Blend Labs, Inc.

Good afternoon and welcome to Blinn's second quarter 2021 earnings release conference call. All participants are in a listen-only mode. Should you need assistance, please signal by pressing star zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star and the number two. Please note this event is being recorded. I would now like to turn the call over to Crystal Sumner, Head of Legal, Compliance, and Risk. You may begin.

Good afternoon, everyone, and thank you for joining us today to discuss Blinn's fiscal 2021 second quarter results. I'm joined on the call today by Neema Gansari, Co-Founder and Head of Blinn, Mark Greenberg, Head of Finance, and Tim Myopoulos, President. Before we start, I'd like to note that certain statements made during today's conference call regarding Blinn and its operations may be considered forward-looking statements under federal securities law. The company cautions you that forward-looking statements involve substantial risk and uncertainties in a number of factors, many of which are beyond the company's control, could cause actual results, events, or circumstances to differ materially from those described in these statements. Please refer to the risk factors included in our filings with the Security and Exchange Commission, which are available on the company's website at blend.com under the Investor Relationship section. and on the SEC's website at sec.gov. You should not put undue reliance on any forward-looking statement. Also note that any forward-looking statements we make on this call are based on information available to us and assumptions and beliefs as of today's date. We disclaim any obligation to update any forward-looking statement except as required by law. During this call, we will be discussing certain non-GAAP financial measures. Information regarding our non-GAAP financial results, including a reconciliation of such non-GAAP results to the most directly comparable GAAP financial measures, may be found in our earnings release, which is available on the company's website under the investor relations section and included as an exhibit to our Form 8K, furnished with the SEC before this call. These non-GAAP measures should be considered in addition to our GAAP results and are not intended to be a substitute for our GAAP results. I'd also like to mention there are slides and product demos for your reference available for download at investor.blend.com. With that, I'd now like to turn the call over to co-founder and head of Blend, Nima Gamsari. Nima, you may begin.

Thanks, Crystal, and thank you all for joining us today. I'm Nima Gamsari, head of Blend, and I'm also one of the founders. The last few months have been a very exciting time for Blend. We've grown our revenue quarter over quarter despite a national softening in mortgage volumes, which indicates that we are growing our customer base, expanding our customer relationships, and diversifying our product offerings. We also executed a successful IPO in that time period with strong investor interest and support, and so a special thank you to our customers and team members for helping us get through that milestone. believe that banking will look very different in the future than it does today and it's that future that we're constantly moving towards and preparing for we started blend nine years ago to take friction out of banking and make the process of getting a loan or opening a deposit account as easy as anything else that they would do online and above all else we wanted to bring simplicity and transparency to financial services but today the banking industry still heavily relies on paper documents making the approval process for these products slow, expensive, and more susceptible to error and fraud. Many of you have likely had that experience personally. I know I have, opening an account or getting a loan, visiting a branch, having to sign a stack of paper. And the good news is, with our help, our customer base is committing to making this a better experience for everyone. We see a future of proactive finance where consumers receive personalized, data-based suggestions from their financial services firms, and that's focused on driving their financial wellness, the consumer's financial wellness. We predict that consumers will be able to open their mobile phone and, in just an instant, see everything that their financial services firm can do for them tailored to their specific financial situation. With that future in mind, Blend's platform is designed to power any banking product using data-driven workflows. That means from the moment the consumer starts with their financial services firm to the moment they digitally sign their final documents, we center the experience around their unique data profile, including their assets, their income, tax history, credit history, everything an underwriting team needs to make a credit decision in real time. Through our products, financial services firms are able to deliver those real-time customer experiences across important financial moments in people's lives. estimate the serviceable adjustable market of blends current product offerings is greater than 33 billion dollars and we expect this market to grow over time as we add more products to our software platform develop additional marketplaces and expand internationally financial services firms choose us as a strategic innovation partner today and we believe they will continue to do so in the future because we are well positioned to help them in critical ways first Unlike legacy point solutions that focus on individual product lines, we sell a single software platform designed to power the end-to-end journey across products and channels. Second, our software platform is flexible and modular, enabling financial services firms to innovate rapidly in response to new opportunities and changing market conditions. Third, we have an expansive and rapidly growing partner ecosystem that use our platform as a way to gain adoption of new fintech innovations, and our customers love that because it helps their end customer, the consumer, get the best experience. And last, we attract and retain the best software engineering talent at Blend to continue innovating and building the value for the financial services industry. Turning to the specifics for the second quarter, we achieve strong revenue performance and continue to make progress on adding new customers and expanding value to existing customers. Our revenue reflects growth across our mortgage and consumer banking product lines, our homeownership journey marketplaces, and the volume of banking transactions that we facilitate on behalf of our customers. In the second quarter, we continued to gain market share across banks, credit unions, non-bank lenders, and fintechs as the consumer expectations