Blend Labs, Inc.

Good afternoon and welcome to Blinn's third 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 Blinn, Tim Myopoulos, 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.blinn.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 laws. The company cautions you that forward-looking statements involve substantial risk and uncertainties, 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 Nima.

Thank you, Crystal. We achieved revenue of $55.4 million this quarter in a market environment that has continued to get more challenging. We grew our blend platform segment revenue modestly by 3% year over year to $36.1 million, despite a 63% decline in industry mortgage volumes from Q3 2021 to Q3 2022. according to the Mortgage Bankers Association. Three primary factors drove our performance. First, the migration of software-enabled title revenue to a blend platform as we fully integrated Mr. Cooper onto the platform. Second, the strength of our performance in mortgage banking and related revenue relative to industry volumes. And third, roughly 50% growth in consumer banking and marketplace revenue excluding software-enabled title. Our mortgage banking and consumer banking marketplace performance reflects continued execution of our strategy. We are driving increased share of industry lending volumes, achieving higher pricing per funded loan, doing a great job of retaining customers, and leveraging product expansion to increase wallet share and utilization of our platform. Against the backdrop of the largest annual mortgage resignation declines in 30 years, I'm really pleased to see our strategy working, and we believe we are setting up for long-term success as lending conditions improve. Despite this mortgage industry volume decline, today we've narrowed our guidance range for 2022 revenue to $235 to $240 million within the range we laid out back in March. As our outlook demonstrates, we've executed our strategy through challenging headwinds. We're able to make progress because we've remained focused on what's within our control, specifically our customers and its growth, product growth, and our cost structure. Let's start with our customers. The headlines are that we continue to grow market share while maintaining strong retention levels and improving our pricing. Our gross revenue retention was 98% this quarter, roughly in line with recent quarterly trends. This reflects our ability to retain our customer base even with a modest offset from attrition of smaller independent mortgage banks, a number of which are facing unprecedented challenges to their businesses. and we continue to deepen our partnership with our customers. Our market adjusted net revenue retention rate increased to 190%, up from 164% last quarter. This is due to the following reasons. One, our ability to cross sell consumer banking products and mortgage add-ons like income and close. Two, our ability to secure price increase on contract renewals due to increased value in the platform. And three, new marketplaces like software enabled title. Our strategy is to continue to go deeper with our customer base and create more value per unit for every one of our customers. These retention metrics support the fact that our customers are not only staying with us, but they're also adding more products and growing with us. We've seen over 80% of our Q3 mortgage renewals occur at higher rates in Q3, while the remainder remained flat. This pricing uplift during a time of decreased volumes, budget constraints, and pressure on operational efficiency is possible only because of the value we continue to deliver and the need for these organizations to lean more heavily on technology during these times of margin compression. Now let's dive a little deeper on market share. Our market share of total funded mortgage originations in the first half of this year approached 20% for the first time. This achievement in a declining mortgage origination volume environment is a good indicator that we're aligned with customers who are well positioned to weather the downturn. In a depressed origination environment, it's expected that smaller, less capitalized firms will either shut their doors or merge with others to survive. And we expect more consolidation in the industry going forward. Over the last couple of quarters, notwithstanding the tough environment, we've continued to grow market share across banks like PNC and continue to increase adoption among credit unions. like Schools First and Oregon Community Credit Union. With member first mindsets, we want the latest technology to deliver the best in class experiences to those members. Schools First signed on as a customer last month for our mortgage and home equity solutions. Schools First is the fifth largest credit union in the United States with 27 billion in assets serving more than 1.2 million members. Oregon Community Credit Union came on board in September. OCCU has more than 3 billion in assets and currently serves more than 250,000 members. As banks and lenders seek to provide a full suite of services and deliver a seamless experience for their consumers while focused on operational efficiency, they come to blend. And we are focused on delivering the value they need in this environment because we believe the lenders who will emerge from this downturn even stronger are the ones who are investing in and adopting new technology. Shifting to consumer banking marketplace, we continue to diversify our revenue streams even in this cycle. Our consumer banking and marketplace revenue has grown significantly, as I noted at the outset, driven by the transition of Mr. Cooper to software-enabled title by integrating them into our platform, along with home equity and personal loan growth. This quarter, over a third of our customers use one or more of our consumer banking products. As noted, we've also seen significant growth in the number of transactions year over year as customers begin to ramp up their volumes on Blend for these consumer banking products. Let's turn now to our product growth, the second area under our control. At the end of Q3, 75% of our customers use multiple product lines, reflecting an increase from 62% a year ago, a great validation of the broad platform we are building to transform the banking experience for our customers and the consumers they serve. Our eClose, home equity, and income verification solutions continue to be popular