Q2 2023 Doma Holdings Inc Earnings Call

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Good day, and thank you for standing by and welcome to the del Mar 2023 second quarter Conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

Last question during the session you will need to press star one one on your telephone.

Down here, an automated message advising your hand is raised to withdraw your question. Please press star one one again please be advised that today's conference is being recorded and I would now like to hand, the conference over to your speaker today Karli Herzog head of Investor Relations. Please go ahead.

Thank you operator, good afternoon, everyone and thank you for joining us on our second quarter 2023 earnings conference call earlier today, gentlemen issued a press release announcing our second quarter results, which is also available at Investor I don't mind Dotcom, leading today's discussion will be done with founder and Chief Executive Officer and.

And Chief Financial Officer makes them at.

Following managements prepared remarks, we will open up the call to questions.

Before we begin I would like to remind you that our discussion will contain predictions expectations or looking statements and other information about our business that is based on management's current expectations. Other than the presentation forward. Looking statements include but are not limited to done with expectations or predictions of financial and business performance market conditions competitive position and industry outlook.

Forward looking statements are subject to risks uncertainties and other factors that could cause our actual results to differ materially from historical results and work on my forecast, including those set forth in Jumbo. Most recently filed annual report on Form 10-K, and subsequent filings with the SEC.

For more information please refer to the risks uncertainties and other factors discussed in almost most recently filed annual report on Form 10-K, and other SEC filings all cautionary statements that we make during this call are applicable to any forward looking statements. We make wherever they appear you should carefully consider the risks and uncertainties and other factors discussed in donuts that'd be two filings do not place undue reliance.

Forward looking statements as Don was under no obligation and expressly disclaims any responsibility for updating altering or otherwise or revising any forward looking statements, whether as a result of new information future events or otherwise except as required by law.

Additionally, during this conference call.

I'll go for it to non-GAAP financial measures, including retained premium beers.

Gross profit adjusted EBITDA and other measures described in our earnings release.

Our GAAP results and a description of our non-GAAP measures with a full reconciliation to GAAP can be found in the second quarter of 2020 earnings release, which has been furnished to SEC and it's available on our investor website, and with that I'll turn the call over to Maxim clock yoga.

Thank you Charlie good afternoon, everyone and thank you for joining our second quarter call.

Small market for mortgage transactions with a much better solution and at a much faster speed and our previous go to market focus.

This initial endeavor is just one of several we intend to pursue and is subject to final contractual agreement and any required regulatory approvals.

As part of our go forward strategy and in parallel with the distribution of our technology on a licensed basis or title insurance underwriting business and are independent agents remain of critical importance and will continue to be a core part not only of our Gulf War business, but also in offering title insurance to cover consumers across transactions where are directly license technology has helped.

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We believe that there will always be significant need for traditional title insurance across a significant number of transactions and that many of these transactions can also benefit from our technology being used to identify where key risks need to be more closely examine as part of a traditional underwriting process.

For the last 18 months have proved to be incredibly challenging to <unk> as we navigated through a rapidly declining mortgage market and skyrocketing interest rates. The reconfiguration of our business model to best drive our vision gives us newfound confidence that are proven technology is now best position to drive a massive impact that we've always known we can achieve.

We'll discuss three key themes on this call today.

First I will provide an update on our path to reaching adjusted EBITDA profitability. This year and the steps we are diligently taking to achieve that goal. During a continued period of both high mortgage rates and low mortgage volume and as we begin implementing our new strategy.

Second I will provide more details around our new go forward strategy for the business and how are considerable technology advantage will ensure we fulfill our mission, while benefiting all stakeholders and the mortgage transactions.

Third I will outline a much leaner more streamlined company structure. We've recently implemented which includes the divestiture of our local retail title divisions in which we believe better positions us to achieve success with our new strategy.

I will then turn the call over to our CFO , Mike Smith, who will discuss our financial results in more detail.

Regarding our first theme we remain highly focused on our goal of reaching adjusted EBIT profitability by the end of this year and we continue to make steady progress towards that goal.

Our adjusted EBITDA loss was $14 million in Q2 compared to a loss of $22 million in Q1 of this year and we expect to see a further significant improvement in our adjusted EBITDA loss from Q2 Q3 of this year we.