and COVID-19 pandemic-fueled behavior shifts continued to drive industry-wide digitization. Key customer wins include Mr. Kugel, a top 15 non-bank mortgage lender for our mortgage title and close products, KeyBank, a top 20 U.S. bank for our mortgage products, DECU, one of the nation's largest credit unions for consumer banking suite, and Built Technologies, a modern card company for renters for credit card products. We're excited to partner with Mr. Cooper across our mortgage title and closed products as we work to deliver an end-to-end digital home purchase and refinance experience to their customers. Build Technologies represents an increase in trend of fintechs who typically have great in-house tech talent partnering with Blend to accelerate their ability to put appropriate infrastructure in place and effectively originate all of their products. In all, customers signed in the second quarter added a capacity of around 270,000 annual banking transactions to our base. This number represents banking transaction volume at our signed customers, volume that we will have the ability to capture in the coming quarters as we work to onboard them onto the Blend platform. Since we expect that we will be talking about new customers on our earning calls going forward, I'd like to take a brief moment to provide some context around the journey from signing to going live on our platform. You'll hear us refer to four phases that signify their stage in the onboarding process. Those four phases are signed, in deployment, live, and growth. Customers generally contribute to revenue in the live and growth phases. While the length of time to onboard a customer varies by type, and the nature of products that they initially adopt, it generally takes between one and three quarters to progress from signed to live, and another quarter or two to then move to the growth stage. We drove progress moving customers to the in-deployment live and growth stages in the second quarter, including Utah Community Credit Union for our consumer banking product suite, Fairway Independent Mortgage for our mortgage product, and BMO Harris Bank for our personal loans. Fairway, a top 10 mortgage lender, has gone live with Blend to drive efficiency in its mortgage operations and is in the midst of a Blend rollout to hundreds of branches across the country. BMO Harris Bank is in the top 25 banks in the United States and a longstanding customer. Our partnership started off in mortgage and expanded to home equity loans and line of credit, and they're now deploying Blend to power personal loans. Overall, we have good momentum in setting the foundation for future market share expansion and are continuing to gain traction at the high end of the markets. As of today, we serve 32 of the top 100 U.S. financial services firms by assets under management, up from 31 at the end of 2020, and 28 of the top 100 U.S. non-bank mortgage lenders, up from 24 at the end of 2020. Another achievement for us was our acquisition of Title 365, which we closed on June 30, 2021. Title, escrow, and settlement services are a key piece of the one-stop shop for homeownership and home refinance that Blender is building. but they are currently paper and labor intensive. We had already started the process of building a software-driven title agency, BlendTitle, internally, but in Title 365, we found a great match to expedited transformation of this set of services. In Title 365, we acquired a highly experienced and talented team combined with operational scale and sought-after licenses and relationships that allow us to continue to serve our customers in new ways and across all 50 states. We also expect that the acquisition will continue to accelerate growth of our core platform revenue as we complete the integration and shift legacy title volume onto our software-driven blend platform. We've frequently been asked why an innovative Silicon Valley software company would undertake the process of acquiring and transforming a services business to drive growth. The answer for us is simple. Our vision is that the key services businesses that support the homeownership journey can and will be embedded in a digital mortgage process, which we power today, and the Blend platform is rapidly becoming the foundation for that transformation. By acquiring an at-scale title business and migrating customers and services onto Blend's software platform, we can accelerate our strategy to power the end-to-end journey for any banking product, including mortgages and home equity loans, and in the process, more quickly scale the innovations we've already made on our platform to digitize title insurance. Over time, the acquisition creates substantial upside for Blend's customers, financial services firms, for consumers, and therefore ultimately Blend shareholders by driving core platform revenue growth. With the acquisition closed, we're executing on our integration plan and are eager to continue our work with the talented Title 365 teams and members of Blend. So far, what we've seen is what we expected, and we are fully integrating Title 365 into the Blend platform and business model. As for our progress on key integration milestones, First, the Title 365 team has quickly become an integral part of Blend as we have retained Title 365's capable leadership team and key staff. Second, we are proceeding with critical technology integrations necessary to deliver our software-enabled title escrow and settlement services to existing Blend customers. We are fully resourcing those efforts and they are top priority for our team. Third, Mr. Cooper is in deployment with the Blend platform, including our enhanced title escrow and settlement services as of early Q3. We expect them to go live on Blend in the first half of 2022. As Mr. Cooper is the largest Title 365 customer, its adoption of Blend will facilitate migrating Title 365's legacy business to Blend's software-enabled Title escrow and settlement services. We also expect to launch pilots of the joint Blend and Title 365 experience with a select group of mutual customers by year end. Those efforts are likewise on track. In the meantime, we will continue to deliver Title 365 services to existing customers. Those customers have responded favorably to the acquisition, save for the attrition of a handful of legacy Title 365 customers who are not inclined to be on the Blend platform, including some who view Blend as a potential competitor. We fully expected and planned for this limited attrition and took it into account in our assessment of the deal. And lastly, we have seen significant interest from Blend customers in the Blend Title solution, including interest from a number of our largest customers. For all of these reasons, we remain confident in our ability to execute and deliver on the premise of the