Q2 2024 Real Matters Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the real matters Q2, 2024 earnings conference call.
At this time all lines are in listen only mode. Following the presentation, we will conduct a question and answer session.
At any time during this call are you required immediate assistance. Please press star zero for the operator. This call is being recorded on Tuesday may seven 2024.
Lynne Willard: I would now like to turn the conference over to Lynne will regard Vice President of Investor Relations and corporate Communications. Please go ahead.
Lynne Willard: Thank you operator, and good morning, everyone welcome to real matters financial results Conference call for the second quarter ended March 31, 2024 with me today are real matters, Chief Executive Officer, Brian Lynch, and Chief Financial Officer Rodrigo Pinto. This morning before market opened we issued a news release announcing our results for the three and six months.
Lynne Willard: Ended March 31, 2024, the release accompanying slide presentation as well as the financial statements and MD&A are posted in the investors section of our website at real matters Dot com.
Lynne Willard: During the call we may make certain forward looking statements, which reflect the current expectations of management with respect to our business and the industry in which we operate however, there are a number of risks uncertainties and other factors that could cause our results to differ materially from our expectations.
Lynne Willard: Please see the slide entitled cautionary note regarding forward looking information and the accompanying slide presentation for more detail. You can also find additional information about these risks in the risk factors section of the company's annual information form for the year ended September 32023, which is available on SEDAR.
Lynne Willard: And in the Investor Relations section of our website.
Lynne Willard: As a reminder, we refer to non-GAAP measures in our slide presentation, including net revenue net revenue margin adjusted EBITDA and adjusted EBITDA margin.
Lynne Willard: non-GAAP measures are described in our MD&A for the three and six months ended March 31, 2024, where you also find reconciliations to the nearest ifr ref measures with that I'll turn it over to Brian.
Brian: Thank you Lynn and good morning, everyone and thank you for joining us on the call today.
Brian Lang: I'll kick things off by going over the business highlights of the quarter. Rodrigo will then follow up with a brief discussion of the financial highlights before we take questions.
Brian Lang: Consolidated revenues increased 19% sequentially in the second quarter to $42 2 million.
Rodrigo: And were up 12% year over year due to growth in our U S appraisal and Canadian segments.
Rodrigo Pinto: We delivered positive consolidated adjusted EBITDA of $1 $7 million in Q2, mainly due to strong operating leverage in our U S appraisal and Canadian segments.
Rodrigo: The U S 30 year fixed rate mortgage was down approximately 50 basis points in the second quarter and we saw modest improvements in market volumes, albeit from historical lows.
Rodrigo: We estimate that second quarter U S mortgage market origination volumes increased 9% quarter over quarter and year over year.
Rodrigo: Second quarter U S appraisal purchase and refinance revenues outperformed the market.
Rodrigo: Purchase revenues were up 19% quarter over quarter compared to an estimated addressable market increase of 12% and refinance revenues were up 23% sequentially compared with an estimated addressable market decrease of 3%.
Rodrigo: We launched one new lender as well as the new channel with a tier one lender in the second quarter. We also posted year over year market share increases with four of our top seven U S appraisal clients.
Rodrigo: We continued to leverage our platform to improve our margin profile in the second quarter hosting another new record high for U S. Appraisal net revenue margins of 28, 3% up 40 basis points from Q1.
Rodrigo: Modestly improved market conditions and market share gains increase the transaction volumes on our platform, while we kept our operating expenses relatively flat demonstrating the operating leverage in the business.
Rodrigo: Which fueled our U S appraisal adjusted EBITDA increase of 65% quarter over quarter to $4 4 million.
Rodrigo: U S title segment revenues net revenues and adjusted EBITDA were relatively flat quarter over quarter as a decline in refinance origination revenues was offset by an increase in Oreo home equity diversified in other title revenues.
Rodrigo: We launched two new clients in the U S title in the second quarter.
Rodrigo: The change in product mix of our U S title segment resulted in a decline in our net revenue margins to 44% in the second quarter from 47, 3% in the first quarter of 2024.
Rodrigo: Our focus remains on adding new clients to our title platform in 2024 in.
Rodrigo: In line with the comments I made on our last conference call. The RFP cycle is active and we've moved forward as expected.
