Better Home & Finance Holding Company

Thank you for standing by. My name is Kayla and I will be your conference operator today. At this time, I'd like to welcome everyone to the Better Home and Finance Holding Company third quarter 2024 results. All lines been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press the star and 1. I would now like to turn the call over to Hanna Khosla, Vice President of Corporate Finance and Investor Relations. You may begin.

Welcome to Better Home and Finance Holding Company's third quarter 2024 earnings conference call. My name is Hanna Khosla, 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, chief financial officer of Better. In addition to this conference call, please direct your attention to our third quarter earnings release, which is available on our investor relations website. Also available on our website is an investor presentation. Certain statements we make today may constitute forward-looking statements within the meaning of federal securities laws. that are based on current expectations and assumptions. These expectations and assumptions 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 and investor presentation, both of which are available on the investor relations section of Better's website. and when filed in our quarterly report on Form 10-Q filed with the SEC. Amounts described as of and for the quarter ended September 30th, 2024 represent a preliminary estimate as of the date of this earnings release and may be revised upon filing our quarterly report on Form 10-Q with the SEC. More information as of and for the quarter ended September 30th, 2024 will be provided upon filing our quarterly report on Form 10-Q with the SEC. I will now turn the call over to Vishal.

Thank you, Hannah, and welcome to our third quarter 2024 earnings call. We appreciate everyone joining us today and for your continued support as we drive towards our mission to make homeownership better, faster, and easier for our customers by building a technology platform that revolutionizes the experience of becoming and being a homeowner. We continue to make good progress towards our vision in which every customer can seamlessly buy, sell, refinance, insure, and improve their home digitally online instantly. I'd like to start by highlighting some of our key achievements during the quarter. We continue to lean into growth to drive increased volume, balance with ongoing efficiency improvements, diversification of our distribution channels, and corporate cost management to target reaching profitability in the medium term. In short, even in a market that remains challenged with historically low housing affordability and persistently high mortgage rates, we continue to make progress against the roadmap we set out at the start of the year. In the third quarter, funded loan volume increased to $1.035 billion, representing a 42% increase year over year and 8% increase quarter over quarter, beating the guidance of $1 billion in funded loan volume that we provided last quarter. Given a number of significant one-time financial items relating to the closing of the D-SPAC transaction that impacted Q3 2023, in addition to our year-over-year comparisons, we will also highlight the quarter-over-quarter changes from last quarter. Q3 revenue was $29 million compared to $32 million last quarter and $5 million in the third quarter of last year. As a reminder, last quarter revenue also included certain non-recurring benefits related to a positive mark-to-market impact on our lock pipeline that totaled approximately $5.5 million, which should be excluded when comparing quarters sequentially. Excluding this benefit, our revenue increased approximately 8% quarter over quarter. We continue executing on strategies to increase conversion through additional products and services, as well as improve sales efficiency to drive higher customer pull-through. We also continue to increase revenue per loan through pricing and marketing channel optimization, resulting in year-over-year gain on sale margin improvement from 1.58% in Q3 last year to 2.08% in Q3 this year. As discussed on our last earnings call, I'd like to remind everyone of our strategic priorities for 2024. Our first priority is thoughtfully leaning into growth, against which we showed continued progress this quarter. Year-over-year funded loan volume growth was driven by increases across all three of our product categories. purchase, refi, and home equity loans, with home equity products and refinance loans being the largest growth drivers this past quarter. Purchase loan volume increased 13%, home equity loan volume increased 493%, and refinance loan volume increased 177% year over year. Even with some of the temporary rate relief we saw in Q3, this quarter closed the 30-year fixed mortgage rates well above 7%. putting continued strain on our customers facing high costs of living and affordability issues. Our home equity products enable them to access the equity in their homes, even if refinancing their existing mortgage in the current rate environment is not economic. We continue to embrace the opportunity to grow our experienced loan officer footprint, add additional marketing and brand advertising channels to our D2C business, as well as launch new products and services, such as the streamlined refinance product for FHA and VA borrowers that we rolled out last week, to ensure we are well-positioned as consumer demand returns to capture increased market share. Our second priority is improving operational efficiency and further variabilizing loan production expenses and maximizing operating efficiency during a highly challenging macro environment. In the third quarter, total expenses increased approximately $9.5 million quarter-on-quarter as we continued leaning into certain growth expenses such as marketing, loan origination expenses, and compensation for larger loan production teams to produce higher volumes, as well as the absence of certain non-recurring expense benefits taken last quarter. Specifically, our third quarter marketing and advertising expenses increased from $9 million in Q2 to $12 million in Q3. We continue to evaluate the return on each incremental dollar of marketing spend and expect this spend to slow as we go into a seasonally slower period in the market and become more efficient in our marketing strategies. These growth expenses were partially offset by lower general and administrative expenses and lower corporate compensation expenses. While our loan production team compensation increased in the third quarter because of increased funds and loan officer hiring, we still believe we are significantly more efficient than the industry average as it relates to production costs. Based on our learnings through industry benchmarking exercises, we believe the average cost to sell and process a mortgage in the United States is nearly $9,000 per loan. Utilizing Tin Man's capabilities, we have been able to automate time and labor-intensive components of the mortgage process and reduce that cost by over 35% of the industry average. We believe our continued investments in technology will significantly drive down our costs further, resulting in improved operating efficiency and superior customer experience. As a follow-up from our discussion last quarter around our investments into AI, we are thrilled to announce the launch of Betsy, the first voice-based AI loan assistant for the U.S. mortgage industry. Betsy is our latest innovation built through Tin Man, the company's proprietary loan origination platform, to enhance the operational efficiency of our loan teams and to improve customer experience by accurately and instantly answering detailed questions and efficiently assisting with outstanding tasks. with a goal of enabling faster service times, enhanced self-service capabilities, improved customer engagement, and greater sales efficiency. Betsy allows loan officers to focus their time on discussing interest rate details with customers and other more complex license activity instead of gathering data or performing basic verification tasks. She leverages AI and large language models to accelerate a customer's entire mortgage journey from pre-approval start to close loan, and is programmed to verbally communicate with customers to answer mortgage application inquiries and to collect and verify outstanding application data. Because Tin Man's centralized and context-rich data environment is organized in a hierarchical, tree-like structure, it can easily be understood by LLMs like Betsy. This contrasts with traditional mortgage industry software, where information is spread across multiple fragmented systems and data sets, such as the point-of-sale system, the CRM system, the loan origination system, the document management system, and the pricing engine. We believe that Betsy will help catalyze our growth over the coming years, and we are only beginning to witness how AI will disrupt the traditional mortgage industry. And our technology is setting the standard in delivering maximum value, savings, and service to American homeowners. We are excited to show you today a demonstration of how Betsy can interact with a customer on a call. And we'll play this clip to help illustrate the power of this technology.

