Better Home & Finance Holding Company

My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to the Better Home and Finance fourth quarter and full year 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. And if you'd like to withdraw that question, again, press star one. Thank you. I will now turn the conference over to Hannah Kosla, Vice President of Corporate Finance and Investor Relations. Hannah, you may begin your conference.

Welcome to Better Home and Finance Holding Companies' fourth quarter and full year 2023 earnings conference call. My name is Hannah Kosla, and I am the Vice President of Corporate Finance and Investor Relations at Better. Joining me on today's call are Vishal Garg, founder and chief executive officer of Better, and Kevin Ryan, president and chief financial officer of Better. Certain statements we make today may constitute forward-looking statements that are subject to risk, uncertainties, and other factors, as discussed further in our SEC filing, that could cause our actual results to differ materially from our historical results. We assume no responsibility to update forward-looking statements other than as required by law. During today's discussion, management will discuss certain non-GAAP financial measures, which we believe are relevant in assessing the company's financial performance. These non-GAAP financial measures should not be considered replacements for and should be read together with our GAAP results. These non-GAAP financial measures are reconciled to GAAP financial measures in today's earnings release. which is available on the investor relations section of Better's website and when filed in our annual report on Form 10-K filed with the SEC. Amounts described as of and for the year ended December 31st, 2023 represent a preliminary estimate as of the date of this earnings release and may be revised upon filing our annual report on Form 10-K with the SEC. More information as of and for the year ended December 31st, 2023 will be provided upon filing our annual report on Form 10-K with the SEC. I will now turn the call over to Vishal.