We continued to realize substantial cost savings from a prior workforce actions implemented at the end of 2022 with expected annualized compensation cost savings of $85 million to $90 million.

We also anticipate further annualized compensation cost savings of $10 million to $12 million related to additional workforce reduction actions recently implemented as part of moving to our new strategy, resulting in a leaner and more focused organization.

Additionally, the sale of our local operations is expected to directly result in an adjusted EBITDA benefit of approximately $2 million in Q3, when compared to Q2 and.

And lastly, we expect additional savings as we continue to further streamline expenses inclusive of occupancy costs software licensing and other operating expenses.

As we transition to offering our technology on a licensed basis. We believe there is a massive growth opportunity ahead of us. So while we remain cautiously optimistic that achieving adjusted EBIT profitability by year end is achievable and we are still working tirelessly to get there the continually challenging macro environment and transformation underweight accompany could push the timeline modestly.

But ultimately this transformation will better position us to achieve sustainable profitability.

This brings me to the second key theme of our earnings call our new strategy.

When we started the company nearly seven years ago, our vision was to utilize cutting edge machine learning and predictive analytics to replace the time consuming expensive and highly manual underwriting process utilized by large traditional title insurers.

We have now proven that our technology works as we have instantly underwritten title insurance for over 86000 months partnering with some of the largest lenders in the country we.

We have helped our lender partners and turned reduced mortgage closing timelines by over 15% and deliver upwards of 20% cost savings on title and settlement fees to consumers.

Just as important as the lightning fast benefits that are solution provides the lenders is the fact that are observed claims and last performance on instantly underwritten transactions have come in at a similar level as the traditional manual underwriting methods that it replaces.

In other words, we've proven that we can offer an incident affordable alternatives to manually unwritten title insurance for mortgage transactions with no additional risk.

Over the last five years, while we demonstrated the value and safety of our technology. We have also learned that some methods of distributing this technology are much more effective than others.

While we driven success in our enterprise channel by selling directly to large lenders, who could utilize our infant unwritten title insurance product in the refinance transactions. We also experienced challenges and executing scale of change management necessary for our technology to get expediently rolled out across the local retail office footprint, we acquired from <unk> in early 2019.

At the same time, we've heard a growing chorus of demand from the secondary mortgage market to price and predict title risk more efficiently to enable faster speed of execution and mortgage origination and to significantly lower fees for consumers at a time, where housing affordability is near crisis levels.

With our new strategy, we will harness the learnings with gain in our distribution efforts to now offer our technology on a licensed basis directly to key players in the mortgage ecosystem.

In addition to Supercharging our distribution, we believe that the unit economics for this business model will be significantly better than our previous model.

As both a software company focused on the widespread distribution of our unique technology and a fiercely competitive underwriter with a vast network of independent agents.

Immediately metal than more strongly position to deliver on our core mission of making homeownership more important.

That would be March board on that mission. Our initial focus will be activating our licensing model for several of the largest originators and secondary Bart buyers and the mortgage market.

Among this group there are a few specific institutions, who have been longtime partners and collaborators with us since the company was founded and add much have been key contributors in our development of this month.

Those partners are working collaboratively with us to finalize the best way to jointly delivered almost technology to their customers. So that we made together deliver solutions that protect lenders from final risks, while providing significant additional cost savings to borrowers at a time when they need it the most.

We are discussing commercial terms with several of these collaborators in any final arrangements are subject to final contractual agreement and any required regulatory approvals.

With these significant mortgage industry players across both the primary and secondary mortgage market, we share a desire in a sense of urgency to reduce closing costs for borrowers by a wide margin compared to traditional non technology based solutions.

We believe that bringing these solutions to life is a testament to our incredible technology and product organization, which has been working tirelessly over the past year to prepare domas instant underwriting technology to be directly licensed and integrated with the core platforms and technology frameworks utilize both by the largest secondary mortgage participants and their customers. So that we not only enable.

A single point of distribution to nearly all of the nation's largest lenders, but also to ensure that title risk decisioning can happen right upfront when lenders are deciding whether to underwrite the loan versus traditionally towards the end of a loan closing process.

This brings me to the third key theme of our earnings call <unk>.

<unk>. Our go forward strategy will require us to focus on developing and supporting an externally available software platform as well as driving the success of our underwriting business VR innovative technology solutions, we have transitioned our organizational structure to be much leaner with a more people light footprint.

