Q3 2023 Doma Holdings Inc Earnings Call
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Good day and thank you for standing by welcome to the del Mar third quarter 2023 earnings call.
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After the speaker's presentation, there will be a question and answer session.
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We will now like to hand, the conference over to your first Speaker David D Horn.
Please go ahead.
Thank you operator, good afternoon, everyone and thank you for joining <unk> third quarter 2023 earnings conference call.
Earlier today <unk> issued a press release announcing its third quarter results, which are also available at investor <unk> Dot com.
Leading today's discussion will be <unk>, founder and Chief Executive Officer backs in golf and Chief Financial Officer, Mike Smith.
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 forward looking statements and other information about our business that is based on management's current expectations as of the date of the presentation.
Forward looking statements include but are not limited to delmas 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.
Or from our forecast, including those set forth in <unk>. 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 <unk>. 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.
Should carefully consider the risks and uncertainties and other factors discussed in <unk> SEC filings.
Do not place undue reliance on forward looking statements as Doma is under no obligation and expressly disclaims any responsibility for updating altering or otherwise 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. We will also refer to non-GAAP financial measures, including retained premium and fees adjusted gross profit adjusted EBITDA and.
And the 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 third quarter 2023 earnings release, which has been furnished to the SEC and is available on our investor website.
With that I'll turn the call over to Maxim cough CEO of Gama.
Thank you Dave Good afternoon, everyone and thank you for joining our third quarter earnings call.
Last quarter, we unveiled several core components of our narrowed strategy and utilizing our instant underwriting technology to drive meaningful improvements to homeowner affordability.
Today, we are providing specific details on how this strategy will work, including an exciting new product that we believe will help us drive profitable growth during a challenging time for the housing market.
And while the overall housing market is experiencing unprecedented headwinds we feel that we have successfully repositioned our business model and our cost base to allow for us to write an important new chapter for the company and for our industry overall.
We will discuss three key themes on the call today.
First I will provide an update on our path to reaching adjusted EBITDA profitability for Q4 of this year and the diligent steps we are taking towards achieving that goal. Despite a persistently challenging macroeconomic environment.
Second I'll provide an update on the rollout of our new strategy for the business, including more specific details on the growing category of demand that is driving our focus on providing a newly configured solution to meet this demand.
We'll also shed more light on the key commercial institutions in the broader mortgage ecosystem across both the primary and secondary markets. We are focused on partnering with in order to deliver a far better faster and more affordable suite title solutions to American homeowners.
Specifically I will also be announcing an exciting partnership that we're planning to launch in Q1 of 2024 with one of the largest mortgage market participants in the country.
Curt I wanted to take a few minutes to talk about the growing strength of our core underwriter platform, which is a stable source of profit for domo that continues to perform well despite difficult market conditions.
I will then turn the call over to our CFO, Mike Smith, who will discuss our financial results in more detail.
Regarding our first team we remain highly focused on our ambitious goal of reaching adjusted EBITDA profitability for Q4 of this year and we continue to make steady progress in that regard.
Our adjusted EBITDA loss for continuing operations was $5 million in Q3, a significant improvement from our adjusted EBIT loss of $12 million in Q2 of this year.
This quarter over quarter improvement was driven mainly by workforce reductions the sale of our local business and further cost reduction actions we have taken.
Looking ahead to Q4, we expect to see the continued effect of our cost structure improvement initiatives as well as our new strategy helped to get us within striking distance of our goal of reaching adjusted EBITDA positive in Q4 of this year.
That said, while we believe we are within striking distance of achieving this goal and expect to see continued significant improvement in our overall adjusted EBITDA. We do believe that there is risk to us achieving full quarter profitability in Q4, primarily due to the continued degradation of the housing market as.
As of now we expect that risk to persist into the first quarter of 2024 against the backdrop of continued macroeconomic uncertainty and a seasonal low point for the housing market in Q1.
Despite all of this we have successfully executed significant cost reduction actions, while still enhancing the customer service levels that our underwriter in our enterprise Division and also funding investments to support our future growth opportunities, particularly as it relates to our new strategy.