add-ons. We also continue to innovate on products with high potential ROI, like our new instant home equity solution that we launched in September. Home equity represents a huge opportunity for lenders, but unlocking that opportunity has been far from straightforward. A typical home equity loan flow involves more than 30 steps, and time to close can be more than 45 days. Our instant home equity solution makes this source of funds much more accessible, enabling lenders to reach many more people and ultimately drive more revenue, all at a reduced cost. Mountain America Credit Union is the first signed customer, very quickly after our launch, and is expected to roll out over the next year. I believe products like Instant Home Equity are important to the future of Blend for three reasons. First, we believe the future of finance is real time, delivering value to consumers in ways that they didn't even know was possible instantly. Instant Home Equity is a prototypical example of that. Within seconds, the consumer knows their approval status because our platform does so much of the heavy lifting behind the scenes. Second, Instant Home Equity is packaged as a fully vertically integrated solution with a bundled pricing strategy. This solution includes our base platform offering, as well as add-ons that we've been investing in, such as income, close, title, and more. By combining these features, we not only offer a better real-time experience, more operational value to the lender, but also more revenue to Blend. Lastly, all of this is powered by Blend Builder, which we've been developing under the hood for the past few years. Blend Builder is our unique platform that allows us to design and configure products in shorter timeframes, we drag and drop the major lending components instead of writing significant amounts of code. We started developing Instant Home Equity several months ago and delivered our first version faster and cheaper than was previously possible. Over time, Builder will be a source of continuous innovation for Blend and our customers and operational leverage for Blend and our customers as well. All of that being said, our biggest business is our large mortgage customer base. Many of these are independent mortgage banks who are navigating economic uncertainty. And the rest are banks and credit unions who have been loyal mortgage customers and are considering or are currently using Blend in other parts of their organization. First and foremost, we must make sure that our mortgage customers are successful, happy, and continuing to get even more value out of Blend going forward. This is especially important as efficiency becomes front and center for them in a new margin environment. Technology can help automate and create productivity for their users and processes. For them, our strategy is twofold. Over the last two years, we've invested heavily in those productivity features that can drive benefits to their organizations. We've said many times that the downside to the recent rapid volume increase and subsequent decline in mortgage volumes led to them being too busy to invest in new capabilities for the future. Now that has shifted. We are focused on getting all of that functionality that we've developed live and generating real value for our customers. The Blend Builder opens up a new paradigm for the long-term. As a reminder, Blend Builder is that low-code, no-code platform I described around home equity. This can give them more efficiency, more automation, and an even more modern platform long-term, which continues to make us the long-term bet for those banks and lenders. We aren't ready to move our mortgage product to Builder yet, but we are investing in the underlying capabilities right now to ensure we can deliver this to our customers for the future. We believe that doing this will continue to allow us to have strong retention and growth within our customer base, both in the short term and the long term. And now more than ever, we are focused on making sure that our customers love Blend and come out the other side of this mortgage volume decline stronger than ever through the use of technology. Now turning to the third thing in our control, our cost structure. Last quarter we outlined a plan to reduce our non gap net operating loss by 50% by the end of 2023 and execution is underway. With our release today we announced a further reduction in our headcount primarily within our title business following the substantial headcount reductions we made in April and August. We will continue to evaluate the scale and scope of our title operations and seek to right size this business as the market environment evolves. We also set targets for our key operating expense lines as a percentage of revenue, G&A, sales and marketing, and R&D. Those targets remain intact, and we are making progress against them. Mark will talk more about that later. Bigger picture, the goal is to get the blend of profitability, and that's where we're focused. We have a strong customer base, a great product, growing market share, and the leading platform to drive digital transformation. We will do whatever is necessary to manage our capital and exercise discipline with our cost structure through the current downturn in service of building a profitable company for the long term. Lastly, while we remain focused on optimizing our cost structure, we do not want to sacrifice the innovation we're building towards transformation. For example, our platform offering, Blend Builder, has been years in the making and will play a key role in enabling us to meet those goals in an efficient way. It was created in-house, and the Instant Home Equity offering described earlier is the first substantive new product that's come out of Builder. This was developed end to end, vertically integrated in months instead of years. Because building on this platform is primarily drag and drop instead of code, imagining new solutions like instant home equity requires significantly fewer engineers to build and manage. This creates operational leverage for us, as well as increased speed of delivery for our customers. Blend Builder will help us get to the target of high teens to low 20s in R&D as a percentage of revenue as described last quarter without sacrificing the most important items on our innovation roadmap. With that, I want to thank everyone and turn it over to Mark to talk through our financial strategy.

