Blend Labs, Inc.

Good afternoon and welcome to Blend's fourth quarter 2022 earnings conference call. My name is Winnie Ling and I'm head of legal for the company. Leading today's call are Nima Gamsari, co-founder and head of Blend, and Amir Jafari, our new incoming head of finance and administration. Our outgoing head of finance, Mark Greenberg, is also with us. After Nima and Amir deliver their prepared remarks, our team will take questions. You can find the supplemental slides on our investor relations webpage at investor.blend.com. During the call, we'll 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 Blend and its operations, in particular its guidance for 2023, may be considered forward-looking statements under federal securities laws. The company cautions you that forward-looking statements involve substantial risks 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-Qs, and other SEC filings. We're 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, Winnie. 2022 was an extremely challenging year for our industry, as we continued to see a sharp uptick in mortgage rates and margin compression for our customers. we at Blend were not immune to the industry volume declines, which naturally impacted our financial performance. While the results are disappointing in the absolute sense, our total revenue was within the original guidance we laid out last March, when no one knew quite how historic the mortgage origination downturn would be. It's important to note that despite these challenges, we continue to outperform the broader mortgage origination market in 2022, which points to the significant value we deliver through any part of the market cycle. The technology that powered our customers and drove productivity during the high volume pandemic boom is the same technology that is helping our customers improve their speed, efficiency, and ultimately their margins today. Outside of mortgage, we've also continued to see traction with our builder enabled consumer banking products, which grew by mid double digits in Q4 versus the same period last year. I'm also proud to share that in Q4 2022, Credit One Bank signed deposit accounts that takes advantage of the drag and drop capabilities of our builder platform. We're also pleased to expand our relationship with Compere Financial in Q4 2022, who is rolling out with our builder enabled personal loans, credit cards, and specialty products. We believe the power of our builder platform could accelerate this growth rate in 2023, as we focus on putting the power of composable origination in the hands of our customers. Even with all this momentum, we remain realistic about the challenging and uncertain macro environment, and you'll hear us talk more about some of our ongoing cost management efforts, which are intended to align our cost structure with our outlook. Before diving into that topic, as well as where we are focused in 2023, I want to welcome Amir Jafari to the team. He's off to a flying start since joining earlier in the quarter and will play a big role in helping orchestrate Blend's continued evolution into a platform company as we advance our strategy around the builder platform. I also want to thank Mark Greenberg, who's here with us today, as well as Tim Myopoulos, who stepped down from his management role a few weeks early to assist with the FDIC's recent efforts to protect insured depositors at Silicon Valley Bank. Tim will remain on Blen's board. This has been a real team transition and it's been great to see everyone so invested in our success. Lastly, we recognize the events of the past week have had significant impact on our industry, and we will continue to monitor the situation. While this is obviously a unique and dynamic time for the industry, we're staying laser focused on what's in our control, which is to continue supporting our customers and executing our business strategy. So that brings us to 2023 and how we're executing. This year, we're focused on three goals that I discussed in January, and I want to talk briefly about the early momentum we're seeing with each. First, we're focused on accelerating our path to profitability by reducing our cost structure. I'm pleased to affirm that we're executing well on our cost reduction targets and have line of sight to surpassing our previously stated net operating loss reduction objective. In Q1 2023, we'll see the full benefit of the cost cutting actions we took last year. And across 2023, we expect to see ongoing improvements in our expenses from the actions we announced in January. Amir will share more on the progress we've made so far. Over the course of the year, we will continue to be disciplined with our expenses and our focus around initiatives that are absolutely critical to our business strategy. Our second area of focus this year is to continue to deliver outstanding value to our mortgage customers. We know that our mortgage customers and the loan officers using our product value simplicity and efficiency above anything else. This is especially important in this market environment where shopping times have lengthened and costs of lending have increased. Our mortgage offering continues to lead in driving best-in-class, self-directed experiences for borrowers while automating multiple steps of the lender process to reduce the cost of origination and lower pull-through times. An ROI study of Blend's customers conducted by MarketWise Advisors in Q4 2022 showed that our mortgage solution helped increase transaction speed by 37%, which in turn drove a 34% increase in closing rates. In a tight, purchase-driven market, the speed from initial contact to closing is a critical value driver for our customers, allowing them to convert more borrower leads into loans. Market-wise determined that using our technology resulted in savings of over $630 per loan, an increase of over 40% since the prior study was conducted in 2021. Simply put, our mortgage solution is expanding our customers ROI over time. And so this year, we're focused on making sure our customers