Blend Labs, Inc.

Good afternoon and welcome to Blend's second quarter 2023 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 head of finance and administration. After the prepared remarks, our team will take questions, moderated by our investor relations lead, Brian Michaleski. 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 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 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.

Thanks, Winnie, and good afternoon, everyone. Our second quarter results exceeded expectations for the second quarter in a row, demonstrating continued progress on our strategic priorities. Even amidst a tough market, we are deepening wallet share with our mortgage customers and our Blend Builder platform, a key driver of our growth strategy, is gaining traction, unlocking efficiencies and speeding time to revenue for both us and our customers. And with that, we're accelerating on our path to profitability. We outperform the top end of our total company revenue guidance, owing to strong performance in our mortgage suite of services, as well as our growing revenue diversification as we begin to deploy our builder-enabled consumer banking product lines to more customers. I'm also encouraged to see this translate into a pipeline of nearly 40 opportunities between our mortgage and consumer banking products, even as market conditions remain dynamic. In Q2, we saw this increase as our customers began to crystallize their budgets for the upcoming year, keeping our sales efforts in full swing. So far in 2023, we've deployed 18 consumer banking products. This translated into strong results from our blend platformer segment, which also exceeded the high end of our prior guidance, and we improved our software margins meaningfully quarter over quarter on top of that. We have also taken significant steps to streamline and improve how we operate as a company, and we are seeing these savings show up in our results in a meaningful way. As a result, in Q2, we surpassed the 50% operating loss reduction target we set last year, and we did it two quarters ahead of our original goal. This is a testament to our focus on execution, regardless of the operating environment. On top of that, there's more work being done on the efficiency side, which you may have seen from our additional cost reduction announcement effective today. We also achieved two sequential quarterly reductions of non-GAAP operating expenses since the start of the year and have lowered our expense rate by nearly $100 million on an annualized basis since this time last year. We did this all while maintaining the high quality of service and support our customers expect from Blend, and we're just getting started on leveraging the efficiencies that Blend Builder can provide us. To wrap up the highlights, we know that executing well in the current environment will pay dividends as market conditions improve. We have a great customer base that continues to grow, and we continue to expand those customers' use of our products, all the while Blend Builder is live and enabling our customer success. With that, let's cover our three company priorities for the year and how we're progressing on our mission to bring simplicity and transparency to financial services. Let's start with our first key strategic priority, which is to support our mortgage customers through a very challenging period. Mortgage rates are at 23 year highs and origination volumes are sobering as a result. This is a real headwind for our customers and for Blend. But we aren't planning around a recovery. We are planning to be profitable in this type of environment. That leaves us with two things in our control on the revenue side. One is helping our customers grow market share by getting the most value they can out of our core product. And the second is providing a creative add-on to drive even more value per unit to our customers and more revenue to blend. And we're seeing that play out in practice in our customer base today. First, many customers who leverage our technology to power their businesses continue to outperform the broader mortgage resignation market, and as a result, they are taking more market share. We only report market share biannually due to lag in the metric and the timing of the measurements of the industry size, but you've seen us grow there. And because we continue to roll out new value add features like soft credit pulls and our Spanish language intake form and things like condition sync, which drive efficiency, our customers largely renew with us with more value and at higher prices. On top of that, our add-on products such as BlendClose and BlendIncome deliver meaningful improvements in cost and time to close rates. Especially in a margin pressure environment, these gains are front of mind for mortgage customers who want to deliver the highest quality experience at the lowest cost to their customers. And in aggregate, these things ultimately are reflected in our growing mortgage rate revenue per transaction, which increased to $93 in Q2 from $77 in the same period last year. So while short and medium term macro headwinds persist, we're focusing on what's in our control, driving adoption and utilization growth of our value add features, maintaining strong retention and growing our mortgage market share, all while continuing to set the foundation for our next generation mortgage products on the builder platform. But this is only one of our bright spots, which leads me to the second big priority for the year, growing adoption of our builder enabled consumer banking products. In 2023 alone, as I said earlier, we've deployed 18 consumer banking products and 25 since Q2 of last year. And we're already seeing revenue growth from these rollouts in our consumer banking suite revenue. In addition, our customers are interested and they see the value in Blend Builder. We have an active backlog of over a dozen projects underway, which will continue to drive incremental growth as these go live and ramp over time. And while we continue to see market environment lengthening our sales cycles, the level of pipeline that we