Blend Labs, Inc.

Good afternoon and welcome to Blend's first quarter 2022 earnings conference call. My name is Crystal Sumner, head of legal compliance and risk for the company. With me today are Nima Gamsari, co-founder and head of Blend, Temiopolis president, and Mark Greenberg, head of finance. After Nima and Mark deliver their prepared remarks, the team will take questions. You can find the supplemental slides on our investor relations webpage at investor.blend.com. During the call, we will refer to certain non-GAAP measures which are reconciled to GAAP results in today's earnings release and in the appendix to our supplemental slides. Non-GAAP measures are not intended to be a substitute for GAAP results. Also, 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 uncertainty, and 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 see the risk factors we've identified in our most recent 10-K, 10-Q, and other SEC filings. We are not undertaking any commitment to update these statements if conditions change, except as required by law. I'll now turn the call over to Neema.

Thank you, Crystal, and hello, everyone. We appreciate you spending time with us today. Blend delivered a solid first quarter in a tough market with revenue ahead of expectations. In many ways, this quarter validates our view of both 2022 and Blend's long-term potential. For this call, I'd like to cover four topics. First, a summary of our Q1 highlights and our general operating environment. Second, an update on current market conditions and how this impacts our business. Third, how we're executing against our long-term growth thesis. And lastly, an update on how we're thinking about near-term management of the business and capital allocation. After that, Mark will review the quarter in more detail, and then we'll take questions. Tim is also with us for Q&A. Starting with Q1 highlights, we are encouraged by our top-line performance, which reinforces our confidence in our 2022 outlook. Revenue of $71.5 million was ahead of the range we gave you at the end of March, and Mark will take you through that in more detail. But the takeaway is that we did better than we expected in both mortgage and in consumer banking. In fact, we delivered 3% growth in blend platform segment revenues as compared to Q1 2021, despite Q1 mortgage market volumes being down an estimated 44% year over year. Additionally, declines in Title 365 were less than anticipated. This was largely due to the timing of interest rate impacts. Refinancing activity has begun to meaningfully decline in Q2. In addition to benefiting from growth in mortgage market share, we continue to cross-sell and increase our wallet share of our existing customer base. At the end of the quarter, about two-thirds of our existing customers subscribe to two or more software products. Consumer banking and marketplace revenue, therefore, was up 55% year over year, and we are seeing continued adoption of this suite of products. At the end of Q1, 22% of our blend platform revenue came from consumer banking and marketplace, and approximately one-third of our total customer base now use one or more of these products. So we've exceeded our expectations for the first quarter and we're continuing to build momentum in the business. Nonetheless, we are mindful that the broader economic environment is going to continue to be challenging. Here's what we've observed since we last spoke to you six weeks ago. Mortgage rates rose quickly in the last two months, as you all know. And for these and other macro reasons, we are now projecting a 41% year-over-year drop in mortgage resignation volumes in 2022 versus the 35% outlook in place at the time of our call in March. Given persistently strong housing demand, these declines are disproportionately hitting the refinance market, a decrease that started in earnest in April. While this is a difficult time in our industry, Blend is well positioned to help our customers navigate this reset. It's in moments like this that customers are compelled to focus on efficiency and technology, both to preserve margin and be better positioned to take advantage of the eventual upturn. I'll touch on this more later. At Blend, we're increasingly diversifying our revenue base, with consumer banking and marketplace now starting to grow more quickly. And with that as the industry backdrop, let's shift to how Blend is operating in this environment and why we think we're in a good position to continue executing on our growth thesis despite the current market volatility. There are two important indicators, one internal and one external, that we watch closely to monitor our progress. An important pillar in the Blend growth thesis is our ability to acquire and retain customers. In Q1, we reported gross revenue retention of 98%, roughly in line with our 99% in Q4, and market adjusted net revenue retention of 159%, up from 147% in Q4. Our unique differentiation is our focus on delivering a full platform solution that accelerates the digital transformation process for our customers. This platform solution, coupled with our business model, positions Blend to build relationships rooted in a shared journey of growth