are fully utilizing the rich portfolio features already available to them. I'd like to call out a few highlights that point to the early momentum there. Adoption of our LO toolkit grew across all 10 features in Q4, and we see that trend continuing in Q1. We also sold a combined 17 new income and close deals in Q4 2022 and Q1 of this year. Stickiness and deepening relationships doesn't show up in the P&L right away, but strengthens our position for the long term as origination volumes recover. Last, but definitely not least, in 2023, we plan to drive adoption of our Blend Builder platform. We've been evolving our platform over the past three years to enable composable origination, a new capability that financial services firms have wanted for many years that enables us or them to easily configure custom workflows from a set of modular components. Financial services firms are already able to achieve composable origination through our pre-built consumer solutions like instant equity, deposit accounts, credit cards, and eventually they'll be able to build their own custom solutions using the builder platform. We're also working to make our mortgage offering available on the platform and all of our future offerings that we can become the platform as a service company that we aim to be. And we already have a few limited builder powered features available to some of our mortgage customers, including a Spanish language intake form, which helps our customers serve their Spanish speaking borrowers. So whether through a pre-built or custom solution, it's this level of flexibility and composability that allows our team at Blend to deliver product updates on a frequent basis, all while helping our customers quickly and easily bring product ideas to life and introduce unique experiences and lower resignation costs through simplified workflows. And when our customers win, we win. This is the kind of innovation that is driving the mid-double digit growth in our consumer banking revenue. So just as our customers benefit from the speed, flexibility, and innovation from our platform, Blend benefits from the growth, predictability, and incremental margin that comes with it. In Q4 2022, we introduced a platform fee for the Blend Builder platform that will generate regular recurring revenue for all consumer banking deals. Over the next year, we aim to put the power of our builder platform in the hands of our customers. Earlier this week, we hosted this first of several events introducing composable origination to our customers and prospects. We're pleased with the early reception and encourage everyone on this call to visit blend.com slash platform to learn more. To wrap up my remarks, in 2022 and year to date here in 2023, we have accomplished a lot of heavy lifting and moving Blend closer to realizing our vision for the banking industry. Ultimately, we are building a business to last not just through this difficult cycle, but for many decades to come. And we've taken important steps to enable us to get all the way there as a sustainably growing and profitable business ultimately. Now I'd like to hand it over to Amir to recap the quarter this year and our outlook.

Thank you Nima and good afternoon everyone. On today's call, I will cover our financial results for the fourth quarter and full year 2022. I will also provide an update on our progress to optimize our cost structure and accelerate our path to profitability. I will discuss the changes we expect to make to our disclosures in order to align our financial discussion as we continue our evolution as a platform company. I will conclude with our outlook for Q1, including a few insights on cost actions you saw from us in January. Please note that all figures referenced in our results are on a non-GAAP basis, unless otherwise stated. We provide our reconciliation to comparable GAAP metrics alongside the earnings release we posted to our website prior to this call. As Nima explained, the industry we operate in has been facing incredible challenges. In 2022, interest rates increased at a faster pace than any time in recent history. Stickier-than-expected inflation and the threat of a looming recession worked in combination to dampen confidence, delaying decisions regarding borrowing and home ownership for many consumers. Between Q4 2021 and Q4 2022, industry-wide refinance volume declined by nearly 90% as the rate environment worsened. total mortgage origination in Q4 was less than a third of the volume we saw in the same period last year. This represents a truly remarkable decline in activity. Against this market backdrop, our business continue to make investments in our lending products to improve experience, efficiency, and access to financing, all while giving the lender the right set of solutions to enhance their own productivity and reach as many borrowers as possible. in january we announced additional cost reductions and efficiency initiatives that combined with the swift actions we already took in 2022 across our business are expected to reduce blend's annualized cost of revenue and operating expenses by over 100 million on a non-GAAP basis exiting calendar 2023 from what we reported in Q3 2022. We are making great progress on these efforts and I'm confident that we'll be demonstrating continued expense improvement quarter by quarter through 2023. Diving into the full year results, our total company revenues in 2022 were $235.2 million, within the original guidance we provided at this time last year, when industry forecasts of mortgage volumes were more than 20% higher than where they ultimately landed. We credit this performance to a number of factors. Our mortgage business continued to gain market share, increasing by 510 basis points on a blend funded volume basis between the end of 2021 and the first half of 2022. We demonstrated strong gross revenue retention at 97% for the fourth quarter. We feel this metric demonstrates the need of our product during all phases of the mortgage cycle. We grew wallet share with existing customers