Hello?

Hello, this is Betsy, a virtual assistant with Better Mortgage, a trusted partner of LendingTree, calling on a recorded line. Is this Corey Smith?

Yes, this is him.

Great to meet you, Corey. I'm calling about your recent interest in a home equity line of credit on LendingTree. Do you have a minute to talk?

Yeah, I do, actually.

Perfect. So I understand you're interested in a $50,000 loan. One of our experienced loan consultants can tailor a HELOC solution that's perfect for you. To do that, we just need to gather some income information about your work. Can you please tell me, are you self-employed or do you work for an employer?

Well, why do you need that information?

I completely understand your concern. We need this information to ensure we tailor the best HELOC solution for you based on your income. Your financial situation helps us provide you with the most suitable options. Can you please share if you are self-employed, work for an employer, or both?

Well, I have my own company and I also work part-time for an employer.

Got it. Thank you for sharing that, Corey. Let's start by gathering your annual income from your own company. Can you please tell me how much you earn annually from your own company?

That comes out to about $50,000 a year.

Thank you for sharing that, Corey. Now let's move on to your part-time job with your employer. Can you please tell me how much you earn annually from your part-time job with your employer?

That comes out to about $10,000 a year.

Thank you for providing that information, Corey. You've been very helpful. I'll connect you now with one of our skilled Better Mortgage Loan consultants who will tailor a HELOC solution to fit your needs. Please wait a moment while I connect you.

Thank you very much.

While we're waiting for the loan consultant to join, what's your weather like today?

It's hot, and I'm trying to stay cool during home renovation.

That sounds like a busy day for you. Home renovations can be exciting, but also quite a task. Do you have any questions about HELOCs or Better Mortgage I can answer for you while we wait?