with our customers. Externally, a key leading indicator is our customers' increased investment in digital transformation automation. Investing during downturns positions companies to gain market share and come out stronger on the other side. For banks and lenders, getting stronger is about investing in improving the customer experience and driving efficiency. Technology is the most effective, scalable way to do that at a lower cost with a clear ROI. Our platform is designed to achieve that goal, allowing customers to significantly improve their profitability and be more competitive. This is especially vital in a downturn when margins tighten. Shifting to how we're executing our long-term growth thesis, we feel very good about the key indicators for long-term growth at Blend. We are focused on the following three growth areas. First, helping our customers be more efficient through fully integrated software. Second, delivering the best possible experience for our consumer banking product lines. And third, being the platform that powers the end-to-end value chain in home ownership. Let me talk about these three in more detail. Starting with efficiency, on the heels of the market reset, we've heard from our customers about the need to standardize their process and become more operationally efficient. Margins are very tight. Based on surveys that we've commissioned, customers that run their loans through the Blend platform realize an average return of investment of 6.5 times the dollars they spend, saving almost 12 hours per loan. This means that increased usage of Blend software drives additional benefits and is a big reason we're seeing our platform segment remain strong despite the steep decline in mortgage volumes. On top of that, our investment in products like BlendFastTrack, which will clear loan conditions automatically using technology before a human touches it, will help drive our customers' cost of production down. This creates more value for our customers and thus more revenue for Blend. Many customers have told us that they intend to accelerate investment in automation. When I talk to mortgage executives, the number one topic I hear on a daily basis is driving efficiency in their operations. That enables them to stay competitive, grow market share, and ultimately offer lower cost products to their customers. Now, shifting to consumer banking. Thank you. Outside of Home Equity and BlendBuilder, we are partnering with Wells Fargo, empowering their next-generation rental payments reward credit card application through a company called Built. By delivering a seamless digital experience and streamlined application process for their customers, we processed a significant amount of applications within the first 48 hours, showing the flexibility and scalability of our consumer banking solutions while helping our customers become more efficient through the use of technology. Lastly, we're continuing to invest in being the end-to-end platform that brings together all the components of the homeownership lifecycle. This is a win for everyone. Consumers get a single platform that seamlessly ties together components such as income verification, approval, home insurance, title, and closing. And lenders get more efficiency as the system automatically orchestrates these events and manages the data flows. This helps keep their costs down, which is very important in this time. When we add a value like this to our customers and consumers, this drives them to be more successful. And given our success-based pricing model, it also drives more revenue to blend. Providing the end-to-end journey is not just important for the reasons I mentioned. It's also what will be required for lenders to remain competitive now and in the future. Leveraging our software solution gives lenders the ability to have a superior offering while keeping costs down and driving an exceptional experience. This is the promise of technology. To summarize, with an industry-leading platform, a growing roster of customers well-positioned for the next upturn, and increasing revenue diversity as we bring more customers live on consumer banking and marketplace offerings, we are in an excellent position to drive digital transformation at a time when institutions need it the most. Lastly, I want to talk about our capital management strategy. As we discussed in our last call, we are moving to adjust our cost structure to meet market realities, without jeopardizing our primary goal of continued investment in the Blend platform. As a first step in this effort, we reduced our headcount by approximately 10% in April. The reductions were primarily within Title 365, where our needs are significantly lower given current market and certain G&A functions. We expect to begin seeing the cost benefits of this action in the second half of the year, We believe that decisions like this will allow us to emerge from the current environment stronger and even better positioned to achieve our vision. Building on the workforce reduction, we are doing a comprehensive review to align our cash consumption and market realities near-term, while charting a clear course towards stronger product and operating