made it possible.
Our entire consumer suite is now available on blend builder, giving existing products a vast amount of flexibility.
For our customers that means that many of the front and middle office capabilities that they've struggled with are rapidly becoming encapsulated by software our software saving them time money and technical diligence or a large mortgage customer base, we anticipate that all of the complex compliance requirements and integrations needed for the application process.
<unk> will eventually be drag and drop lower no code.
And this applies to both automated and manual approvals.
Services that used to require many months and dedicated technical teams are now available in a library of modules for almost every major consumer banking function, while allowing for an extensive personalization and branding.
Besides making our customers' lives easier it means our platform engineers don't need to do customization work or even build in additional configuration points, we can deploy faster speeding time to revenue for our customers and blend and funding accounts in days not weeks and for blend that means high quality pure software revenue that we believe we.
Drive meaningful value for shareholders.
To summarize all of the points above.
We are making material visible progress towards our path to profitability. We are dedicated to our mortgage customers who are showing their strength through these tough times and we believe blend builder has laid the infrastructure for a bright future for us and our customers to create massive value across the banking software stack.
Now, let me turn it over to Amir to talk through our key numbers for Q1.
Thank you Neil and good afternoon, everyone I'm pleased to be joining you today to discuss our financial results for the first quarter.
The results. We're reporting today are a testament to the resiliency of our business model and Thats, an exceptionally low volume environment for industry mortgage originations.
Our performance of the commitment of our employees and our customers who are critical partners in helping us build a more simple transparent banking future.
As I walk through the financials I'll provide context surrounding the outperformance relative to our Q1 guidance along with an update on our outlook for Q2.
Before getting started as we previewed in our last quarter call. We are changing the way we present, our financial results effective Q1.
We've made these revisions to give you better clarity on the progress, we're making on our strategic objectives. The NEMA recap in his remarks.
The constitution of these new reporting lines in comparison to our old ones can be found in our supplemental update.
Ill briefly touch on how we are thinking about them here.
Our two segments consists of top form which comprises our software businesses and professional services and title, which now also includes our software enabled title offering in addition to title III 65.
Within our software business, our mortgage suite revenue line now includes our marketplace activities as well as value add products like income and close that attached to the same loan recharge for our mortgage product.
As you recall these were formerly reported in our consumer banking and marketplace revenue line.
Our consumer banking suite reflects the lending deposit and broader banking technology products that are powered by our builder platform.
We understand that historically it has been challenging to follow along with this growth and I am optimistic that as we continue to see meaningful progress. This presentation will provide you with greater clarity.
We also want to be clear about the margin profile as we have for each of our different business lines.
We said different goals for our platform in title operations based on the different operating characteristics of each.
Our goal is to improve on each of these independently in this new presentation should provide you line of sight to our progress here.
With that also let's move on to the results for the quarter.
As a reminder, unless otherwise stated all results are non-GAAP .
Total company revenues in the first quarter were $37 3 million, beating the top end of our outlook by 7%.
We reported platform revenue of $24 7 million entitled revenue of $12 6 million.
As a reminder, our prior guidance reflected the previous presentation of our platform business, which included our software and our title business from the platform segment.
Our first quarter results included $3 2 million in software enable title that is now classified in the title segment.
Adjusting for this our platform business was 9% above our expectations and our title business performed at the top end of the range.
We credit this outperformance to the resilience of our customers who require share through the market compounded by slightly better industry volume than our expectations.
This is the realization of the point you made earlier when our customers win we went alongside them.
Furthermore, we believe this validates the leverage that our deepen wallet share has even with a small outperformance on loan volume Arkansas.
Our consumer banking suite also performed well benefited by a stronger than expected home equity volume in the last month of the first quarter.
We want to emphasize that our results represent a beat against the top end of our guidance and the new and old presentation of our reporting segments.
Our mortgage banking suite revenue declined by 33% year over year to $17 8 million.
Amidst a 58% mortgage market volume decline over the same period.
Our aggregate mortgage fee revenue per transaction was $98 up from 71 in the same period last year, an increase of 38%.
This improvement reflects the benefit of additional cross sold products and the rollout of value add features to our base product that enables us to realign the prices we charge a renewal.