Is there a significant improvement in P&L. This quarter illustrates we are confident that these adjustments are largely behind us now and our efforts and our focus are currently on growing our revenues and expanding our margins addressing the massive demand and need for a much lower cost title insurance solution and getting our existing technology to market to meet these critical needs.
This brings me to the second key theme of our earnings call and update on the implementation of our new strategy.
As we discussed on our last quarterly earnings call. Our go forward business strategy is centered around providing solutions to the growing market for us for more affordable and tech driven title and closing offerings.
By licensing our patented instant underwriting technology upstream directly to the largest mortgage market participants in the country, while continuing to serve independent agents through our underwriting channel. We are confident that we can meet market demands and bring down costs for homeowners.
We are providing more specific details about exactly how this strategy will work the growing category of demand that is driving our focus on providing a newly configured solution to meet this demand and the key commercial institutions and the broader mortgage ecosystem across both the primary and secondary markets, we intend to partner with in order to deliver a far better faster and more affordable suite.
Little solutions to American homeowners.
Over the past several years, we have seen an increasing frequency of data points, telling us that the housing industry is in desperate need of more affordable options not only across the entire spectrum of homeownership, but entitle and closings specifically.
And among lower income minority borrowers this problem is particularly acute in.
In 2022, two of the government sponsored enterprises or Gse's released equitable housing plan, but specifically pointed to a need to help facilitate the deployment lower cost title and closing solutions.
Fannie Mae released research that analyzed approximately $1 1 million home purchase loans acquired by the enterprise in 2020 that showed that within low income first time homebuyers, 21% of black homebuyers take.
Closing costs equal or greater than their down payments.
Just last month, the CFPB released a report showing the total loan costs and fees in 2022 increased 22% over the previous year, while the average monthly payment excluding taxes and insurance for borrowers taking out of conventional conforming 30 year fixed rate mortgage rose, 46% from December 2021 to December 2022.
This was driven almost entirely by the rise in mortgage interest rates.
Further in the last 12 months, our top three largest lending customers in our enterprise Division, let us know that they are actively looking for ways to reduce the fees that they are borrowers spend specifically on title and closing.
Put simply American homeowners, and particularly low income minority homeowners or potential homeowners are approaching a level of desperation when it comes to being able to afford to buy or refinance their home.
In a nutshell, our new strategy is focused squarely on providing a solution to these needs of American homeowners in the current housing market to be offered much more affordable title solutions key to this strategy of shifting the placement of our instant titled Technology further upstream towards the beginning of the mortgage origination process, which allows us to significantly reduce our own <unk>.
Cost of service opens up higher margin software revenue for us and thus allows us in turn to offer greater discounts to the homeowners who are burdened with bearing the cost lenders title insurance at this time of critical need.
Our large enterprise lender partners have told us for years that moving our instant underwriting decision closer to the loan underwriting decision itself or even in some cases before the loan underwriting decision enables them to significantly reduce key areas of cost and operational activity.
Today, we are answering the significant demand for more streamlined upfront affordable title solutions with a groundbreaking new product, which will put our new strategy into practice and allow for us to start driving meaningful benefits to home affordability to homeowners across the country.
We are calling this new product upfront title and we intend to make it generally available to both mortgage software providers as well as the government sponsored enterprises as soon as the end of this year.
Because this new product is so central to our new strategy, it's important to understand exactly how it will work as well as how it will drive meaningful benefits for borrowers lenders and the secondary mortgage market as well as <unk>.
Our new upfront title insurance product will enable us to provide an instant title underwriting decision as well as rate and coverage coding all within or in communication with the core platforms used to determine eligibility for loan underwriting itself.
Specifically, we have designed the product to integrate seamlessly with number one mortgage software systems utilized by large lenders to process borrower demand and issue prequalification decisions for mortgages and number two the core automated underwriting systems utilized by the government sponsored enterprises.
By offering our new upfront title product mortgage software platforms as well as the Gse's directly we will enable the lender customers of these platforms to be able to get instant title certainty at the point of deciding whether or not to underwrite the loan as well as to provide their homeowner customers are priced generally far below current industry standard rates for title insurance.
Additionally, this configuration of our technology will help us shift more of our revenue toward higher margin software licensing revenue in other words meaningful savings for the borrower instant certainty for lenders and a stickier high volume high margin revenue stream for us.