Yeah, I was wondering what sets Better Mortgage apart?

Better Mortgage stands out for its flexibility in offering various options tailored to your needs. This includes customizable draw periods, different loan terms, and the choice between receiving cash directly or having debts paid off on your behalf. We provide HELOCs and cash out refinances to help you find the best solution for your situation. Does this cover what you were looking for?

Yes, it does. Thank you very much.

You're welcome. Looks like we have a loan consultant on the line. One moment while I connect you. Okay, Corey, I have our loan consultant on the line, and they will go over the options with you. You are in great hands.

Hi, Corey. This is Tony with Better Mortgage. It looks like you are speaking to our virtual assistant, Betsy. I can now help guide you through your application moving forward.

Excellent. Thank you very much, Tony. We are super excited about what Betsy can become in the future as we further integrate Betsy into Tin Man and help consumers along even greater portions of their application through the entire mortgage process. Finishing with our third priority of diversifying our distribution channels through growing our B2B business, 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-effective way or improve the fulfillment efficiency of their existing mortgage business. In that vein, I'm excited to tell you all about Neo Home Loans, a leading distributed retail mortgage platform founded by Danny Harani, Ryan Grant, and Chris Ledley with a vision to deliver the best possible service to customers across the US and truly make an impact on their lives before, during, and after a mortgage transaction. Like I said better, they have always held a vision of revolutionizing the mortgage industry and doing right by their customers. We are thrilled to have hired Danny and Ryan and a few others from the NEO team with the goal of expanding Better's leading technology platform and digital lead funnel to empower NEO local loan officers. For those less familiar with the nuances across channels in the mortgage industry, there was historically a bifurcation between the local branch-based lenders and the digital online lenders. Traditionally, the online lenders were viewed as technologically advanced, fast, easy, and low cost, whereas the local lenders are advice and guidance based and provide high touch education and analysis to their customers, but can be slower and reliant on legacy technology. We are excited to reset these stereotypes by rolling out NIO home loans powered by Better. The NIO team just joined us. So it's still early days, but we look forward to welcoming their 50-plus loan officer branches serving customers across 48 states to join forces with Better and together change the way customers navigate their homeownership journey. I see NEO powered by Better as the perfect combination of NEO's demonstrated track record in customer service excellence and strong reputation within the communities they serve and our AI-driven 10-man technology, which will hopefully remove friction from their fulfillment process and expand their capacity to help more customers. Given the fact that we are just getting started, I want to say that it's simply too early to give volume or financial expectations for NEO Powered by Better. But given the onboarding time required to move branches over to our platform, we wouldn't expect a material impact to our volume in the near term. We will be sure to keep you updated as the onboarding proceeds and as the team stays laser focused on executing the technology integrations. We believe this opportunity to expand Tin Man into the distributed retail channel unlocks a key part of the market that has historically been challenging for online originators to serve. specifically on the purchase side, where customers are more reliant on the advice and guidance of their trusted local loan officer. For context, the direct-to-consumer segment, where we have traditionally operated, grew tremendously during the COVID refi boom, but has since stabilized at around approximately 20% of total mortgage originations in the United States, whereas the distributed retail channel made up approximately 40 to 45% of the market from 2021 to 2023. By that math, this opportunity has the potential to nearly triple the addressable universe of customers we have the opportunity to serve. Looking beyond 2024, the medium-term opportunity for better remains very exciting. We remain focused on enhancing our go-to-market, with growth being our North Star, while continuing disciplined expense management and channel diversification. We will continue to invest in Tin Man Automation and AI to improve the customer experience and further drive down labor costs, making our platform more efficient and scalable. With that, let me now turn it over to Kevin Ryan, our Chief Financial Officer, who will discuss the quarterly performance and our financial strategy. Kevin?