While we are encouraged by this number we want to highlight that there were some benefits related to the accounting treatment of multi year contracts that influence this calculation this quarter.
Normalizing for these impacts we expect our revenue per transaction to be in the mid to high 80% This year.
Our consumer banking suite revenue totaled $5 2 million in Q1, an increase of 34% as compared to the prior year period.
This was primarily benefited by higher home equity volume I mentioned and contribution from new deployments on our builder platform over the past year.
Closing up the revenue discussion, we reported $1 7 million of professional services revenue.
Moving onto gross profit.
<unk> non-GAAP gross profit was approximately $16 3 million down from $29 4 million last year.
Primarily impacted by lower mortgage origination activity I mentioned previously.
Our software gross margins were approximately 75% in the first quarter up from 72% for the same period last year on both a GAAP and non-GAAP basis.
Our gross margin improvements reflect the continued cost optimization programs, we've implemented the benefit of higher margin consumer banking revenues and the ability to continue to expand on the value of our mortgage product through innovation and the enablement of additional feature sets.
Given the level of effort and focus we are ahead of our target ranges for this year and anticipate the continued cost optimization programs. We are undertaking will have additional effect improving our margins sequentially. This year.
While we are all excited about the progress here there are a couple of areas of focus I want to point out as well.
First while we don't aim to generate a sizable services business within our platform segment, we are evolving our model to ensure it covers its own costs and continuing to accelerate our timelines of value for our customers.
We believe blame builder will provide a meaningful benefit here as we leverage the power of <unk> origination to simplify and accelerate our deployment.
Second in our title segment, we are continuing to align the costs to deliver this product in a very low volume environment.
Our current outlook indicates the refinance market has stabilized and we expect a return to modest growth next quarter.
As a result of the right sizing efforts, we have implemented we expect this business to generate a modest gross profit next quarter and sequential improvement thereafter.
non-GAAP operating costs for the first quarter totaled $47 1 million compared with $68 9 million in the previous year.
The decrease is a result of the cost reduction initiatives, we have undertaken to date and our commitment to driving operational excellence through the organization.
With this we saw a meaningful sequential improvement across all expense departments.
Our non-GAAP loss from operations was $30 7 million versus $39 5 million in the prior year.
The improvement in our operating losses ahead of our expectations benefiting from higher than expected revenue better margins and greater financial leverage through operating efficiencies.
I am encouraged and optimistic about the progress we've made towards our $20 million quarterly operating loss score exiting 2023.
We believe the business has the ability to provide further operating efficiency as we continue to execute on our existing initiatives and identify new opportunities through the lens of operational excellence on our path to profitability.
The company has adopted a quarter of velocity and optimizing performance for profit and as we continue to begin we are finding new ways to do this better every day.
We said last quarter that we expected to see sequential improvement in our operating loss through the balance of the year.
We also said last time that we will now report another quarter with a three handle and we are on track with this goal.
Now turning to our balance sheet, our cash cash equivalents in marketable securities as of March 31 totaled $307 million with total debt outstanding of $225 million on our five year term loan due July of 2026.
Our $25 million revolving line of credit remains undrawn.
We have reexamined, our business and feel that we have ample runway and liquidity based on our current outlook.
As we accelerate our path to profitability, we will continue to look at our capital allocation plans and provide further optimization on leverage.
In light of the current share price, we have optimized certain internal equity programs in order to limit our overall dilution.
While these changes had a modest cash impact in the quarter. We made this tradeoff in order to preserve long term value for our shareholders, which include our employees.
We will continue to evaluate the best allocation of our cash in this market environment alongside our business priorities imbalances with any opportunistic activities to improve our overall balance sheet.
We are encouraged by the resiliency of the business and the results we've seen to date, but industry and macro conditions remain highly uncertain.
Because of this we will continue our practice of guiding quarter to quarter for the time being.
We will revisit this as the broader industry conditions clarify.
We expect platform revenue to be between 27 and $28 million in Q2 2023.
We expect our title business revenue to be between 12, five and $13 million in Q2.
Our total company revenue outlook is expected to be $39 5 million and 41 million for Q2, which at the midpoint would represent 8% growth quarter on quarter.