Rodrigo: In Canada revenues were up 15% quarter over quarter on modestly improved market conditions, and our cost base was flat, which resulted in a 26% quarter over quarter increase in adjusted EBITDA.
Rodrigo: We launched two new clients and one new channel in Canada in the second quarter.
Rodrigo: With that I'll hand, it over to Rodrigo Rodrigo.
Rodrigo Pinto: Thank you, Brian and good morning, everyone as Brian outlined earlier U S mortgage market conditions improved modestly in the second quarter with a declining mortgage rates do we parts to a slight compression of spreads as well as <unk>.
Rodrigo Pinto: 30 basis points of declining to 10 10 year Treasury yield.
Rodrigo Pinto: To date more than 24% of existing mortgages have a rate of over 5% and these cohorts continue to grow which is very positive for our business as they represent future and refinance candidates.
Speaker Change: We continue to firmly believe that the markets will recover and so we remain focused on the things. We can control you show you that we don't we do what's necessary to grow our client base and our market share managing our operating efficiency and driving towards our long term targets, while maintaining a strong balance sheet.
Rodrigo Pinto: Turning to our second quarter financial performance I will start with our U S. Appraisal segment, where we recorded revenue of $32 6 million up 16% from the same period last year due to improved market conditions as well as increasing our market share with our clients.
Rodrigo Pinto: As Brian mentioned earlier, we outperformed the markets in the second quarter, our purchase origination revenues were up 10% year over year compared with an estimated addressable markets increase of 9%.
Rodrigo Pinto: And our refinance origination revenues were up 14% compared with an estimated addressable market increase of 9%.
Rodrigo Pinto: Home equity revenues were up 38% year over year as we relaunch it in the home equity channel with some of our existing lenders and had strong market share growth, which includes the addition of this channel with a tier one clients that went live in Q2.
Rodrigo Pinto: U S appraisal mats revenue was $9 2 million for the second quarter up from $7 7 million in Q2 2023.
Rodrigo Pinto: We continue to see strong net revenue margins in the second quarter with an increase of 70 basis points year over year hitting another record high of 28, 3%.
Rodrigo Pinto: Our ability to leverage our platform.
Rodrigo Pinto: <unk> been a solid year over year margin increase pushing past the upper end of the range of our fiscal 2025 targets of 26% to 28%.
Rodrigo Pinto: U S appraisal operating expenses increased 5% year over year to $4 9 million in the second quarter U.
Rodrigo Pinto: U S appraisal adjusted EBITDA was $4 4 million for the quarter up 40% from the second quarter of fiscal 2023.
Rodrigo Pinto: Adjusted EBITDA margins increased to 47, 9% from the 46% we posted in the second quarter last year as a result of improved net revenue margin profile, partially offset by a slight increase in operating expense.
Rodrigo Pinto: Turning to our U S title segment second quarter revenues declined 9% year over year to $2 million due to lower our <unk> and home equity revenues on a year over year basis refinance origination revenues were up 23% compared to them.
Rodrigo Pinto: Estimated market increase of 13% as we launched it.
Rodrigo Pinto: Second channel with our tier one lender at the end of September increasing our market share with that client.
Rodrigo Pinto: U S title revenue was zero point to $9 million up 90% from the second quarter last year and Thats revenue margins increased to 44% from 36, 8% due to a higher proportion of refinance origination orders that closed.
Rodrigo Pinto: We've reduced U S title operating expenses by 18% year over year to two and a half from Union and we.
Rodrigo Pinto: According to an adjusted EBITDA loss of $1 7 million for the U S title segment compared with a loss of $2 3 million in the second quarter of fiscal 2023, an improvement of 28% due to the year over year reduction in operating expenses and net revenue margin improvement.
Rodrigo Pinto: In Canada second quarter revenues were up 2% year over year to $7 6 million due to improved market volumes and that's <unk>.
Rodrigo Pinto: Revenue was $1 four.
Rodrigo Pinto: Million, which was flat however margins expanded by 20 basis points year over year as we continue to leverage our platform.
Rodrigo Pinto: <unk> adjusted EBITDA.
Rodrigo Pinto: Zero point to $9 million compared to $1 million in the second quarter of 2023.