Because of the distribution channels for this new product are highly consolidated and these platforms already have well established customer acquisition and technology innovation connections to nearly all of the mortgage lenders in the country. We believe our narrow go to market focus on mortgage software providers and the gse's themselves will allow us to scale upfront title with significantly lower cost of cost.
Our acquisition going forward.
We are now in the process of filing rates for the title insurance component of this new product and believe that these rates will generally be up to 50% below the average already discounted rates utilized by large centralized lenders and up to 80% below the average rates utilized by smaller regional lenders.
We intend to charge partners, who utilize our upfront title offering a reasonable software licensing fee to access our title Decisioning and provide this information to their lender customers and we also believe that the magnitude of the discount we provide on our associated title insurance policies will help drive meaningful additional premium volume from the transactions themselves.
And even with the reduced premium rates were passing onto the homeowner we have confidence based on how we've designed this product configuration that on both the software licensing component as well as the underwriting component, we can run long term gross margins well above 60%.
We are also excited today to announce that we will be partnering with one of the largest mortgage software platforms in the country to launch our upfront title product. The pilot program to demonstrate both the benefit of the solution for lenders and their borrower customers.
In this initial launch we have worked collaboratively with a major national lender customer on our partner's platform to be able to deliver instant underwriting entitled certainty. This lender as a key part of the underwriting decision they make and our partner software.
This will in turn allow them to pass on our significantly discounted rates to their end borrower customers, which we believe will drive meaningful new title insurance premium business for our underwriter.
As part of this initial launch our partner will be paying doma software licensing fee for utilizing our instant decisioning.
We anticipate being able to go live with this pilot by early Q1 of 2024 subject to agreement and documentation of final commercial terms with the goal of being in a position to expand our partnership upon demonstrated program success in the second half of 2024.
With this initial partner significant position in the mortgage software market. Their platform is utilized to process a meaningful amount of the nation's mortgage origination volume. So this is a significant launch for us.
In summary, our newly announced upfront title insurance product addresses the rising demand for significantly lower cost title and closing solutions at a time of severe housing affordability constraints.
By shifting our product capabilities and focus to utilize our same patented technology via a much lower cost of customer acquisition channels and our higher margin platform configuration. We believe we are positioning the company to take share at a more rapid pace, while our new strategic vision leads out front and the critical mission to significantly reduce the high costs that pace homeowners.
During a period of limited affordability.
It's critical to note that our upfront title product is minimal remaining engineering work required to go live as it is built on our already patented scalable and unbiased underwriting platform.
And it was built to factor in all of the existing requirements of our intended commercial partners, including those of the Gse's.
The underlying technology for this product has been scale tested to accurately underwrite title risk over a period of nearly six years.
While we are excited to announce our pilot program with one of the leading mortgage software platform for upfront title insurance. Our intent is to work over the next few quarters to discuss and hopefully finalized commercial partnerships with a broader set of mortgage software platforms and GSE partners. So that we can deliver meaningful cost savings for homeowners at a time when these homeowners are demanding press release.
As part of our go forward strategy and in parallel with the distribution of our technology on a licensed basis, our title insurance underwriting business and our independent agents remain a critical importance and we will continue to be a core part of our business.
Which brings me to the third key theme of our earnings call.
Youll see in our press release today that we are now providing financial information for our two business divisions going forward underwriting and enterprise technology.
Our underwriting division includes all revenue and expenses generated by the business of underwriting title insurance across our various distribution channels.
Our enterprise Technology Division includes all revenue and expenses, resulting from the continuation of our existing enterprise distribution activities, which we continue to grow and develop as well as results from our expanded efforts to license our technology via innovative distribution channels, such as our new upfront title product.
Our underwriter continues to perform remarkably well despite difficult market conditions even.
Even if our newer initiatives and shift in strategy within enterprise technology take longer than expected to materialize. Our underwriter has demonstrated it can be standalone profitable and we believe that there are additional levers we can pull to manage our consolidated business through a prolonged down period.
The latest market share from the American land title Association shows that we continue to gain share both sequentially and year over year in Q3, among all title underwriters in the country to an all time high of 2%.