Thank you, Hannah, and welcome to our fourth quarter and full year 2023 earnings call. We appreciate everyone joining us today. I'd like to start by recapping some of our major accomplishments in 2023. First, we listed on the NASDAQ stock market as a public company in Q3 2023 and ended the year with approximately $554 million of cash, restricted cash, and short-term investments, which allows us to strategically execute against our corporate objectives. Second, throughout the year, we've been laser-focused on prioritizing expense reductions and improving our unit economics, while continuing to invest in the proprietary technology that underlies our competitive advantage. We reduced total expenses by approximately 71% year-on-year and by over $1.1 billion since 2021. Specifically, year-over-year in 2023, our mortgage platform expenses declined 74%, marketing and advertising expenses declined 68%, technology and product development expenses declined 32%, and general and administrative expenses declined 22%, where the expense decline was partially offset by increased costs of going public. As the mortgage market is showing early signs of strengthening in the first half of 2024, we are leaning into certain growth expenses to drive increased market share and efficiency. Balance with continued discipline cost management to target reaching profitability in the medium term. Third, we expanded our B2B, or as we call it, mortgage as a service channel with the addition of new partners, including Infosys and most recently, Beyond.com, which launched in the first quarter of 2024. For those newer to our story, I'd like to provide a background of the company, our mission, proprietary solution, and competitive advantage. Better was founded to fundamentally transform the entire homeownership process through the use of technology by delivering the best experience to consumers at the lowest cost. Our mission is to make homeownership better, faster, and cheaper by building a proprietary end-to-end technology platform that automates and revolutionizes the experience of finding, financing, and selling a home. Since our founding in 2016, we've achieved over $100 billion in loan origination volume entirely digitally, and at our peak in 2021, reached nearly 2% of refinanced market share through our online frictionless consumer interface. We have since also proven that our platform enables a seamless digital purchase experience, with purchase loans now making up 91% of our volume in 2023. Our proprietary technology powers multiple product solutions across the mortgage, real estate, and insurance verticals, with more products launching frequently, including recent launches of digital VA loans, one-day mortgage, and one-day Elon. The home finance market is enormous, with annual spend on average around $3 trillion per year, through market cycles, and a strong megatrend towards digitization, with consumers seeking price transparency and convenience. We believe our product is highly aligned to where the market is going, yet we are penetrating less than half a percent market share today, leaving tremendous room for long-term growth. At our core, we're seeking to disrupt an antiquated process, which is manual, costly, slow, and complicated by leveraging our proprietary technology platform, Tinman. We aim to reduce the cost to produce alone and create a single one-stop shop platform with multiple home ownership products embedded into a highly automated single flow from lead to fund, allowing us to pass through savings from automation to our customers in the form of lower rates and faster turnaround time. In fact, from 2018 to 2023, Better's average rate for a 30-year fixed Fannie Conforming loan was approximately 6% lower than the industry average, saving customers real money on each payment they make through the life of their loans. Further, our business model is balance sheet and credit risk light, with 96% of our loans produced in 2023, excluding HELOC loans, eligible for purchase by the GSE. I'll now turn to our three strategic priorities for 2024. Our first priority is thoughtfully leaning into growth amid a more favorable macro environment than we saw in 2023. Our second priority is improving operational efficiency and further variablizing our origination expenses. Our third priority is adding new B2B channel partners, enabling us to further leverage our industry-leading technology. Now to dive further into each. Starting with our first priority of leaning into growth, Over the past two years, we have been intensely focused on significantly reducing expenses and maximizing corporate efficiency during a highly challenging macro environment. With signs that the mortgage market is beginning to turn, it's time for us to thoughtfully lean into growth to make sure we are ready when consumer demand returns and that we capture increased market share across purchase, rebuy, and delock. Specifically for purchase, we're focusing on growing our real estate agent relationships as they are key to the consumer experience. We partner with local agents and other local service providers involved in the home purchasing process and bring them into the Better ecosystem. Once we establish trust with agents, they're more likely to help us convert the customer to Better because they have confidence that the mortgage will close. As mentioned last quarter, we are also piloting a program called Better Duo, where we enable third-party real estate agents to become loan officers and grow their revenue base. While still very early from a financial perspective, Duo agent enrollment is scaling favorably, going from 12 producing agents in Q4 of 2023 to 48 producing agents in Q1 2024, demonstrating demand from agents for the additional revenue generation opportunities provided by this program. Another critical driver of growth has been a fundamental change in our commercial operating model. Specifically, we have begun hiring experienced loan officers on commission-based compensation plans, a significant deviation from our prior compensation plans, which had higher fixed cost components and no commission. In the past, we have also hired relative newcomers to the industry. whom we would train to become loan officers, whereas now we are hiring seasoned purchased loan officers with experience nurturing customers through higher rate environments. We are pleased to see early conversion improvements from this new operating model and the seasoned sales talent we are hiring, as well as better alignment between our production output and costs. Further, the seasoned loan officers are providing an increased level of service to consumers that enables us to improve revenue per loan while remaining market competitive. Through Better's history, we have been the low-cost provider to the consumer. but we see significant opportunity to increase our gain on sale margins while still remaining highly cost competitive, as well as limiting concessions offered to customers through our improved service. The second priority is operational efficiency and variabilizing loan production expense. As mentioned, we've adopted a new operating model and compensation structure for the majority of our sales team with lower bases and higher commissions to better align costs with volumes and drive conversion outcomes. We are additionally increasing customer acquisition expenses in a highly programmatic and controlled manner, predominantly through digital performance marketing on existing and new channels. Across our acquisition channels, we have the ability to immediately measure and review ROI and acquisition spend and modulate spend up or down based on performance. Our third priority is adding new B2B partnerships to our B2B mortgage as a service distribution channel. We continue to see demand for our technology and origination capabilities from new partners with strong brands who are looking to offer mortgages to their customers in a cost-efficient way. We're pleased to have announced new relationships with Infosys and beyond, enabling them to provide their customers with seamless digital mortgage and home equity loan experiences. While both these partnerships are just beginning, we believe their interests as well as other pipeline conversations we are having demonstrate a strong product market fit for our B2B offerings and demand for our technology. Looking beyond 2024, the medium-term opportunity is exciting. We remain focused on enhancing our go-to-market and continuing to invest in automation through the cycle. For our go-to-market, we aim to continue improving customer conversion, especially converting website visitors into funded loan customers, and expand customer acquisition via new marketing channels and adding new partnerships. We continue investing in Tin Man to improve the customer experience and further drive down labor costs, making our platform more efficient and scalable and enabling us to drive our customers with lower rates, higher approvals, and faster certainty. It is Tin Man which powers our highly differentiated competitive advantage and drives our better, faster, and cheaper customer experience. In summary, we have a large and attractive market opportunity, a track record of knowing how to scale for growth when the market environment permits, and how to reduce expenses when it doesn't. A business model that is balance sheet and credit risk light, a competitive advantage power prior technology and industry leading product, and a medium term plan for growth and profitability, and a healthy cash position. Let me now turn it over to Kevin Ryan, our President and Chief Financial Officer, who will discuss the quarterly performance and our financial strategy.