Rodrigo Pinto: In total second quarter consolidated net revenue of $11 5 million was up 16% year over year from improvements in all three segments.
Rodrigo Pinto: Consolidated operating expenses were down 6% year over year to $11 2 million in the second quarter.
Rodrigo Pinto: We increased consolidated adjusted EBITDA to 0.7 million from a loss of $1 7 million in the second quarter of 2023.
Rodrigo Pinto: Finally, our balance sheet remains strong with no debt and cash flow of $44 4 million at March 31 2024.
Rodrigo Pinto: I'll turn it back over to Bryan Bryan.
Bryan: Thank you Rodrigo.
Bryan: Overall, we were very pleased with our second quarter results, we outperformed the market gain market share launched new clients and a new channel with a tier one in U S appraisal.
Bryan: We also hit a new record for net revenue margins in U S appraisal that pushed us past the high end of our fiscal 2025 objectives.
Bryan: While our title segment continues to face strong market headwinds, we continue to perform at the top of lender scorecards and position the business for the anticipated increase in volumes and are moving toward adding customers with a focus on tier ones to our platform.
Bryan: Our Canadian business continues to deliver steady performance and is also poised for growth due to our market leadership position.
Bryan: Finally, we posted positive adjusted EBITDA for the quarter and we have the capacity to scale up with our existing cost base as market conditions continue to improve.
Bryan: We have a strong balance sheet with more than $44 million in cash and no debt.
Bryan: And our focus remains on the long term earnings potential of our business.
Speaker Change: With that operator wed like to open it up for questions now.
Speaker Change: Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone you will hear three Tom prompt acknowledging your request and Youre question is will be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by the Q. If you are using it.
Speaker Change: Your phone please lift the handset before pressing any keys and your first question comes from Daniel Chan with TD Cowen. Your line is now open.
Daniel Chan: Hey, good morning, nice results, especially considering that the tier ones continue to lose significant market share here in prior quarters, we saw that be a headwind on your results, but it seems like you're offsetting it with that what was the offset this quarter to help you.
Daniel Chan: With some of those market share losses from your tier ones.
Speaker Change: Good morning, Dave Thanks for the question.
Dave: The big offset for US is over the last couple of years I think we've done a great job at diversifying our customer base. So when we take a look at where we are generating revenue today, Dan, it's pretty well, 50% with banks and 50% with non banks, so even though some of the <unk>.
Speaker Change: <unk> had a challenging quarter, we are seeing the non bank step in and continue to grow so as long as we continue to win market share.
Speaker Change: In both those segments, which we did this past quarter than even if some of our banks are losing a bit of share we're gaining share with them and we're gaining share with our non banks, who seem to be finding some share in this in this current market.
Speaker Change: Okay. That's good to hear thanks for that.
Speaker Change: Last quarter, you mentioned that you have about three to four times excess capacity in your title and closing business.
Speaker Change: Second channel with that tier one customer are doing relative to your capacity expectations and do you think youre going to need to invest for additional capacity. If you win the rfps that you mentioned.
Speaker Change: Yes. So the first part of the question is the second channel with the tier one has been a little slower than we would've expected Dan.
Speaker Change: Our original expectation was it would sort of be at 50 50.
Speaker Change: Volume on either one of those channels I think simply it's just taken a little while for the tier one to get that channel fully up and organized so we expect over time that that channel will grow so thats sort of a tailwind of the future.
Speaker Change: And then I think the second question was around investing in tier ones in title as we look forward into the future.
Speaker Change: The upfront there'll be a little bit of investment Dan just from a tech standpoint to make sure that we've got the appropriate integrations that we need but beyond that we still have on the title side of the business three to four times the capability from a volume standpoint. So we're feeling really confident that youll continue to see our.
Speaker Change: Cost base, where it is with quite a bit of upside potential in volume.
Speaker Change: Great. Thank you.
Speaker Change: Your next question comes from Richard Tse.
Richard Tse: <unk> with National Bank financial Please go ahead.
Richard Tse: Yes. Thank you.
Richard Tse: We wait for the inflection on volumes I was wondering if you could maybe update us on how much incremental revenue you could support under your current opex in the appraisal segment.
Speaker Change: Thank you Richard again right.