see gives us a high degree of confidence in the long-term outlook for Blend and Blend Builder and our ability to transform the banking space. And just as our builder platform generates value for our customers, there are also several other positive outcomes for our business. I'll let Amir cover this in more detail, but overall, we are seeing the benefits that a platform model has in improving the stability and diversification of our revenue profile and lengthening our customer relationships with us as they make longer and larger commitments. And that will become apparent in our growing remaining performance obligation. In all, over the past decade, we became a leader in innovation, establishing a stronghold in the mortgage market, winning leading market share with quality financial institutions, and expanding across the entire consumer banking portfolio, all while developing and strengthening the transformational Blend Builder platform that will propel our mission forward. And now, as we enter our next chapter, in which we shift from building to deploying, we are in a position to leverage the efficiency of Blend Builder to deliver more innovation per dollar for our customers, which brings me to our third priority, our path to profitability. Now that Builder is scaled across many of our customers and is our primary internal development tool for new products, Blend is foundationally set up to be more efficient. we can innovate on Builder and order magnitude faster and with marginal costs. As a quick example, one of our larger long-time clients in the unsecured loan origination space came to us with around 40 new feature enhancement requests as they try to navigate a complicated macro. We scoped the work to add this to our original platform, and those 40 features would have taken six or more months to do across multiple people to implement. In addition, some of the requests were specific to that client, making it difficult to support because we have a standardized product. And so overall, this path would have taken significant resources and cost and led to a less than happy client. Fortunately, we had already been in the process of migrating that client to our builder platform, and we scoped the 40 enhancement requests on the new platform ahead of that go live. Not only were many of these features simple configurations, but the ones specific to that client were handled by our professional services team as configurations in their unique environment, allowing us to keep our gold standard products to be standardized while offering the customer the flexibility they need. This meant that the entire request list or almost the entire request list could be done in weeks and at a much, much lower cost. Our customers can be more successful, happier, and at a lower cost with Blend. In short, Builder allows for a fundamental shift in our operating model. It has been a big investment to get here, but the leverage it gives us sets us up well for the next decade. So what does this mean practically? Well, today we announced a few key changes in support of this to further accelerate our path to profitability and make the most of that platform. First, this ability to build products faster and cheaper allows us to deliver more innovation per dollar that we spent. and we have tightened our research and development spend going forward as a result. We believe we can do this without sacrificing innovation, and in fact, in some areas, increase our pace of innovation in new product development. And as a side note for investors, please come to our investor day in September, which is directly after our customer conference, Blend Forum, where we'll be announcing some new products. But we aren't stopping there. We're also reducing and focusing our sales and marketing spend around the Blend Builder platform and the related mortgage investors for our customers. We know sales efficiency matters and the market's tight, and we're paying very close attention to how we spend our sales and marketing dollars and making sure we get the best ROI. And this overall simplified organization as a whole has meaningful effects on the required corporate support in our general and administrative functions, leading to further lowering costs in those areas. But while the reductions we are announcing today are sizable, they are targeted to the areas I just mentioned. And importantly, there are certain areas we're not touching. For example, our customer support and customer success teams are largely remaining intact and in some cases growing, because we want to be responsive to customers who are navigating a very complicated macro situation. And professional service and integration are very important to work through the backlog of customer rollouts, which drive more value to them and more revenue to Blend. I also want to address our title business. We have achieved a number of goals with this business over the past couple of years by digitizing key parts of the title process. We have also significantly improved the cost structure and operating model for title for turning it to positive gross margins despite record low volumes. With the steps we've undertaken to date, including today, we are on track to return the title business to positive non-GAAP operating profit contribution within the next several quarters. This is now a more sustainable business for us with operating leverage potential as the refi market ultimately returns. We remain committed to our title business and our customers. And as a result of all of these efforts across Blend, we're even leaner and more focused today. We expect that these actions will further accelerate our path to profitability, and we expect those savings to start materializing in our bottom line in Q3. And because of our overall long-term foundational investments with Blend Builder, we believe we can not only be profitable with this expense base, but we can continue to innovate, grow our customer base, and our product suite, ultimately expanding our addressable market even further. Now, let me turn it over to Amir to talk through our key numbers for Q2 and our guidance for the next quarter.