Thank you, Vishal. Even while the market remained challenging, we continued leaning to growth this quarter, driving both year-over-year and quarter-over-quarter funded loan volume in line with the guidance we provided last quarter of reaching $1 billion in volume in Q3. Also, as discussed last quarter, we continued awfully leaning into certain growth expenses, including compensation and marketing. In the third quarter, we also terminated our New York office lease, for which we expect to save approximately $10 million fully loaded between today and 2030, the end of the original lease. Turning now to the financial results of the third quarter. We generated funded loan volume of $1.035 billion, revenue of approximately $29 million, and an adjusted EBITDA loss of approximately $39 million. Total gap net loss for the third quarter was approximately $54 million. Our third quarter funded loan volume was 75% generated through our D2C channel and 25% generated through our B2B partner channel. It was 71% purchase, 16% HELOC, including home equity lines of credit and closed-end second-lead loans, and the remainder by dollar volume was refinance. Now, to touch briefly on our balance sheet and capital positioning. We ended the third quarter of 2024 with $480 million of cash, restricted cash, short-term investments, and self-funded loans. We believe we continue to be well capitalized for growth with liquidity to continue executing against our vision and corporate objectives. We continue to maintain strong relationships with our financing counterparties with three warehouse facilities for a total capacity of 425 million as of September 30th, 2024. This past quarter, we also completed a reverse stock split of betters common stock at a ratio of one post split share for every 50 pre-split shares. As a result of the reverse stock split, Better has regained compliance with the minimum bid price requirements for continued listing on the NASDAQ global market. Post-reverse stock split, as of September 30th, we had approximately 15.1 million shares outstanding across classes A, B, and C shares. Turning now to our outlook for the remainder of 2024. Given the recent trend higher mortgage interest rates in our entry into a seasonally slower period of the year, offset by the continued growth initiatives we have discussed on this call, we expect fourth quarter funded loan volume to be approximately in line with third quarter volume. We remain focused on driving operating leverage through continuing investments in efficiency, corporate cost management, and diversifying our distribution channels. targeting profitability in the medium term. I'll now turn it back to the operator for Q&A.

At this time, I would like to remind everyone in order to ask a question, please press the star and the number one on your telephone keypad. Our first question comes from the line of William Tang with Susquehanna. Your line is open.

Hey, guys. Thanks very much for taking the question. Vishal, I wanted to ask about the launch of your recent AI loan assistant, Betsy. It sounds like it certainly has potential. The demonstration was very impressive. But in your view, how is Betsy differentiated from other AI technology in the lending space? I was wondering if you could help elaborate on that point.

Totally. Thanks. That's a great question. I think Betsy is very advanced relative to some of the things that we've seen in the AI stuff space that we've seen with mortgage companies. A lot of the AI that mortgage companies that our public peers have done is really related to a lot of the back office part of the process, processing or underwriting, where there's been OCR, which is effectively reading data off a page. So looking at income data off of pay stub and coming up with what's the closest approximation to what the income might be. And we've had that in our Tin Man system for years. A lot of the other AI that people talk about is decisioning-based AI, where effectively the machine is taking the decision rather than a human taking the decision to move the loan file forward. Again, we've had that for years inside Tin Man. We've built out one-day mortgage, you know, where the bulk of the process of getting the mortgage from a lock to a commitment letter is automated. And then the last bit that we've seen in other mortgage companies too is chatbots. So doing chat-based customer support online. And if you've ever actually used those chatbots, you'll see there's a huge lag and the chatbots are not actually able to move the customer along other than basically being an interactive FAQ or frequently asked questions list. What we've done with Betsy is actively integrate Betsy into our platform Tin Man. And as you could tell from the call, Betsy was able to, one, understand what the items were missing from the consumer's loan file, was able to take that data in and then append it into Tin Man itself and move the process along and determine that the next step would be a rape quote, which would require a human-based loan officer and then effectively transfer that to a human-based loan officer. So you're talking about fundamentally replacing the work that a traditional loan assistant or SDA, sales development assistant, would have done it better here. Now, to give you a context, back in 2021 when we were doing $58 billion of volume, we had over 1,500 SDAs and loan assistants. And I would say that, you know, the total spend on them was over $100 million a year. And Betsy is basically able to functionally do the task of these loan assistants and allow us to scale up. Betsy is now taking in 100% of our inbound phone calls that our loan officers can focus on helping consumers when they're ready to actually lock a rate, have a discussion across products or things like that that are licensable activities. So we think that the technology we've used on Betsy The way we've developed Tin Man, which really is fundamentally a decisioning engine on a tree-based data structure inside what is called a JSON blob, which is something that is really easy for LLMs to understand and then take through at a speed that is really unmatched. We haven't seen anyone be able to bring the speed of response time, which as you saw was almost natural about 800 milliseconds relative to the three-second kind of response time that you see in chatbots or voicebots out in the industry. Nobody's been really able to engineer that in the way that we have, and that's why we felt comfortable launching it commercially and now have scaled it to 100% of inbound calls being actively taken by Betsy. And so I think that we've done a lot of work on this, and we're just getting started. Today, Betsy is the worst that it will ever be. It gets better week on week, and we're very, very excited about what it's going to be able to do for our cost structure going forward.