Richard Tse: Extra capacity that we mentioned before is stays the same and we still believe we have 30% to 40% in our appraisal segment capacity.
Richard Tse: That's.
Richard Tse: We can see a growth in that range that we would need to change our cost structure at this point.
Speaker Change: Okay, and then just to clarify on the title close Rfps.
Richard Tse: What conditions are required for some of these prospects to come onboard so it just really.
Richard Tse: Waiting for a turn on volumes.
Richard Tse: Is it rates retrench or bad or is there something else that they're looking for.
Richard Tse: No Richard I think it's just that they've been waiting for I think an uptick in volumes as you know thats somewhat connected to rates. So they have been probably keeping their eye on on whats happening from a rate standpoint. The good news is I think at least a handful of the tier ones have definitely moved their mindset.
Richard Tse: The awards looking at the Rfps and Onboarding, new vendors. So as I mentioned in my comments, we're feeling confident that that pipeline is moving it's moving in the right direction and so we anticipate to see.
Richard Tse: So more new customers coming on board over the next few quarters.
Speaker Change: Okay, and just a last one for me you've obviously done a good job in terms of controlling the controllable as you talk about so as you look forward in the next 12 months are there kind of any incremental operating priorities that you have on the table here and if so what would they be.
Speaker Change: Richard.
Richard Tse: As you know this is a title of the year that we go through our strategic plan looking forward.
Richard Tse: But again, Brian as we said before we believe our cost structure as you know each dependency volumes.
Richard Tse: We continue to focus on our 25 targets.
Richard Tse: Both on net revenue and adjusted EBITDA margin line.
Speaker Change: So we.
Richard Tse: Again, we don't see any major changes in our cost structure of course will vary in accordance with the volumes that we start to receive from the market.
Speaker Change: Okay. Thank you.
Speaker Change: Your next question comes from Steven Mitchelson with BMO capital markets. Your line is now.
Speaker Change: Hi.
Stephen Machielsen: On U S. Appraisals net revenue margins have been ticking up there is there anything to think that they will persist or even increase from these levels.
Stephen Machielsen: Yes. Thanks for the question. So no I don't think so I think you've seen us now at the top of our long term range that we had 26% to 28%.
Speaker Change: So as we look forward our assumption is that we'll continue to stay at the top end of that range and we built an awful lot I think and gained an awful lot of efficiency in that over the last year.
Speaker Change: Okay, and sticking with U S. Appraisals were there any one time factors in the tier one market share gains is it likely that you could give back some of these gains in the future or is there still room to move higher.
Speaker Change: Well, there's definitely still room to move higher as we when we laid out our 2020 plan. Our goal was to get at least a couple of our tier ones up to over 50% market share and then 40% and 30 with the remainder of the tier ones. So the good news is we've achieved that already and we are.
Speaker Change: <unk> seen another another customer cross that 50% plane. So I think we're in very good shape with with market share. We've continued to gain market share we look out to the future and we believe there is still tremendous amount of upside.
Speaker Change: So I think I would leave it at that.
Speaker Change: Okay.
Speaker Change: Final question for me is I guess a bit more of a broader market question. So.
Speaker Change: NBA <unk> cut their forecast back in April I'm, just wondering how these aligned with your view of the mortgage market do you think their forecasts are still a bit too sanguine.
Speaker Change: Well, that's a very good question again, not trying to call the market here, but I am sure. They released their numbers just before we saw an increase under 10 year treasury yield that happened over the last two to three weeks so I.
Speaker Change: It's hard for me to judge.
Speaker Change: Estimates, but I think they didn't have the most current markets data by the time that they publish their numbers so.
Speaker Change: Very likely we will see.
Speaker Change: Neil revision of NBA, and Fannie Mae numbers out there.
Speaker Change: Alright.
Speaker Change: Thanks for taking my questions.
Speaker Change: Thanks.
Speaker Change: Your next question comes from Martin <unk> with ATB capital markets. Your line is now open.
Martin: Hey, great. Thanks for taking my question.
Martin: Can you talk a little bit about competitive behavior in this environment.
Martin: <unk>.
Martin: There has been any exits acquisitions.
Martin: Thanks.
Speaker Change: Sure. Thanks for the question Martin So on the appraisal side. There has been there has been some some sort of moving bowls as far as competitors go so we.