Thanks, Nima. Good afternoon, everyone. I'll walk through our financial results and I'll provide context in the following order. First, I'll start with a recap, including how we are performing in this market cycle. Second, I'll expand on Nima's comments surrounding our efforts to reduce our cost structure as part of our broader capital management strategy. And last, I'll provide context around our guidance update. and how we expect to see trends unfolding for the rest of the year. Then we'll open it up for questions. Let's start with the highlights from Q3. Total revenues for the quarter were $55.4 million. Blend platform segment revenue was $36.1 million, slightly up by 3% year on year. Title 365 segment revenue was $19.3 million. Within Blend platform, Our mortgage revenue declined by 27% year-over-year in Q3 to $19.9 million amidst a 63% mortgage market volume decline in the same period. Our consumer banking and marketplace revenue totaled $15.3 million this quarter, up from $6.6 million or up 132% as compared to the prior year period. This includes $6.1 million of software-enabled title revenue that has migrated to the Blend platform. Year-on-year, total non-mortgage-linked consumer banking transactions grew by approximately $145,000 to approximately $229,000 in Q3, driven by additional home equity and personal loans, as well as credit cards and deposit account openings being processed on our platform. Closing up the revenue discussion, we recognize $865,000 in professional services revenue. Moving to gross profit, Q3 non-GAAP gross profit was approximately $21.6 million, down from $40.6 million in the prior year period. Current period non-GAAP gross profit includes $19.8 million attributable to Blend Platform and $1.8 million to Title 365. Our change in gross profit is primarily the result of a lower contribution from our mortgage business, as well as lower order volume and unfavorable product mix within our title business. In this quarter, our platform margins reflect the migration of software-enabled title revenue, which is contributing lower margins. Our blend platform non-gap gross margin for the quarter was 55%, but if we exclude the effect of the migration, our blend platform gross margin would have been in the mid to upper 60s, up from the low 60s in Q2 22. The improvement is being driven by a combination of our focus on managing cost of revenue and layering in higher per funded loan pricing as we execute on our customer contract renewals. In the medium term, we remain committed to managing our entire platform business to the low to mid 60 percentage range, inclusive of software enabled title, as we improve margins in that area of the business. Non-GAAP operating expenses for the third quarter totaled $58.7 million, compared with $61.7 million in the prior year. The decrease reflects our continued progress in rightsizing our operating model for the current market environment. Our non-GAAP loss from operations was $37.1 million versus $21.1 million in the prior year. NEMA highlighted our focus on our cost structure, and I want to fill in some details regarding early progress. Overall, Our non-GAAP quarterly operating expenses are down from Q2-22 to Q3-22 by approximately $7 million and Q1 to Q3 by over $10 million. The Q2 to Q3 progression includes just over $4 million per quarter in lower G&A, $1 million in lower R&D, and just under $2 million in sales and marketing. While macroeconomic conditions remain challenged, our goal to reduce our quarterly non-GAAP net operating loss by 50% by the end of next year remains unchanged. We are still in the early days here and our progress will not be linear, but we are committed to meeting the targets we laid out in our last call and will continue to manage the cost structure to align with market realities. Earlier today, we announced that we further reduced our headcount by just under 100 positions mostly within our title business reflecting anticipated lower origination and refi volume for the rest of the year and into 2023. As rates have continued to rise this year, since May, we have in aggregate eliminated nearly a quarter of our beginning of the year head count, totaling over 500 positions, including the elimination of backfills. These actions combined are expected to yield $69 million in annualized savings. As stated in our last call, We expect the bulk of cost savings associated with our workforce reductions executed over the course of the last several months to materialize starting in Q1 2023. As Nima mentioned, we will continue to evaluate the scale and scope of our title operations and seek to right size this business as the market environment evolves. Looking ahead, the strategies we're executing on include offshoring certain functions, focusing our resources on products that contribute to near-term ROI, driving down vendor spend, and reducing supporting headcount. Now turning to our balance sheet. This quarter, we also recognize an approximately $57.9 million non-cash gap charge to reflect the impairment of Title 365 goodwill and intangible assets, driven by a decline in the fair value of the Title 365 reporting unit. As a result of this and the impairment charge recognized last quarter, the goodwill and intangible assets have now been fully written off. Our cash, cash equivalents, and marketable securities on September 30th totaled a little over $400 million. Our $25 million revolving line of credit remains undrawn. I'll wrap up now with 2022 guidance and our near-term outlook. We continue to make good progress on the growth drivers that are within our control amidst a challenging macro environment. Based on our year-to-day performance and current projections for the fourth quarter, we are narrowing our full year 2022 revenue guidance. We now expect annual blend platform revenue of between $134 and $136 million and Title 365 segment revenue of between $101 and $104 million. This brings our full year 2022 consolidated revenue guidance range to between $235 and $240 million within the range of $230 to $250 million originally provided in March 2022. Our outlook reflects the strength of our product and our execution for our customers during an historic mortgage origination downturn. For perspective, at the time we issued our 2022 guidance in March, industry forecasts called for a 35% decline in origination volumes versus the 56% now predicted. We've remained within our original forecast range throughout this period. Although economic conditions remain highly uncertain, our blend platform revenue expectations reflect lower expected mortgage volumes offset somewhat by continued growth in consumer banking and marketplace revenue, including the migration of software-enabled title revenue. With that, let me turn the call back to Nima for his closing remarks.