Thank you, Nima, and good afternoon, everyone. I'm pleased to be joining you today to discuss our financial results for the second quarter. As Nima highlighted, we delivered another great quarter, executing ahead of our targets, both for revenue and non-gap operating loss. we are also continuing to take the necessary steps that allow us to both control our own future and ensure we achieve our long-term goals, including our path to profitability. As I jump into the results, let me just remind you that, unless otherwise stated, all results are non-GAAP. Total company revenues in the second quarter were 42.8 million, outperforming the top end of our outlook by 4%. We reported platform revenue of 30.3 million which was 8% ahead of guidance. We credit this outperformance to two dimensions. First, our customer base is demonstrating resilience in a tougher origination environment by gaining share in a market where volumes were a little better than we expected. Second, our customers are demonstrating faster adoption and go-live of Blend's add-on products. Similar trends are benefiting our consumer banking suite revenue as our backlog converts to new deployments reaching go-live at a time when the industry is seeing stronger than expected personal loan volumes. Our mortgage banking suite revenue declined by 17% year over year to $22.3 million, despite the origination environment declining 37% over the same period as measured by the Mortgage Bankers Association. As we gain traction with the customers through continued adoption of add-on products, coupled with the customer renewals and new logos, we are generating improved mortgage suite revenue per transaction. Our fee per funded loan rose to $93 from $77 in the same period last year. Our consumer banking suite revenue totaled $5.8 million in Q2, an increase of 27% as compared to the prior year period. This growth reflects new deployments and ramp-ups on the builder platform over the past year, particularly our home equity solution. We also generated $2.2 million of professional services revenue, up 10% from last year due to fees associated with consumer banking deployments. We reported title revenue of $12.5 million, in line with our expectation amidst a challenging refinance environment. Moving on to gross profit, total company non-GAAP gross profit was $23.8 million, down only 8% from last year against a 35% decline in total revenue. Non-GAAP platform gross margins improved meaningfully, reaching 74% compared with 61% a year prior. Looking specifically at Blend's platform performance, gross profit on a dollar basis increased 9% despite a 37% decrease in market origination volume over the same period. This is strong evidence that our software platform business model combined with the cost optimization and efficiency programs we've undertaken are materially improving our ability to generate incremental profits in a lower market volume environment. We also reported record non-GAAP software gross margins of approximately 81% in the second quarter, up from 73% for the same period last year. Our gross margin expansion reflects the benefit of increased higher margin consumer banking suite revenues, as well as the vendor optimizations we've implemented within our mortgage suite. Effectively, we are lowering the cost to power the origination of the same loan while delivering more value for customers through add-on products, which in turn is driving higher per loan funded loan rates. Q2 gross margin performance demonstrates that we remain well ahead of our target ranges for this year. While gross margins can fluctuate a bit quarter to quarter, partly due to the differences in timing of certain expenses, we expect 2023 will remain strong and we believe 80% is an achievable run rate for our software business by next year. I also want to point out the progress we've made evolving our professional services model to realize the benefits of the investment in our configurable platform. As more of our deployments shift to Blend Builder, we are deploying more efficiently, positioning us to drive industry standard gross margins from this line item. In our title segment, we made great progress this quarter to align the cost to deliver this service in a very low refinance volume environment. We achieved our goal of returning to positive gross margins in Q2 and have undertaken additional actions to further support our operating profitability goals for this business. As Nima mentioned, we've executed a business process redesign that focuses title on becoming a profitable entity that will operate sustainably and is ready for scale. Some of these undertakings include, first, reducing processing times by leveraging technology and workflow enhancements that translates to productivity