And despite the market headwinds our underwriting teams continued hard work helped us deliver one of the highest revenue producing weeks, we've seen all year during September.
In addition, significant tech initiatives that we've recently launched in the underwriting division have allowed us to lead with technology in ways, which have been critical to our success by facilitating. The addition of new agents and increasing the wallet share of existing agents.
For example, we.
Starting with the instant underwriting of refinance transactions for independent agents last year and now have it available to agents in all states, where we offer title production services.
We've used this foundation to build new capabilities for the title production team that will be used to benefit our title production services more broadly.
Over the last several months, we have taken several steps to increase the operational efficiency of this division, we've released significant upgrades and we believe that rolling out our technology will benefit our independent agent focused title production team by saving them time and expense, while also offering us opportunity to drive margin expansion in this division in the coming quarters.
We are also in the process of rolling out enhanced reporting for our independent agents to help these agents determined how they are performing with respect their competition, which we believe will ultimately allow our partners to make better data driven decisions and further benefit from our partnership with Delta.
In closing I am proud of our team and their ability to navigate a continually challenging macro environment. It is clear to us that consumers need lower cost title solutions and as we discussed earlier, we believe that many in the industry Echo our views.
As key players in our industry moved towards innovative more efficient lower cost solutions for title and closing Doma is ready and able to make a lasting impact on the housing affordability crisis.
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 our recent financial performance.
Mike.
Thank you Max and good afternoon, everyone today, I'll be providing an overview of delmas third quarter financial results. Please refer to our earnings release filed earlier today for full details of the quarter.
Unless otherwise specified all of the comparisons cited in my remarks, our sequential comparisons to the second quarter of this year.
The latest MBA mortgage finance forecast is projecting that the 30 year fixed mortgage rate will remain above 7% in the fourth quarter of 2023 and will remain above 6% for the duration of 2024.
As we stated in the past these elevated rates will likely continue to put pressure on refinance and purchase order volumes industry wide for the foreseeable future.
As we discussed on our August Q2 earnings call, we exited all of our local retail operations nationwide and during Q3, we have worked through the majority of the transition periods related to these sales.
As a result, the local branches and their associated operations are classified and recorded as discontinued operations in our financial results beginning in the third quarter of 2023.
My remaining comments are focused on our continuing operations.
Overall, our primary measure of unit economics, as adjusted gross profit, which was $6 million in the third quarter of 2023, and which compares to $5 million in the second quarter of this year.
Adjusted gross profit as a percentage of RPF increased to 39% in the third quarter compared to 30% in the second quarter of this year, an overall increase of nine percentage points due to lower provision for claims as a result of lower claims activity.
Adjusted EBITDA, our main profitability measure was negative $5 million compared to negative $12 million in Q2, 2023, an improvement of $7 million.
This improvement was primarily the result of our previously discussed workforce reduction actions and company wide efforts to reduce operating expense.
Moving onto our topline performance in the third quarter, we recorded revenue on a GAAP basis of $76 million, which compares to $81 million in Q2 of 2023, a decrease of 6% primarily caused by the sale of our local retail operations and partially offset by the continued strength seen in the homebuilder market.
As a reminder, GAAP revenue includes the portion of agent premiums that Domo does not retain.
So we focus on them as retained premiums and fees for our P&L as an important metric, which excludes the premiums retained by third party agents.
We believe this is a much better representation of <unk> underlying top line performance.
With this in mind, our P&L was $15 million in the third quarter down 7% compared to the second quarter driven by the sale of our local retail operations.
Underwriting RPF within our third party agent channel decreased 3% in the third quarter compared to the second quarter, primarily from a decrease in policies from our independent agent network, and partially offset by RPF growth our homebuilder business.
As we noted on our prior earnings call. We are focused on the performance of the underwriter during the third quarter. The underwriter performance was aided by the strength in the homebuilder portion of the business and positive improvement in gross profit, resulting from favorable reserve development.
And we also expect to see continued positive momentum in our underwriting business benefiting from lower cost driven by our most recent cost reduction actions.
As Max mentioned, we look forward to executing on our new strategy and we remain highly focused on becoming adjusted EBITDA profitable on a sustainable basis.