margins that will lead to Blend having long-term profitability. Our plan will include looking at ways to improve our cost structure, such as improving our product margins, increasing speed of deployments, and better managing our spend internally. We also continue to monitor title volume and adjust our cost structure as market conditions warrant without jeopardizing our customers' or consumers' experiences. With all that being said, we are taking a long-term view as our role as a preferred technology partner for financial institutions. We are continuing investments in our platform, helping our customers be more efficient, delivering the best possible experience for consumer banking, and powering the end-to-end value chain in homeownership. we are executing a disciplined approach to our capital allocation strategy while investing in key growth areas that I highlighted earlier. To that end, we plan to provide an update on our plan next quarter. As our plans are finalized and implemented, I'm confident you'll see a company well-positioned to deliver on its mission, to bring simplicity and transparency to financial services, and to do so in a way that creates substantial value for shareholders. I know we have a lot of work to do, but we are energized to attack it. While market conditions are challenging, we believe the current period could be accelerant for industry transformation. Just as COVID drove faster digital adoption in consumer and enterprise markets, a significant mortgage reset may also drive accelerated investment in digitization as operational efficiency becomes a driver for long-term success. Wrapping up, I want to thank our customers for their engagement with Blend through these tough times for them, and our investors for supporting us as we position the company for long-term growth and value creation. And I especially want to thank everyone at Blend and the team here for their hard work, resilience, and dedication to the mission. I'm grateful for all your efforts and excited for the journey ahead. Thanks, and now I'll turn it over to Mark.

Thanks, Nima. Hopefully everyone on the call has had a chance to review our release. I will go through our release in the following three categories. First, I'll provide color on our Q1 performance, including how we are performing in the early part of the current mortgage cycle. Second, I'll cover our recent and planned cost management activities as part of our broader capital management strategy. And last, as our release notes, and Nima has touched on earlier, we reiterated our 2022 revenue outlook today. I'll comment on that as well and how we see trends unfolding for the rest of the year, and then we'll get to your questions. Let's start with the highlights from Q1. Blend reported consolidated revenue of $71.5 million above our guidance range of $63 to $66 million provided on our Q4 earnings call. The higher than expected result can be attributed primarily to better than expected blend platform performance, both in mortgage and consumer banking marketplace, and lower than expected year-on-year decline in Title 365 revenue for the period. Blend platform segment revenue was approximately $32.8 million, up about 3% year-on-year against our expectations of a modest decline. And Title 365 segment revenue was approximately $38.7 million, down almost 13% from the fourth quarter of 2021 against an anticipated 20% decline. It's important to note that at the time of the Q4 earnings call, we had solid funded loan data for the first two months of Q1. Given both significant predicted declines in mortgage lending by Fannie and the MBA and expectations of Fed interest rate actions, we were anticipating a pronounced decline in refinance activity beginning in March. However, that refinancing cliff was pushed out several weeks into Q2, and as such, we saw a sustained volume of refi closings that benefited our Q1 results more than we had initially expected. In addition, our customers' purchase mortgage volumes were slightly ahead of our forecast, reflecting the underlying quality of our customer base and the strength and resilience of our market share. To put some further context around mortgage banking performance, our Q1 revenues were down 16% from Q4, compared to an estimated 29% decrease in industry mortgage volumes. Year on year, our Q1 mortgage banking revenue was down 7% against a 44% market decline in origination volume. This demonstrates that we are continuing to make progress in our goals to increase our market share, including both new customers and wider adoption with existing customers. As illustrated in our supplemental slides, we estimate our customer share of U.S. mortgage industry volumes increased to just under 25% in the second half of 2021, up from 23.5% in the first half of 2021, and from 16.7% in the second half of 2020. This includes a higher utilized market share north of 15% in the second half of last year, with nearly another 10% of committed but not yet utilized capacity. So we're continuing to make good headway and taking share with substantial TAM still available to us. Q1 included an important new deployment in March and also included ramping of volumes and other