Thanks, Mark. The macroeconomic environment is out of our control, but something we are approaching prudently. And we are doing so by adapting the things that are within our control. And to recap, what we're focused on is, one, our execution within our customer base, two, our ability to deliver not just one, but a suite of products on a platform to our customers, And three, our ability to decisively manage our cost structure. We are managing the business to weather the cycle and come out stronger on the other side. We're planning for mortgage industry unit volumes to remain at or near historic lows through 2025. And we're doing this all in a way that allows us to continue to innovate because one thing that we all know is true, the banking industry will continue to transform and that transformation is driven by technology. to deliver real-time experiences that will benefit consumers and financial institutions alike. With that, thank you again for joining. Crystal, we're now ready for questions.

Thank you, Neiman Mark, for your remarks. We'll now turn to Q&A. Our first question comes from David Unger from Wells Fargo. Please feel free to unmute and go ahead.

Hi, can you hear me? Yes, we can. Sorry about that. Retention ratio. It's improved by a lot, you know, meaningly to 190%. I'd like to know how that compared to your expectations coming into the quarter. And, you know, baseline for that, what's what's reasonable to think going forward. Thank you.

I think part of the reason, this is Nima, thanks for the question. Part of the reason for that was the way that that's calculated, which is described in the disclosure, is the total revenue from customers this year compared to last year adjusted for volumes. And there's more detail in the disclosure on that. And so as we add more add-ons, it tends to be pretty chunky sometimes with customers where if they add a new big add-on, like software-enabled title, for example, that number will jump. And we always expect our market-adjusted net revenue retention to be high as long as we're investing and adding new add-ons and growing within our current customer base and helping our customer base adopt new functionality. But sometimes it'll be lumpy like this.

Our next question comes from Michael Ng from Goldman Sachs. Please feel free to unmute and go ahead.

Hey, good afternoon. Thank you very much for the question. I just have two. first, could you talk a little bit more about your expectations for OpEx and cost savings? Is the 4Q OpEx a good run rate to think about as we go into 2023? Or do you think you could see further cost reductions? And then second, I was just wondering if you could talk a little bit more about some of the costs related to the platform migration. It was helpful to get the context about the mid to upper 60s extra platform migration? Are those really one time in nature? And when should we see, I guess, platform migration costs come off? Are we through that now? Thanks.

So thanks, Michael. So in terms of OPEX, we continue to look across the business and make sure that we're investing our time and our energy in the right levers. You saw what we did again this quarter. Our headcount is down 25%, nearly over 500 positions since the beginning of the year. So we're continuing to right-size the business. Some of those savings still are yet to be seen in the run rate. It does take time for that to play in. But if you look at Q1 to Q3, it's down $10 million in OPEX. I think Q2 to Q3 is down $7 million in OPEX. And then in terms of the title and cost of revenue, obviously, some of that is variable to the volume that we're doing. But others, we continue to look at vendor spend and opportunities for us to optimize offshore and right-size the business overall. And then your second question. The gross margin. Oh, the gross margin. From the title perspective, sorry, the software-enabled title, it's early days in that business. So we're making some upfront investments in the costs associated with software-enabled title. But overall, that's something we're confident in the overall blend platform gross margin that'll be in the low 60s, as we've reiterated.