Our total non-GAAP net operating loss is expected between 26, five and 25 million for Q2.
Representing a meaningful step towards our end of year $20 million or lower target.
Overall, we are encouraged by the ongoing strength of our business model in light of this dynamic market. We believe that our strategy of aligning strength with strength and fortifying our business model is just beginning to take effect. While we have more work to do we are excited to be able to share more detail, including an update to our longer term outlook at our inaugural <unk>.
Investor Day event this fall.
I tuned for more information on this in the coming months.
With that let me turn the call back to Nemo for his closing remarks.
Thanks, Sameer I am encouraged by our results for this first quarter and optimistic about our outlook for the balance of the year.
We are executing with renewed focus driving toward our goal of profitability, while growing market share as we deliver superior value to our customers.
We now have clear line of sight to positive operating income and believe we are positioned to manage all future liabilities, while continuing to invest in our business.
As I said in the beginning of my prepared remarks, we're a different blend today.
We're more focused and have a greater sense of urgency across the company.
I appreciate the level of execution, we're seeing by our team in these critical times.
With that thank you again for joining Winnie we are now ready for questions.
Thank you need Miranda <unk> remarks, I will now turn to Q&A. Our first question comes from Matt Stotler from William Blair.
Please feel free to go ahead.
Hi, Thank you for taking the questions maybe just wanted to start off.
A look at the I guess the formulae.
Known consumer banking and marketplace segment.
<unk> been growing very quickly was still somewhat limited in terms of contribution to the overall business.
Any thoughts on how you can accelerate adoption of these products and I mean at.
At this point of the basically contingent on the roll up on builder and if that's the case, how does that impact the <unk>.
Monetization strategy for these products.
Yes. Thanks for the question Matt This is NEMA.
A couple of things one we did just announce it is not right yet in our revenue we announce it.
A really great partnership with Navy federal expansion with them around deposit accounts of new membership.
A lot of focus around deposits given the current situation with regional banks and broader the broader banking system. So we expect to see more demand on that front. We also mentioned that almost 20 projects.
In progress right now on blend builder as we speak.
So I think the way to get that to grow is to continue to go out there and sell it and work with customers who want to get that value across the bank. They are a great customer base relies on us and we're in active conversations with a number of them on opportunities to continue to grow with them.
Thanks, Nina our next question comes from Ryan Tomasello from K BW, Brian Please feel free to go ahead.
Hi, everyone. Thanks for taking the questions and congrats on the continued progress.
I appreciate the updated financial targets for positive operating income in Q4.
I was hoping that you could put a finer point around the drivers there maybe the assumptions you're making for.
Top line growth between now and then.
Gross margins go by product and I guess to <unk>, where do you think.
non-GAAP opex exiting this year or can come through.
The run rate benefit of the expense.
Please.
Thanks.
Thanks, Brian several items to unpack there. So let me make sure I go through them, one with regards to where we're seeing we're seeing an acceleration in our or just the prior targets that we've set and that's contributing both from what you saw on the revenue basis tied to that the improvements that you've seen on the gross margin basis and those are those are triggering not just the beat that we have had this quarter, but also part of the.
As we proceed further.
As I mentioned in the prepared remarks suite beyond that just as a company with a renewed focus that we have on executing to this path of profitability. We've been looking at other parts of the business you can see this in the revenue disaggregation in our breakouts, where we will manage to higher levels of profitability that is a contributor by itself. You also asked with regards to just our overall opex.
For us the point that I want to make sure we get across is that we are in essence, not only ahead, but also that we would reaffirm.
Well said.
We're past the $20 million operating income below the 20 minute our operating income loss that we've previously shared.
For Q2 thousand 23.
Thanks Amir our next question comes from David <unk> from Wells Fargo, David would you like to them yet.
Yes, thanks very much just one from me Nemo Big Picture question can you talk about AI and how that could play a role in your business.
Just transforming the banking industry in general what opportunities do you see what do you think could be potential first starts and stops in the industry. Thank you.
Yes, I think the place that we're seeing the most traction for AI and enterprise right now is what I'll call the co pilot space.
And one benefit the blend has that I think is a unique benefit us because we have so much market share already flowing through our platform and so many loan officers.