Part of this organizational change is because our narrower focus means that our local division is no longer core to our go forward strategy.

We faded in our last earnings call that our local leadership team had finalized and was implementing a plan to ensure that the local division accelerates the company's path to profitability.

As you may have seen in recent announcements we have executed against the strategic plan via the sale of our local business through multiple transactions.

We have now sold all of our local operations to several suitors for total gross price in excess of $35 million prior to legal adviser and other fees with a substantial portion linked to performance and retention based earnouts the.

The majority of the proceeds receive we're used to pay down existing death. These executed transactions resulted in the transfer of approximately 300 employees and 60 local branches and operations to new leadership in organizations.

I am confident that we have found optimal new homes for our local business and former colleagues and if the business will thrive under their new leadership, we will continue to facilitate a smooth transition for our employers and employees and customers.

I think our local team for their hard work I am incredibly grateful for your contributions over the years.

Posted divestiture of our local division as well as the launch of our new technology business, we expect to provide information for our two business divisions going forward underwriting and enterprise technology.

Our underwriting division will include all revenue and expenses generated by the business of underwriting title insurance for independent agents.

Our enterprise Technology Division will include all revenue and expenses, resulting from the continuation of our existing enterprise distribution activities, while we continue to grow and develop as well as results from our expanded efforts to license our technology via innovative distribution channels.

In closing, we believe our strength and focus on deploying our instant underwriting technology on a broader scale through both licensing our software and working with our independent agent community will enable us to meaningfully grow the business and deliver an enormous impact on the housing affordability crisis.

Looking ahead, we are focused on generating sustainable and profitable growth and building enterprise value for our stakeholders.

We look forward to updating you on our progress throughout the year I will now pass the call over to our CFO , Mike Smith to provide you with further details on a recent financial performance.

<unk>.

Thank you Max.

Good afternoon, everyone today will be provided an overview of <unk> second quarter financial results. Please refer to our earnings release filed 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 to the first quarter of this year.

The latest MBA mortgage finance forecast projecting that the 30 year fixed mortgage rate will remain above 6% in the third quarter of 2023.

Five 9% by the end of the year.

As we have stated in the past these elevated rates will likely continue to put pressure on refinance and purchase order volumes industrywide for the foreseeable future.

As we noted on our prior earnings call. During the first quarter, we did see and encourage encouraging strengthening of both are open order pipeline as well as our conversion rates from open to closed orders, which.

Which as expected created Tailwinds for both are closed order in RPF numbers in the second quarter.

Looking ahead and as we focus on reporting on our underwriting segment given the strength observed in the homebuilder portion of our underwriting business. We expect continued improvement in RPF performance when excluding our local direct agent channel.

Our primary measure reviewed unit economics is adjusted gross profit, which was $9 million in the second quarter of 2023, and which compares to $4 million in the first quarter of 2023.

Just a gross profit as a percentage of RPF was 29% in the second quarter compared to 18% in the first quarter of this year.

Adjusted EBITDA, our main profitability measure was negative $14 million compared to negative $22 million in Q1 2023 are.

Q to adjusted EBITDA improvement was primarily related to our continued cost reduction savings.

From previously disclosed workforce reduction plans and companywide efforts to reduce operating span.

Following the implementation of our new strategy, we've taken further actions to rationalize our expenses over the last several months, including the sale of our local division as well as further related headcount reductions as we focus on our core businesses.

Moving onto our top line performance in the second quarter, we reported revenue on a gap basis of $89 million up 19% quarter over quarter.

As a reminder, gap revenue includes the portion of third party agent premiums that dolman does not retain so we focus on them is retained premiums and fees or RPF as an important metric, which excludes the premium related retained by third party agents. We believe this is much better representation of Gomez underlying top line performance.

With this in mind RPF was $31 million in the second quarter of 22% quarter over quarter, driven by a 26% increase in purchase clothes orders.

Local RPF comprise 46% of total RPF in the second quarter.

Purchase closed orders made up 70% of our direct residential volume and 89% of our direct residential retain premiums and fees, which compared to 61% and 85% in the first quarter of 2023, respectively.