Kevin? Thank you, Vishal. Throughout 2023, we were laser focused on improving corporate efficiency and raising and preserving capital. We deliberately pulled back on volumes by throttling expenses to prioritize profitability in a highly challenging environment characterized by high interest rates and reduced home sales. We succeeded in raising that capital. We believe that beginning in 2024, the backdrop for mortgage lending is beginning to turn a new corner, but this improvement will take time. We believe the cycle has bottomed, and we accordingly expect to thoughtfully lean into growth in 2024 to drive increased market share and efficiency, balance with continued cost discipline to target reaching profitability in the medium term. During the fourth quarter of 2023, we generated funded loan volume of $527 million. This beat the guidance we communicated on our Q3 earnings call of approximately $500 million. We generated revenue of approximately $9 million in the quarter, and adjusted EBITDA loss improved to $26 million. On our third quarter earnings call, we had guided that we expect adjusted EBITDA to improve in Q4 versus Q3, and it did by approximately 50%. So we reduced our losses by approximately 50%. Our fourth quarter volume was 49% generated through our direct-to-consumer channel, and 51% through our B2B channel, and with 91% purchase loans, 5% refinance loans, and the remainder was HELOC dollar volume. Excluding HELOC in the fourth quarter, 83% of our direct-to-consumer channel loans were one-day mortgage loans, where we generate a commitment to the customer within one day. For full year 2023, we had funded loan volume of $3 billion, revenue of approximately $77 million, and the adjusted EBITDA loss of approximately 163 million. Our full year 2023 volume was 55% generated through direct-to-consumer and 45% through B2B. Total expenses in 2023 declined by approximately 71% year-over-year, so we cut expenses 71%. For full year 2023, our net loss improved approximately 39% year-over-year, and our adjusted EBITDA loss improved approximately 69% year over year. Now, let's touch briefly on our balance sheet and capital positioning. As you know, we became a public company in Q3 of 2023, having raised approximately $565 million of capital from the GoPublic transaction. We ended the fourth quarter of 2023 with $554 million of cash, restricted cash, and short-term investments. This is a 60% increase compared to year-end 2022. In short, we funded the balance sheet. We are now well-capitalized for growth as our cash position provides us with the liquidity to continue executing against our vision and corporate objectives. In addition, we retain strong relationships with our financing counterparties to manage mortgage working capital, even in this low-volume environment. As of December 31, 2023, we had three warehouse facilities for a total capacity of $425 million. Now let's look forward to 2024. As Ashal said, we plan to lean into an improving market and growth to drive increased market share and efficiency. This will be balanced by continued cost discipline to target reaching profitability in the medium term. As I said before, we believe the mortgage cycle has now bottomed and according to the MBA and Fannie Mae, the refinance market is expected to approximately double by 2025. Therefore, we expect our funded loan volume to increase in 2024 as compared to 2023. So volume will be up this year as we prudently increase customer acquisition spend in the highest returning channels to drive increased volume throughout the purchase season, which is upcoming, and increase our origination capacity for higher volumes through limited hiring and production roles. We specifically expect our HELOC volume to increase in 2024 compared to 2023 on the back of increasing spend on HELOC marketing and HELOC production capacity. For the first quarter of 2024, we expect to generate funded loan volume of approximately $600 to $650 million. This will be a quarter-over-quarter increase of between 14% and 23%. This is obviously as compared to the fourth quarter of 2023. We continue to have a keen focus on cost management in 2024, including the continued reduction of corporate overhead, vendor costs, and cost reductions due to further automations. As a result of increased growth expenses offset by continued expense reductions, we expect that our total expenses will be approximately flat in 2024 as compared to 2023. Therefore, we're going to hold our expenses flat while we grow our volumes. Lastly, we expect conversion to improve with continued investments in Tin Man, the increased variable component of the sales compensation plan that Michelle laid out, improved purchase, product offerings, investments in our real estate agent relationships. And finally, we're well aware that the stock's been below a dollar for some time, and we will address that to preserve our listing. We are evaluating potential measures to increase the price of our Class A common stock, including effectuating one or more reverse stock splits to be authorized at our upcoming annual meeting. I will now turn the call back to the operator for Q&A.