Speaker Change: We had one of our bigger competitors as mortgage connect they have sold their valuations business.
Speaker Change: And so they have now joined forces with class, which is not a competitor in our tier one space, they're more of a wholesale servicer. So they would sort of compete more.
Speaker Change: Tier twos and threes.
Speaker Change: So we've seen a little bit of movement, there and on the title side one of the competitors that we used to talk about was DOUMA and they have now gone from being a public company to private in the past quarter and they are definitely focusing their attention more on their tech business and becoming more of a SaaS suppliers. So they are.
Speaker Change: We're definitely taking a step back on the title servicing side. So it definitely has been a couple of moving.
Speaker Change: Moving Bowles with our competitors and I think that will only bode positive for us from a market share standpoint, as we look forward.
Speaker Change: Thank you when you think about the impact of core logic, leaving.
Speaker Change: A year on what do you observe I mean did you get more than your fair share of that business.
Speaker Change: We definitely got more than our FERC fair share I think Martin So I think that was helpful. When I talked about crossing the chasm of 50% with one of our tier ones. Some of that was fueled by the Corelogic shutdowns. So I definitely I think where we stand now and I think we've now got the benefit of all of that.
Speaker Change: That's all for me thank you.
Martin: Thanks Barton.
Speaker Change: Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by the wireless.
Martin: Your next question comes from Robert Young.
Robert Young: Please go ahead.
Robert Young: Robert are you there.
Robert Young: On mute sorry, I was on mute, yes, so good morning.
Robert Young: I was looking for maybe a little more context around the tier one title pipeline you've said, it's looking better than last quarter, you said it was slower than expected.
Robert Young: Because of the low volume and I think you said that theyre changing their their way of looking at the market irrespective of volume. So maybe if you could give a little more context around what that means why theyre getting more engaged and then is the sales cycle still three six months I think you've said in the past.
Robert Young: Yes, so I think as we laid out Rob we thought that there would be some rfps with tier ones. So thats one piece of the sales pipeline and so I think I can say that we've made progress there and so I think we're on track.
Robert Young: But also there is the tier twos threes and fours and so we've actually seen a little bit more activity. There I think it has been a struggle as you know simply because of the market conditions, but we've definitely seen the pipeline start unlocking to a degree so I think theres some opportunity there I think youll see the pipeline movement over the.
Robert Young: Next few quarters.
Robert Young: And then to address your last question just around timing that timing is more or less the right way to look at the timing. It does take a while to go through the RFP process and then roll it out but our goal is to see some new orders from tier ones by the end of the year.
Robert Young: Okay.
Robert Young: And then.
Robert Young: Second question would be around capacity you already addressed capacity entitled maybe if you could talk about appraisal and you said you had 30% unused capacity last quarter and definitely saw the leverage this quarter on better volume and so.
Robert Young: How much capacity do you have an appraisal and do you have to scale that up maybe you could just go a little deeper into that.
Speaker Change: Sure So Rob again.
Robert Young: <unk> volumes on a sequential basis wasn't that material. So we still feel like we are close to 30% capacity in our U S. Appraisal segment again, it's like I answered before.
Robert Young: Our cost structure, we still believe it's solid and the margins that we put us targets right to 60% to 65% and appraisal 50% to 55% in title.
Robert Young: Those are still our goals of <unk>.
Robert Young: Course, we need the volumes to get there, but we.
Robert Young: We don't see major changes in our.
Robert Young: Our cost structure, we just need the volume.
Robert Young: <unk>.
Robert Young: Two to achieve those margins again as you know we did make investments in opex.
Robert Young: Two to create operating efficiencies as we saw this quarter a result of some of the investments we made in the past.
Robert Young: But that's basically it.
Robert Young: Cost structure, we feel it.
Robert Young: Good.
Robert Young: Solid.
Speaker Change: Okay. That's great. That's it for me thank you.
Speaker Change: Thanks, Rob.
Speaker Change: There are no further questions at this time, ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
Speaker Change: Okay.
Speaker Change: [music].
Robert Young: Okay.
Robert Young: [music].
Robert Young: Okay.
Robert Young: Thanks.
Robert Young: [music].