And just to add one thing to what Mark said there, the methodology that we're using to drive margins is add more value to our customers. And that is what substantiates any sort of additional price per unit they're willing to pay us and drive down our cogs. And we have certain parts of our cost of revenue that are, and that's what's driving some of the improvements that you saw from Q2 to Q3 that Mark remarked on.

Next question comes from Ryan Tomasello from KBW. Please feel free to unmute and go ahead.

Hi, everyone. Am I coming through okay? Yep. Hey, Ryan. Hey, everyone. Thanks for taking the questions. Just based on some comments from other mortgage service vendors out there, it seems like the depressed volume environment is starting to trickle down into headwinds into the sales environment. given the focus on profitability and I guess the distraction of volumes. Have you seen any noticeable change there in appetite from clients or at a minimum any elongation in sales cycles? And then regarding the customer low account, apologies if you hit on this earlier in your prepared remarks, but it looks like that declined just a bit sequentially. Just any specific color you can provide around the drivers there? Thanks.

Yeah, I'll hit the second one first. I did talk about it in my remarks, but just to reiterate, smaller independent mortgage banks in particular are the ones struggling. They're less well capitalized. And so we expect some of those to consolidate, whether it's through acquisition or if they go out of business or cut things that they can't afford anymore. And so that's typically where we're seeing our turn, actually all of our turn in that quarter is coming from that. Now, one thing I would add there is that gross retention is how I look at our overall churn as a business. And we've maintained very high gross retention above 98%. So we aim to continue to do that. And some of that will just be continuing to focus on our existing customer base, making sure they're getting more value from our product and platform. And the fact that technology can help transform them and be successful in this new margin environment is not a small thing. I mean, they need this technology and we want to be the ones to continue to provide it to them. I guess that's your second question. Longer sales cycles. I think on the mortgage side, we're definitely watching the market and the sales cycle. My particular focus is serving our existing customers first and foremost in mortgage. We do have some new customers in the pipeline and some customers we announced even this quarter. Schools First is a very large credit union. OCCU is a very large credit union. Those are marquee names in the credit union space. And then adding to that, the diversification of our revenue. We do have non-mortgage products that are very in demand. In particular, credit card and deposits are something that we're hearing a lot from our customers. And we have great products for that. And Builder is a good foundation for those things. And so we're making sure to serve our existing customers first and foremost and continue to drive additional products to our customer base as they need it.