through cross-sale of ROI-positive add-on products like income and clothes, and aligning our pricing at renewal with the incremental value we've delivered through continuous product enhancements. We also credit this growth to our investment in our consumer suite of solutions. As an example, home equity behaved counter-cyclical to the broader decline in mortgage activity and benefited our results this year. We are seeing the right ROI and customer demand in a suite of solutions which are consistent with our platform journey. We believe this position blends well to become a leader in the space and continue to provide better revenue diversification against mortgage market cyclicality. Our blend platform segment revenue was $132 million, down 3% year-over-year. Within our platform segment, our mortgage banking revenue declined by 23% year-over-year in 2022 to $83.4 million. Amidst the 56% mortgage market volume decline over the same period, our consumer banking and marketplace revenue totaled $44.2 million in 2022, an increase of 91% as compared to the prior year end. this increase includes 10.2 million software enabled title revenue that has migrated to the blend platform looking at our fourth quarter results our platform performance reflects that a steeper than expected decline in mortgage origination activity compared to our prior expectations we expect this to carry forward into q1 2023 given the timing between lower q4 application activity and the timing of loan funding when we recognize revenue Closing up the revenue discussion, we recognized $4.4 million in professional services revenue in 2022. Moving to gross profit, Blend non-GAAP gross profit was approximately $91.7 million, down from $116.7 million in the prior year, impacted by lower mortgage origination activity Our blend platform aggregate gross margin in 2022 was 54%. However, excluding software-enabled title and professional services, our gross margin was approximately 73%. Despite the market headwinds, we remain focused on providing value to our customers, not just through the cross-sell of add-ons like close and income verification, but with our core mortgage product itself. As Nima shared, as we enhance our core mortgage product, the ROI we deliver increases incrementally. we continue to align our price at renewal with the incremental value we deliver. To this point, in Q4 we executed more than 75% of available renewals at higher rates, which on average was 14% above the prior funded loan pricing. Non-cap operating expenses for the fourth quarter totaled $58.1 million compared with $73.9 million in the prior year. The decrease reflects our continued progress in resetting our cost structure to support our path to profitability. While we have started to achieve sequential reduction in our expenses in 2022, as we have mentioned in prior calls, we will begin to show the full benefit of last year's actions in the current first quarter. Our Q4 operating expenses were generally in line with our expectations, other than a few accounting-related adjustments that impacted G&A expenses. Our non-GAAP loss from operations was $43.1 million versus $38.7 million in the prior year, reflecting both the G&A impacts and lower revenue. While macroeconomic conditions remain challenged, our goal to reduce our quarterly non-GAAP net operating loss by 50% to $20 million per quarter by the end of 2023 year remains unchanged. We are at the beginning of our platform journey, We are committed to meeting and beating the targets we reaffirmed in January and will continue to manage the cost structure to align with our path to profitability. Now turning to our balance sheet, our cash, cash equivalents, and marketable securities as of December 31st totaled $354 million, with total debt outstanding of $225 million on our five-year term loan. Our $25 million revolving line of credit remains undrawn. We have ample runway and liquidity based on our current outlook. As always, we will continue to be opportunistic when it comes to improving the strength of our balance sheet. I'll shift now to how we expect to shape the discussion of our financial and operating KPIs as part of our evolution to a platform company. First, beginning next quarter, we'll be modifying our revenue presentation in a couple of weeks. As our consumer suite matures, it warrants a separate presentation in our discussion of financial results. We plan to accomplish this by including all of our consumer banking products, which include deposits, home equity, and personal lending products such as credit cards and personal loans, as well as our platform subscription access and a single consumer suite line item. During Q4, our consumer suite revenues were a significant driver of organic revenue growth. and we expect this to continue in 2023. In mortgage, we will begin consolidating revenues from our marketplaces and add-on products like income and clothes into a single mortgage suite line item. This move reflects our focus on expanding relationships with our mortgage customers by including the incremental dollars we gain on mortgage fundings from our marketplace products. In addition to the refined revenue reporting, we are also refreshing the metrics and KPIs we report to reflect how we're managing the business and to enable you to better track our progress as our platform strategy comes to fruition. First, consistent with our planned mortgage revenue presentation, we will be measuring our per funded loan rate inclusive of the incremental dollars we earn from products like income and clothes. Currently, I know many of you calculate our implied mortgage rate for funded loan by taking our mortgage revenue and dividing it by the number of mortgage transactions we report. Generally, this is an indicative measure of the rates we charge for our mortgage-only product, though I'd caution there are some gap adjustments to our revenue related to longer duration contracts, as well as the tiered element of our transaction pricing that both influence this calculation. To illustrate, doing that simple