Underwriting RPF within our third party agent channel increased 17% in the second quarter compared to the first quarter a trend. We anticipate will continue next quarter and through the remainder of the year. If the homebuilder market remains strong and the interest rate environment shows stability or improves.

One additional important event to note during the quarter, we executed reverse stock split to comply with the New York stock exchange minimum share price lifting standard.

As of June 30th we had 13.4 million shares outstanding.

Versus outstanding.

As previously mentioned looking ahead, we expect to see continued positive momentum in our underwriting business and continually decreasing cost driven by our most recent cost reduction actions as.

As Max mentioned, we look forward to executing on a new strategy and we remain highly focused on achieving our goal of becoming adjusted EBITDA profitable this year.

I'll now pass a call back to Max for closing remarks, before we open the call to questions.

Thanks, Mike and thanks, everyone for joining us on our call today.

Critical mission has remained focused on making the home buying process better faster and more affordable looking ahead. The deliberate actions that we have taken will not only transformed the business in position us for long term success in any macro environment, but will enable us to fulfill our mission and make a true impact at a time when homeowners are facing unprecedented affordability challenges.

I'm incredibly proud of our team and the excellent progress we've made in building a more resilient and scalable business, while staying true to who we are at our core and what our vision has been since day. One we look forward to updating everyone with our progress on our next earnings call operator, we're ready for questions.

Thank you Max feel now conduct a question and answer session of today's conference as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again please.

Please stand by while we can pile to Q&A roster.

Our first question comes from Tom White with da David Tennant Company. Please proceed with your question.

Great. Thank you for taking my question.

Cause I guess interesting stuff on kind of the exploring Ah Transitionary I guess moving ahead with this transition towards.

Incorporating a licensing model.

What appeared to kind of make the business kind of more resilient less of transactions centric I guess, but can you talk a little bit about like what you guys need to do sort of operational yeah, or maybe on the investment side to kind of effect that transition in a meaningful way and.

If you're successful just kind of curious what what the mix of your revenues kind of looks like you know over the next three to five years.

And then just a follow up on the commentary around the EBITDA.

Kind of timetable is it fair to characterize that.

The the the potential that it's maybe a bit delay this kind of exclusively a function of just kind of what's happening in the housing housing market or are there any other factors should call up thanks.

Sure.

Take those in reverse order and and good to hear your voice Tom on the first one the factors that might drive some modest delay to adjusted EBITDA profitability. If there is one at all because we still are quite confident that we have a path to get to our original state of <unk> I'd say it would be kind of a <unk>.

Function of two things one you mentioned.

Which is you know continued macro pressure, which it seems that every time, we think we're at up kind of a high point, a 30 year fixed mortgage rates they they keep going higher so.

We want to allow for some continued uncertainty there.

And then we also just wanted to make sure that we have some.

Some degree of flexibility as we transition to this new strategy.

So those are the two main factors and and that transitioning to the new strategy. I think helps me answer your first question about what's operationally required.

To to get the strategy live and what does it mean for our long term outlook.

Looked at the short answer is.

There's really a modest amount of additional operational work required it's not a lot and this is part of why we believe this strategy is.

Is really core to driving value not only against our original value proposition instantly underwriting title insurance using machine learning.

But but perhaps even more importantly in alleviating that the consumer affordability crisis that we're facing right now so we effectively have built most of the technology. That's required to operationalize. This approach right. We've spent a lot of money over the last.

Four or five years in a lot of time with our very talented R&D team building a validating this technology.

What we're talking about doing here is really just effectively changing the distribution model right.

Where we've had success to some degree in the past selling a directly to lenders.

We now see up frankly, a much bigger and likely more attractive opportunity to work in collaboration not only with primary mortgage originators, but also with the secondary mortgage market, where you have a smaller group of participants who have a wide reach across thousands of lenders. If you can find the right commercial framework to integrate with their technology platform.

And get our working invalidated technology distributed to them. So.

Long story short, we don't see a significant amount of additional operational costs or risk for that matter and getting this deployed it is really about making sure that we have the right commercial framework memorialized with not only primary mortgage participants secondary mortgage participants as well.

Thank you.

Thank you as a reminder to ask a question. Please first star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again.

One moment to the next question.

I'm showing no further questions at this time. This concludes today's conference call. Thank you for participating any you may now disconnect.

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