Next question comes from Matt Stotler from Williams Blair. Please feel free to unmute and go ahead.

Hi, thank you for taking the questions. Maybe just kind of a two-parter for me on the consumer banking side of the business. So you noted, you know, I think 8.7 million increase year over year. Just over six of that was from Mr. Cooper. We'd love to, you know, just kind of get some color on, you know, what you're seeing in terms of adoption outside of that customer and thoughts on the pace of further adoption there. And, you know, kind of the second part of that question would be obviously where we're going through the cycle on the mortgage side. Are you seeing the current macro uncertainty having any impact on volumes on the consumer banking side as well? Thank you.

So on the other aspects of why the consumer banking marketplace grew, you know, some of it was add ons like income. verification blend close the digital closing solution home equity lending is not an add on but it's an additional product that's grown and personal loans have also grown for us. And all those product lines we're working off of a pretty small base and we've grown, as you can see, year over year but. The volume impact to that, if we're seeing it in the market, it's much smaller than the opportunity ahead of us. I mean, we're very lightly penetrated in that consumer banking marketplace space. You've seen how much it's grown year over year, and we're investing heavily there to continue to grow that business.

Next question comes from Robert D. from Truist. Please feel free to unmute and go ahead.

Great, thanks so much for taking the questions. Yes, this is Robert Dion for Terry Tillman. Just starting off here, can you provide us with an operational update on offshore operations supporting the title business in India? How is that transition going? And then I have one follow up, thanks.

Sure, so Title 365 came with offshore operations that were already happening in India. So we've been investing in those offshore operations and we think it's a critical part of our strategy going forward.

Great. Thanks. And then just as a quick follow up, can you provide a little more detail around the pipeline of customers who have signed but have not yet deployed? And how does that pipeline look versus 2Q? Thank you.

I don't have the exact numbers compared to 2Q, but we still have material. regional banks and smaller banks that have signed and then have not yet rolled out or in the process of rolling out that number is in our disclosure in the percent that's not tapped part of it is that part of his usage within our customer base and so we still have material opportunity there you can see in the disclosure that some of the untapped volume has come down since since the last I guess the last disclosure on that, and that's just a function of we're rolling out our customers that have signed, and typically the last quarter or last half of the year is when we sign new customers like Schools First and get them rolled out in the back half of the year.

Next question comes from Maddie Strange from KeyBank. Please feel free to unmute and go ahead.

Hey guys. Yeah, this is Maddie on for Josh Beck. I was just wondering if you guys could talk about the demand appetite that you're seeing specifically with any differentiations between your size of customer and how you're thinking about it budgets going into next year. Thanks.

I would say across the board, especially in the, the, In the mortgage space, a lot of the demand is around how do we drive more productivity and more automation? And so some of the add-ons that we have can drive that. And that's all sizes of customers, but in particular, the larger ones and the banks that are taking a multi-year view at this. And then on the other products in the consumer banking marketplace, Probably the biggest demand we're seeing in terms of IT budgets are home equity lending, deposits and credit cards. And I would say all sizes are investing and figuring out how to digitize those areas. There's not just one size, but we are in particular, I spend a lot of time on the road with some of the larger customers, making sure that I'm hearing what they're saying and they're hearing what I'm saying and what we're building. And we see a lot of appetite to continue to digitally transform their organizations. It is top of mind. I had a call today about that with one of them. And so it's top of mind for them and they know they have to do it and they want to have the best software platform to do it with. And that's Blend and particular Blend Builder as a key centerpiece of that.

I think that was our last question. The conference has now concluded. Thank you all for your participation. You may now disconnect your lines.