Thank you. As a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press star one. We also ask that you limit yourself to one question and one follow-up. And for any additional questions, please re-queue. Your first question comes from the line of Ryan Tomasello from KBW. Please go ahead.

Hi, everyone. Thanks for taking the questions. Good morning. Just wanted to start on the operating model changes that you elaborated on. Some of this you already addressed in your prepared remarks, but just if you can expand upon what drove that pivot and also help us understand really how this differs from the existing model where you're more so leaning on, I guess, what you guys tend to refer as customer service reps that are not on a commission-based model. Are you still intending to lean into those fixed cost customer service reps? What are the hiring plans for the commission-based loan officer account going forward?

That's a great question. I can provide some context. Basically, Better has really done an amazing job of getting customers to come to Better and get pre-approved. We had over, you know, almost 20,000 application starts And, you know, that's $8 billion or so if you think of an average home, you know, mortgage value of $400,000. And yet we're funding less than 10% of those. When you look across the industry, people are funding, you know, our competitors are funding at 20% to 40% when we're funding at less than 10%, you know, of applications. And we've been racking our brains. And last year was the first year we'd really been into purchase. Non-commissioned model worked really well for refinance sales because that's a product of where you have a very small gestation period for a lead, like your average lead coming in, turning into a pre-approval, turning into a lock is two days. Whereas in a purchase transaction, that gestation period could take six months to 18 months, depending on how long it takes to find the house for the consumer. And what we realized was that our customer service-oriented purchase salespeople were not doing certain things that really are necessary to nurture the customer all the way through their home ownership journey. So we started a pilot and said, look, you know, we've been a non-commissioned shop for eight years. What can we do differently? And one of the things that, you know, we had really said that was sort of a holy grail for us was the no commissions. And we said, well, are we doing the wrong thing here? Should we test a small commission loan officer pilot that's similar to that of the rest of the industry? And when we did that, we did that in the fourth quarter and we started engaging with the realtors who were on the transaction. We started actively nurturing those leads and we saw conversion rates jump dramatically. And so we leaned more heavily into that. and where we are is now that we've converted the entire sales force to a commission sales model and on our direct-to-consumer channel and what that means is that you know the folks who were we don't have the same customer support folks you're not going to see effectively double hiring you're not going to see us hiring customer support people and loan officers what you're going to see is a scaled hiring of loan officers in conjunction with scaled increase in marketing and improved unit economics as we take advantage of this new business model pivot, which I would say is a really big business model pivot and we hope can help narrow the gap and dramatically improve unit economics between us and the rest of the industry.

Yeah, I think, Ryan, I would add, as Vishal said, we're going to hire the fixed costs. So the fixed compensation is materially lower than in our sales model that we had in 2020, 2021. But obviously the incentives that the salespeople can generate are clearly higher in this model. And so you'll see us grow into, depending on where the market goes around demand, right? I think we're guiding on this call to volume will be up in Q1 versus Q4. I think at the midpoint of our range, that's high teens percent, you know, the 600 to 650. So call it, you know, high teens percentage up Q1. And now we're heading into purchase season. And so these people are experienced. And so we can get them in here, getting trained on the technology and they're productive very quickly. And so we're going to keep hiring. And the pace of that will be dictated by, you know, the results we see in the market we face.

Great. Thanks for all that color, guys.

Your next question comes from the line of Michael Kay from Wells Fargo. Please go ahead.