Branch bankers and employees of these institutions are already using blend.
Can help them I believe we can help them materially over time, we have so many interactions happening on our platform already that we can use to help make their lives a lot easier and a lot better.
It is a space that we're looking into with a couple of our customers to ensure that we can get something off the ground, but still too early to tell exactly how it plays out over time.
Thank you next we have a follow up from Ryan Thomas L. E. K BW, Brian would you like to go ahead.
Yes, thanks for taking the follow up guys I guess in terms of the sales environment, particularly in mortgage.
Have you seen any green shoots there in terms of demand or waiting attrition as we've seen some pass through.
Trough fundamentals in the fourth quarter and first quarter here.
How are you thinking about just the lagging impacts going forward, particularly around industry channel.
Given that capacity still needs to come down.
And then unrelated follow up here would be you called out I think some benefit from revenue recognized on multiyear contracts in the quarter.
Hopeful I think youre seeing how much how much of the revenue in <unk>.
Thanks.
Yeah, Let me let me take the first question and thanks for the question. Let me take the first question on the sales cycles in mortgage and what we're seeing in terms of our outlook there.
Sales side anytime there is a downturn like this and people are really trying to find as much savings as they can mortgage margins are as bad as they've ever been Q1 was the lowest volume volume quarter on record that we've seen at least and so there is and on top of that you layer in low margins, there's going to be some lengthening of sales cycles, but as you saw in our numbers we were.
We're also growing market share and I think part of that is there's consolidation, which we often benefit from because our customers are the ones who are already using technology to get the benefits and have higher margins anecdotally I've had a couple of customers in mind, telling me that they were.
Maybe bucking the trend of the market and be profitable in Q1, despite the headwinds and I think there are a lot of that is just the benefits of using automation and technology broadly in there.
And then our business and.
And so we're looking at this as a time of consolidation and we're looking at a time for us to continue to invest in our customer base and I think if we do the right things and the market headwinds continue to be what they are long term I don't love. It our customer base is growing a lot of pain from it but I think we are going to come out stronger collectively as a customer base together and I think on the flip.
We're also not only we're investing in a mortgage customer base. We're also diversifying in these other areas I mentioned the Navy federal.
Deal they did a press release with US we saw some customers in the mortgage side, who did come back to us after going to lower cost products and so I think that's a really good those are really good indicators for us, but we know we have a lot more work to do and.
Let me turn it to Meredith to answer to your question about the one time.
Revenue considerations.
Ryan I think the peak key pieces to focus on are the following for US where we saw the benefits are very specific to what you called out and what's driving that is as we're seeing upticks in the forecast from our customers. We are now able to recognize more of that revenue. So that's part one of it the way to think about how much that was relative to just the overall base. It wasn't it was not a material mover.
Overall base.
Okay.
Thank you and you are in EMEA.
That concludes our Q&A today.
Im sorry.
I'm, just saying, Brian I think you have a follow up question sorry, if you want to Amit. Please go ahead.
Hey, guys I'll just continue to squeeze in order to you just for the sake of a wall.
Using people's time.
I guess just focus on the software enabled titled products.
Is that a key piece of the business going forward relative to historical when you pitch there in the past.
Conversely is that a business you would consider exiting to free up some capital or at least the liability associated.
With that business.
Another follow up would be just on the revenue per loan growth on the mortgage side that so it's pretty strong exceeding some of these.
Where do you think that could go over time, what type of adoption are you seeing in the marketplace products and the add on products like close just trying to understand where that call it 80% or so of revenue alone that EMEA Coco on a normalized basis could theoretically go over the next few years as adoption trends.
With how we're thinking of a ship.
Yes, so to talk about titled briefly So for example title in.
Two hours and when margins are tight they need to be able to save money and so we're seeing those things gained market share with their within our customer base regain wallet share within our customer base, which is an important Glenn close getting digital closings utilizing <unk>. There's also drive adoption of that product and so I don't know if we're not gonna guide exactly where the total revenue per unit will be.
You know as a general trend we're seeing it go up over time as you as you noted.
Thank you Nina.
I believe that can replace out to you in a for today and that's a wrap for a conference call for today.