That's awesome. If I could, with a quick follow-up, I mean, I know the company was founded with a digital-first approach. It's kind of in your DNA there. But I was wondering, how do you guys view the current TAM, and how does that stack up versus where you think the addressable market can eventually get to? Thank you very much.

Yeah, I think that's another really great question. I think as, you know, we shared in the earnings call, right now the TAM for, you know, consumer direct mortgage companies in the purchase mortgage space is somewhere between 10 to 15%, right? So while we don't have such a large market share as a company, we have a pretty sizable market share when it comes to the percentage of purchase loans that are done consumer direct. What we're doing now with Neo Home Loans is dipping into a market that's four times bigger in the purchase market and really broadening the total TAM from just those folks who are looking to purchase online, which is like 10 to 15%, to people who are dealing with the traditional loan officer realtor referral relationship, which is about 40 to 45%. And so we think that taking Betsy and Tin Man and powering the local lenders with our technology is going to enable us to tap a market size that's about 4X bigger than the one that we've been able to tap so far.

And once again, if you would like to ask a question, please press the star and 1 on your telephone keypad. And your next question comes from the line of Raina Kumar with Oppenheimer. Your line is open.

Hi, this is Jay Koiman on for Raina Kumar. Thank you for letting us ask questions. So firstly, can you just discuss your outlook for 2025 and any initial views on the operating environment you expect for next year?

Sure, sure. So it's Kevin. I'll start. Michelle may want to supplement. I think we've kind of all watched the market together, right? We sit around 440 in the 10-year. We just posted rates this morning like we do every morning. We're just north of 7%. So I think, and the NBA and others have kind of softened their forecast for 25 versus where they may have been a couple months ago. So I think we expect continued improvement in the market environment. I mean, our refinance volume was up off a small base albeit but up massively in q3 uh we've seen that others have were as well uh just for the companies that are public and already reported and so we we assume we're going to get a slow grind lower in mortgage rates over the course of 2025 is our base case and we're planning accordingly um you've seen us take up marketing expense you've seen us lean into growth we pull back uh when it doesn't work, we lean in when it does. And so I think our view on the operating environment is much of the same for next year, but modest improvements throughout the course of 2025, unlikely on a linear basis. This is generally not the way capital markets work, but we expect, you know, on this call in November of 2025, we'll be in a marginally better operating environment and we're running the company accordingly.

Yeah, I mean, look, three years ago this time, when the rates started first kicking up, we were doing 5% of our volume was purchased and 95% of our volume was refinanced. We've had a tough couple of years, but we have pivoted the company super hard. And now 71% of our volume, excuse me, is purchase mortgage, which I think is bigger than the bulk of our direct-to-consumer online peers. And so we've figured out how to do purchase mortgage online. We're cracking the code further and learning further from some of the partnerships we're going to be doing with the local retail operations out there. And I think that's just going to make us better. And so if the market environment stays difficult, I think you'll just continue to see us improve our execution on purchase mortgage. and continue to drive growth through superior customer acquisition costs, superior cost of manufacturing, and lower cost of production and greater efficiency and customer support through what we're doing with Betsy.

Yeah, I mean, it's an important point, right? NEO's specialty is purchase. We think we're getting stronger in purchase. There's a lot of pent-up demand for purchase, home purchase in this country, right? And we know all the reasons why it's been slow to get going around affordability, both rates and housing prices. But we feel like we're putting the best technology in the industry into the hands of these local experts, and that should further drive our ability to penetrate purchase in a low refi volume environment.

And there are no further questions at this time. I would now like to turn the call back over to the CEO, Vishal Garg.

Thank you so much for joining us for our Q3 quarter earnings call. We really appreciate your support of our mission and our vision to make homeownership better for all Americans and look forward to joining you in the coming months ahead for a Q4 call. Thank you.

This concludes today's conference call. You may now disconnect.