Hi, good morning. I wanted to see if you could, given the recent NAR settlement, what do you see as the impact of the housing market and the mortgage origination industry? And how is better positioning itself from the fallout of the settlement? I know you mentioned that, I think it's called Better Duo, you're saying, where you're doing dual licensing for some real estate agents. If you could just talk a little bit about the NAR settlement.

Sure, sure. So it's Kevin. I'd say, you know, first off, it's probably a little too early to tell exactly what happens. But we're watching this closely with great interest, I think, for all the obvious reasons you just pointed out. Like on a macro point, when Michelle founded this company, it was all about lower costs to the consumer, transparency, taking friction out of the home buying process. And so anything that does that, we're supportive of, you know, as a just corporate philosophy. And so we think this should be good for the consumer, but we'll see how it plays out, as I said. And then, you know, you mentioned Better Duo, which is quite helpful. We think the value proposition of Better Duo, because Better Duo is really buy side agents also becoming loan officers. So that's like now being advisor to the consumer. and generate more revenue for themselves, bring more value to the table. We think that should play very well in this new market as the buy-side agent is going to be negotiating likely here with the consumer as to the fee for the service that they will provide. one of the things we've really focused on building our purchase business we were 91 percent purchased but obviously we need more volume at this company and that's what we're focused on we've got to get bigger um is partnering with real estate agents it's something we didn't have to do and refinance it's not as simple as a digital play to go do that and so we've been doing that over the course of the over the course of 2023 um and duo is a big part of this and should fit in well um should fit in well with what is likely to be the new market structure going forward.

I think one thing to add, the important thing is this is going to drive more consumers online. So we think that in the best case scenario, consumers are going to have to figure out how to pay for a realtor. And they're going to come to try to figure out how much they can afford. And the more consumers that do that, the more they get online, the more they will find us. and the more they'll find our value propositions of speed, certainty, and price attractive, along with the service offerings that we're doing. The fact that we have realtors who are signing up to become loan officers on our platform shows you how advanced our platform has become in terms of purchase mortgages. We've built it from scratch, from the ground up. We just didn't reconsider the refi product to do purchase. We've built a product that realtors are adopting and saying, yeah, I want to be a loan officer on this platform.

Okay. That's helpful. Thank you. And the follow-up question is, do you have any thoughts and concerns about the CFPB looking into what they claim are junk fees as part of the mortgage closing process? For example, do you think they could potentially place limits on like loan origination fees or the use of discount points?

I think the CFPB is right to look at a lot of the junk fees that go into the mortgage process. We've always been a low fee, low rate lender. And, you know, our gain on sale margins have typically been substantially lower than that of the rest of the industry. To the extent that the CFPB equalizes the playing field across the board, we think we will be a beneficiary of that.

Okay. Thank you.

Your next question comes from the line of Jeff Cantwell from Seaport Research. Please go ahead.

Hey, thanks. I want to ask you, you know, I understand that some of Better's competitive variance comes from its ability to be a low-cost provider. Do you guys see any opportunities to improve pricing or revenue per fund over time? Thanks.

Sure, sure. So, I mean, that's right, and Michelle just said it, right? We started the company, you know, with the ESOs. We've generally been... low to no fee and low rate. And that has served us well, kind of getting to the place where we're relevant in the market and grew customer base. But I will tell you, we look at this all the time. We study unit economics. The reason we scaled back so much last year was we wanted to do what we call contribution margin profitable loans. So every loan makes money in and of itself. And so we've been putting price into the market. And over the course of 2023, we raised price. We've done it again in Q1. We've seen really limited impact to our conversion rates. I mean, there's some, but limited impact. And so I think as you think about us, and particularly with this new operating model, these are seasoned loan officers. You think of things like Duo, et cetera. it's going to be a higher service offering. When the company was founded, it was really a DIY product. Go online, click here, and that leads itself to a low-cost product. If we're hiring more seasoned people to actually work with the consumer through the home buying process, which can take months, as Michelle said, we think it kind of justifies a slightly higher price. So I think that our trend is already developed. Sometimes it's not easy to see in the numbers because you have marks and things like that that also run through gain on sale. But our gain on sale has been trending up each and every quarter. Some of that's capacity coming out of the market. And some of that's just what we're doing. And I think over time, we'll converge closer to the industry on gain on sale. I don't think we're ever going to be the high cost to the consumer. That's not our model. But I think we're going to trend a little bit higher. So more revenue per unit is definitely in our future.