select customers. Shifting to consumer banking and marketplace, we achieved revenue of $7.2 million in Q1, up significantly from $4.6 million in the prior year period. We highlight that total consumer banking transactions grew by more than 100,000 transactions year on year to approximately 155,000 in Q1. We saw a significant increase in deposit account, personal loan, and home equity transactions in Q1 2022 relative to Q1 2021. It's also worth noting that home equity revenue increased modestly over the prior year, and this continues to be an area of opportunity given the current lending environment. Rounding out the revenue discussion, Blend recognized a little over $1 million in professional services revenue, up from approximately $800,000 in the prior year first quarter. As a reminder, professional services revenues are tied to product deployments. These revenues are lower margin and generally non-recurring. Moving to gross profit, Q1 non-GAAP gross profit was approximately $29 million, up from $21 million in the prior year period. Current period non-GAAP gross profit includes a little under $19 million attributable to Blend Platform and a bit north of $10 million to Title 365. These figures are net of cost of revenue of approximately $43 million, about two-thirds of which relates to the addition of costs associated with Title 365, which we did not own in the prior year period. Blend platform segment cost of revenue increased $3.3 million with early investments in Blend Title and increases in delivery, hosting, and connectivity expenses. Non-GAAP operating expenses for the first quarter of 2022 were slightly under $69 million compared with slightly under $40 million in the prior year, reflecting higher personnel costs and sales commissions associated with our expanding teams focused on development, marketing, and sales of new and existing products, as well as the addition of costs from Title 365. Keep in mind that our OPEX structure compared with prior year now also includes expenses associated with operating as a public company. In April, as Nima highlighted, we announced a workforce reduction of approximately 200 positions or 10% of our then current workforce. The eliminated positions represent annualized compensation expenses of approximately $35.4 million. The reductions were predominantly in Title 365, where our needs are reduced both due to anticipated lower refi volumes near term and our migration of legacy Title 365 customers to blend title. we also eliminated other operating expense positions with a focus on certain corporate G&A functions. This savings will incrementally reduce our cash needs beginning in Q2. However, before considering additional cost reduction measures that we plan to implement, our quarterly OpEx run rate is expected to trend in line with Q1 levels. This run rate includes a ramp in headcount related fixed expenses incurred in late Q3 and Q4 2021, prior to our reduction in 2022 revenue guidance. We've made our first meaningful step towards aligning our operating structure with a rapidly evolving market environment. We look forward to updating you on our comprehensive review process that Nima highlighted when it is complete. Now turning to our balance sheet. Our cash, cash equivalents, and marketable securities at March 31, 2022 were just under $500 million, with total debt outstanding of $225 million on our five-year term loan. Our $25 million revolving line of credit remains undrawn. I'll wrap up now with our outlook. Our full year 2022 revenue guidance provided in our Q4 earnings call is unchanged. That guidance reflects expectations of between $230 and $250 million in consolidated revenue in 2022, with between $140 and $150 million in the blend platform segment, and between $90 and $100 million in the Title 365 segment. Note that the mortgage markets are volatile and uncertain, and if industry forecasts move materially lower, we may need to appropriately adjust our guidance at that time. The blend platform segment guidance reflects expected mortgage banking revenue decline in the high single to low double digits with a more pronounced 41% industry volume decline that we share with you today. Meanwhile, as a reminder, our anticipated 2022 consumer banking and marketplace revenue reflects triple-digit growth from full-year 2021 levels, which includes the transition of revenue from the Title 365 segment as customers transition to the Blend platform and the Blend Title solution, as well as contributions from other consumer banking and marketplace products. Wrapping up, 2022 is off to a solid start in a very challenging environment. A growing market share in mortgage banking is leading to significant performance against pronounced industry declines while we're seeing solid consumer banking and marketplace revenue growth as more customers adopt our platform and our new products. We've begun taking meaningful actions to prudently manage our expenses as we navigate the current downturn while not sacrificing the investments that will enable us to drive and create value from the digital transformation of the financial services industry. Thank you again for joining. Crystal, we're now ready for questions.