acquisition of Title 365. As we look ahead to the balance of the year and into 2022, our priorities are deepening our customer relationships. We're always focused on our existing customers, growing market share, and delivering ongoing product improvement and innovation while we execute on the pace of our Title 365 integration. Blend is keeping an eye on the very long-term as a key long-term partner of digitization for the financial services industry. With that, I'll turn it over to Mark. Thanks, Nima. And thank you all for joining us to review the results of our second fiscal quarter 2021. Before I dive in, I want to remind you that our acquisition of Title 365 closed on June 30th, 2021. Our reported results for the second quarter and for the first half of the year do not include the impact or the results of Title 365, and less noted as pro forma. Beginning with the third quarter and moving forward, we will report results including the contributions of Title 365, and we'll share year-over-year comparisons on a pro forma basis as if we owned Title 365 for the comparable year-over-year periods. Total blend revenues for the second quarter of 2021 were $32.1 million, compared with $21.9 million in the second quarter of the prior year. This represents an increase of 46% year over year. This growth featured strong transaction volumes, demonstrating increased utilization and adoption of our platform, even though total industry-wide mortgage originations were roughly flat to the prior year. In terms of success-based volumes, we completed over 520,000 banking transactions on our platform in the second quarter of 2021, up 51% year over year. Note that we also generate a small percentage of banking transactions under enterprise license agreements with certain customers that are not included in our reported transaction volume. Looking further at our blend P&L for the second quarter, our gross profit was $19.7 million compared to $13.3 million in the prior period. Our non-GAAP gross profit was $19.9 million compared with $13.3 million in the prior year period. In our current stage of development, we are focusing on absolute gross profit dollar growth more than margin expansion. We expect gross profit to improve in the future as we add more products to the platform and progress further on Title 365 integration. Blend operating costs for the second quarter of 2021 were $59.3 million, or 185% of revenue, compared to $34.1 million, or 155% of revenue in the second quarter of 2020. Non-GAAP operating costs for the second quarter of 2021 were $46.2 million, or 144% of revenue, compared with $29.6 million, or 136% of revenue, in the second quarter of 2020. The largest driver of operating expenses was an increase in our headcount, which increased to 917 by the end of the quarter. Note that this does not include employees we added from the Title III 65 acquisitions. We continue to invest in our operations across the company, particularly in R&D to push product enhancements and invest in future products, in sales and marketing to best serve our customers, and in G&A to meet operating needs, support growth and scale, and meet the demands of being a public company. These investments deepen the competitive moat we've built over the past nine years by strengthening our ability to innovate at a faster pace than IT teams at the largest financial services firms can build similar capabilities in-house. Our spending is reflected in the loss in operations for the second quarter of 2021 of $39.6 million compared with the loss in operations of $20.8 million in the second quarter of 2020. Non-GAAP loss in operations for the second quarter of 2021 was $26.3 million compared with $16.4 million in the second quarter of 2020. In the second quarter of 2021, we incurred $6.6 million in transaction and integration costs related to our acquisition of Title 365. Our net income for the second quarter of 2021 was $5.8 million compared with a net loss of $20.6 million in the second quarter of 2020. Our net income for the second quarter of 2021 includes a one-time income tax benefit of $45.3 million, primarily due to the release of our historical deferred tax asset valuation allowance in connection with the acquisition of Title 365. Our non-GAAP net loss in the second quarter of 2021 was $26.2 million, compared with $16.1 million in the second quarter of 2020. Now turning to our balance sheet. Our cash, cash equivalents, and marketable securities of June 30th, 2021 on a pro forma basis were $630 million. which reflects $377 million in net proceeds from the IPO, $219 million in net proceeds from the term loan financing, and a disbursement of $420 million for the Title 365 purchase consideration, which was disbursed in early July. Our reported cash at June 30th also includes $17 million received in connection with the acquisition of Title 365, effectively reducing the purchase price consideration to $403 million, net of cash acquired. Now, I'll turn to our outlook. For the remainder of this year, our revenue will come from two primary sources. First, blend platform revenue, which consists of our mortgage and consumer banking products, our homeownership journey marketplaces, and new products that we continue to roll out on the platform. And second, from Title 365, which will begin to meaningfully appear in our revenue in the third quarter. As we migrate customers, we expect this revenue will convert to platform revenue in future periods. With that, for the full year 2021, we anticipate revenue of between $226 million and $232 million, and pro forma revenue, which includes the impact of the Title 365 revenue for the first half of 2021, of between $365 million and $371 million. To wrap up, we had a solid second quarter, and we're optimistic about our future growth potential as we continue to bring new customers onto the Blend platform, increase the ROI and value delivered, and drive forward with integrating Title III CC5 into our business. And to our new followers in the investment community, I'm looking forward to meeting with you and updating you on all our progress in the years to come. With that, I'll turn the call back over to Nima for his closing remarks. Thank you, Mark. This is an exciting time for Blend, and I'm proud of the team for their efforts and their dedication to our customers. It's incredibly hard to work. It's very complex, but we're diligently working to meet challenges in partnership with our customers. Blend's foundation is strong, and I'm confident that we'll continue to add value to our customers and the industry at large as we move forward as a public company. We're happy with our growth today, and we're confident that Blend will continue to expand and advance our vision of bringing complicity and transparency to financial services. With that, I'll open it up to your questions.