math implies we achieved $71 per loan in Q4, which is an increase of 10% from the same period last year. including the add-on products, would have added another 20% to our per-funded loan rates in Q4. Including all products utilized in the mortgage funding process better reflects how we view our earnings from the same loan across our platform. In 2023, we expect to expand this rate further as we increase adoption of our feature set and add multiple touchpoints on our platform for the same loan. The second KPI change is that we have retired our net retention calculation. This is the one change we are making effective immediately. It has become clear that the inherent market volatility has made this measurement challenging to calculate within our mortgage transaction-based business model. We also understand it may be less helpful to the investment community given the backward-looking nature of the metric and a highly cyclical market. Additionally, next quarter we're going to be retiring our consumer banking transaction counts as we focus on driving customer adoption of BlendBuilder. Our pricing model for Builder will include both subscription and activity-based consumption fees, and as such, transaction counts are no longer the best way to measure our success. Finally, across the full business, we will continue to report our gross retention. Gross retention was 97% for the fourth quarter, reflecting the stickiness of our product, albeit with a small decrease related to smaller mortgage customers consolidating or closing their operations. On the same point, given recent headlines, I wanted to share that Blend does not have any affiliation with or direct exposure to Silicon Valley Bank or Signature Bank. Blend works with a diversified network of banking partners to ensure that our business operations remain resilient even during uncertain times. We will continue to monitor the situation and take the necessary steps to maintain the security and stability of our business. We recognize there are a number of changes here. Our team has worked through this carefully with the objectives of ensuring our analysts and investors have the right disclosures to monitor our progress as we continue our evolution towards becoming a platform as a service company, as well as to simplify our story for everyone. I'll wrap up now with a discussion of our near-term outlook. While we continue to make great progress on the elements of our business that are within our control, the market we operate in remains highly uncertain. Industry outlook for 2023 mortgage origination volumes remains more than 20% below 2022 levels and nearly one-third of 2021 volume. Recent uncertainty around the pace of rate increases and the staying power of a higher interest rate environment clouded the outlook for the year. We have already seen volatility in mortgage application activity during the first quarter as rate optimism and pessimism oscillate. Based on this, for the time being, we are going to be guiding on a quarterly rather than annual basis. We'll revisit that approach as the industry conditions clarify. We expect platform revenue to be between $24.5 and $25.5 million in Q1 2023. We expect our title business revenue to be between $8.5 and $9.5 million. Our total company revenue outlook is expected to be between $33 and $35 million for the quarter. Our Q1 outlook reflects the most recent available industry forecasts, which indicate that Q1 will be the mortgage origination low point for the year. Also note, as I mentioned earlier, that the drop-off in application activity in late Q4 implies lower completed loan fundings in Q1, and this is reflected in our outlook. Should industry forecasts for originations hold for the year, we believe that our platform business would be poised to return to sequential growth in Q2 and each subsequent quarter thereafter in 2023. I would note that our 2023 outlook doesn't reflect any significant new blend platform deals. So new customer activity would provide potential upside. Our total net operating loss is expected to be between 37 and 39. This range includes a 72 million decrease in annualized run rate operating expenses from Q1 2022. We expect to see sequential improvement in our operating loss and believe our Q1 operating loss outlook has us on track to surpass our net operating loss reduction target for the year. I'm also happy to share that I expect Q1 will be the last quarter of our net operating loss carrying a three-handed. As Nima shared, continued mortgage and overall lending market volatility impacts our visibility into the revenue recovery. However, we set our longer term path to profitability with an extended downturn in mind. And because of this, we remain confident in the commitments we have made. It's only been a little over a month since I joined, and I'd like to share my perspective of what I have seen to date. We have an incredible customer base that we have historically served through a single application. We are now able to execute on a platform strategy with Builder being used by our customers to drive digital transformation through a composable origination platform. This brings to fruition our vision from day one as the leading banking platform. This evolution will continue to bring us closer to our customers while also improving our unit economics and free cash flow. Our vision and focus internally on our existing mortgage customers remains paramount. Builder allows us to add new buyers, for example CTOs, and increases our mind share with our existing customers while allowing us to land new logos across an array of financial products. To support our customers, we have incredible people across all of our teams. We will double down on efficiency and velocity through the lens of operational excellence to increase the financial leverage of our spend, providing a clear path to profitability. 2023 will be a pivotal year for Blend as we focus on execution and setting the stage for our next phase. With that, let me turn the call back to Nima for his closing remarks.