I'll now pass the 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, we are focused on our critical mission of making the home buying process better faster and more affordable.
While our efforts have been largely on adjusting our cost structure to align with the current macroeconomic environment and we have significantly reduced our expenses over the past year. We believe that these efforts are largely complete and will provide us with a sustainable cost base as we shift gears into resuming growth in our business as.
As we work towards offering our solutions to be a lower cost of customer acquisition channels and higher margin opportunities. We're excited about the growth potential ahead of US we look forward to updating everyone with our progress on our next earnings call. Operator, we are ready for questions.
Thank you.
At this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced soon.
Withdraw your name.
Your question. Please press star one again, please standby, while we compile the Q&A roster.
Our first question comes from Michael Ward with Citi Go ahead. Your line is open.
Hey, guys. Good evening. Thank you for taking my question.
I was wondering if you guys could maybe discuss specifically for <unk>.
<unk>.
What goes into the the.
<unk> for the EBITDA improvement.
You bet, Mike Thanks for the question here.
One of the things when we look at the fourth quarter.
You can see the trend that we've made and we've made some great progress here on adjusted EBITDA in the third quarter, we expect that to continue into the fourth quarter, but we do believe that that that risk.
Additionally, as we move that into the first quarter as well.
Historically.
Seasonally soft period in the first quarter.
But we expect to see a lot of the efforts and cost reduction measures that we've executed here in the recent past and one with our sale of our local business to.
Come to bear here in the fourth quarter, and we still feel that thats.
Profitability is well within striking distance in.
In that quarter.
Got it thank you.
And the maybe the pilot program, but the software company.
And also the deal was a national lender.
I'm wondering if as the earnings stream from those.
On underwriting stream or is it more of like a royalty stream.
Yes. Good question, Mike and this is Max it's both so this is part of why we're so excited about this this particular launch of the new product upfront title.
And the structure of this product we have effectively.
Configured our patented and proven instant underwriting technology to be licensed really a lot further upstream in the mortgage decisioning process think about it is much closer to or even before that decision to qualify the borrower for the loan to be underwritten.
And because we can license that decisioning.
Anticipate getting both software licensing revenue for that piece of it but then.
The configuration and the accessibility of that algorithm upfront in the process allows us in turn to offer a significantly discounted rate of title premium for the insurance policy itself.
So the primary benefit again accrues to the benefit of <unk>.
Homeowners.
Who are.
Facing an unprecedented affordability challenge, but it has the dual purpose of providing.
Also a pretty significant advantage and driving.
Our new insurance premium revenue stream and even at a discounted amount where it benefits homeowners we believe that.
That insurance premium revenue can be highly accretive to our underwriter and helps improve our margin profile.
Got it thanks that's helpful.
And if I could sneak a third.
A number of exciting.
Exciting opportunities it sounds like just kind of curious if there is one that you.
You see as being the biggest driver of earnings growth.
Call. It next year or next 12 months.
Sure So I would say thematically.
What we're most excited about as.
Is the strategy of the business, which.
Which clearly we're investing resources in to drive.
A significant new source of revenue and earnings growth is our ability to be arguably the only provider in this landscape, who is going to be offering a technology driven solution to help provide significant relief or homeowners, who are facing an unprecedented affordability challenge right I mean.
We cited some of the data in the script itself, but no matter what metric you look at it I mean.
I think that the.
Simplest one is if you were to just run a Google search today for housing affordability.
<unk> story is that housing affordability is a 39 year low.
At the lowest level, it's been since 1984 and so.
What drives our strategy and what we anticipate will drive revenue and earnings growth for us in the future will be our ability to offer a much lower cost and much more streamlined solution for homeowners, who desperately need relief and.
And we think we've got a strong competitive advantage in the way we've configured the product to do that and we're excited to invest behind the growth of that.
Awesome. Thank you guys so much.
As a reminder to ask.
Quick question, you will need to press star one on your telephone and wait for your name to be announced.
Please standby, while we compile additional Q&A roster.
If there are no mark hubs.
Excuse me.
Does conclude the question and answer session and that does conclude today's conference.
You may now disconnect. Thank you.
Yeah.
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