Okay, great. Thanks so much.

Your next question comes from the line of Peter Heckman from DA Davidson. Please go ahead.

Hey, good morning. I wanted to ask a question on the B2B partners. It's kind of an intriguing aspect of the business and now adding beyond.com. Can you talk about the economics on those partnerships and, you know, on a relative basis to DDC, how do you expect it to grow in 2024?

I think the biggest benefit of the B2B relationships is that we have zero customer acquisition costs. So in the case of partnerships like Beyond.com, we're able to instead of having a customer acquisition cost, we're able to utilize their extremely large customer list, their low cost of the marketing to that list in conjunction with the marketing that they're already doing, and drive a discount to the consumer and pay a bounty to Beyond for the applications and consumers that they refer to us. So it's a win-win for all parties. The other partnerships that we have, the ones that are going to be coming out of sort of our partnership with Infosys, those are more full white label mortgage as a service for big banks. And there, what we benefit from is the fact that the banks are outsourcing their mortgage operations to us. In some cases, outsourcing sales and operations to us, along with managing the entire mortgage customer journey online for their customers. And those are all fee businesses. As you might have seen, over 50% of our revenue last quarter was from B2B partnerships. And we think that this presents a really great capability for us to use our platform to drive revenue and build out the business so that we're not solely relying on growth in our direct-to-consumer channel.

Your next question comes from the line of Reggie Smith from JP Morgan. Please go ahead.

Sorry, I was on mute. Good morning.

Thanks for taking the question. You guys talked about investment and payment in the press release and your prepared remarks. I was curious if you could shed any light Any insight on kind of new products, maybe some new things that have launched there, and where you think the capabilities of Tin Man can ultimately go? Sure.

Yeah, we've continued to expand our suite of one-day mortgage products. So Tin Man has gotten now good enough that almost 80% of the mortgage loans that are coming in through the door and getting funded are our one day mortgages, which is pretty impressive for one year post launch. We've now recently taken the HELOC process and turned that into a one day HELOC where consumers are getting a commitment letter on a HELOC within one day, which is industry leading. We've also launched VA and FHA loans. So expanded the capability for us to now reach that portion of the market, which now comprises about a quarter of the entire mortgage market, which is something that we just didn't do before. So Kinman is expanding the breadth of the market, the mortgage market that it's ingesting into its rules engine and becoming faster at being able to autonomously process the mortgages across a broader cross-section of consumer types. Going forward into the future, we've been building for eight years this supervised learning network, which in the context of what people are talking about with respect to AI, is one of the best manifestations of true machine learning and the creation of a rules engine in the mortgage industry. Now, where this goes forward is the ability to use generative AI to further automate many parts of the process and make it easier for consumers to be matched to the right loan officer, be matched to the right loan product, be as well as all of the backend processes which require human intervention still and some use of human logic for those processes to then be done by the machine itself. So we think that, you know, we're just in inning two of the stages of automation and customer delight in terms of the application of technology with Tin Man. We've just been building this platform to get to one day certainty across all these mortgage types. And now from there, you're going to see us really push forward on cost savings and customer satisfaction.

I think, Reggie, we pulled back last year. And so many, as we talked about, we're out raising capital. We pulled back. We did not pull back in technology. This is kind of core to the company. And back to the B2B question, we wouldn't have had half our volume come from B2B if it were not for what we've already built in Tin Man. And as Shell said, we've rolled out a lot of new products. In his direction, we're investing even more in the technology. It is our competitive advantage here.

If you would like to ask a question, please press star 1 on your telephone keypad. We have no further questions in our queue at this time. I will now turn the call back over to Vishal for closing remarks.

Thank you, everyone. We're really pleased with the progress that the business and the technology platform has made in 2023. and we're looking forward to, under our new commercial operating model, demonstrate progress again in 2024.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.