gains measured by orders processed per associate. Second, implementing a flatter organization structure and reducing the span of control. and third optimizing our utilization of lower cost resources including our in-house offshore team we believe these measures will return title to positive operating profit within the next several quarters even with the current market conditions non-gap operating costs for the second quarter totals 41.6 million dollars compared with 65.3 million in the previous year we are delivering on our operational excellence goals at a faster rate than expected The actions we announced in January of 2023 are now fully realized. We successfully executed against every target as now evident in our financial results. At the same time, as we've directed more organizational effort towards our platform strategy, we also launched a deeper examination into areas where we felt we have more opportunity to drive incremental operational excellence. You're seeing that in the restructuring initiatives we announced today, which are expected to reduce our operating expenses an additional 33 million on an annualized basis. We're confident this was the right time to take these actions as we move expeditiously from Glenn's first phase to phase two. As builder deployments accelerate, we are structuring our operating model to support customer growth, rapid deployment, and outstanding service with the goal of achieving operating excellence across the company. Additionally, our builder platform enables us to continue our pace of innovation much more efficiently, serving both our mortgage and consumer banking customers. I want to reiterate a point Nima made here as well. The changes that we have made were designed to not have any impact on the level of service our customers expect from us or the speed at which we can deploy these solutions for them. We have always wanted to align our success with our customers, and this remains core to us as we enter the second phase. We believe these changes have put our business in a position to maximize value for our customers and shareholders as the market conditions improve. Putting all of this together, our non-GAAP loss from operations was $17.9 million versus $39.5 million in the prior year. This step function improvement reflects the velocity of our strategic actions, as I described a moment ago. This surpasses our $20 million net operating loss target for Q4 2023, two quarters ahead of the target we established this time last year. This achievement is a testament to our evolving operational focus and commitment to execution, regardless of the operating environment. This gives us strong confidence we are well on our way to reaching our next goal of becoming a profitable company next year. The business is positioned to benefit from higher revenue, better margins, and now much greater financial leverage. I'm encouraged that as performance optimization becomes core to our culture, we're finding new ways to do this better every day. This new culture and the ability to leverage the investment we made in our platform is what has enabled us to accelerate the achievement of the ambitious operating loss targets we established last year and drive us to profitability faster than we had initially thought possible. We are making an incredible amount of progress, and we are excited to share more details about how this informs our long-term outlook for Blend at our investor day in late September. Now turning to our balance sheet. Our cash, cash equivalents, marketable securities, inclusive of restricted cash, total $278 million as of the end of the second quarter. With the actions we've undertaken, we've remained confident our business remains well capitalized to reach our profitability goals, and we have ample liquidity based on our current projections in this macro environment. I also want to note that our remaining performance obligations topped 50 million this quarter at 53.2 million at the end of Q2. As we've discussed on recent calls, our business model is evolving constructively as part of our broader transition to a platform-first organization. Generally, as our customers add more products at renewal, they are increasingly entering into platform deals with longer and larger commitments. This strengthens the foundation of our customer relationships and importantly brings two primary economic benefits for Blend. First, we are increasing the stability of our future cash flows by adding a recurring SaaS-like fee while retaining the upside associated with our consumption-based model. Second, we believe this shift in payment terms should improve our overall free cash flow with more fees being paid in advance. We are at the beginning of this shift, and as we migrate to the platform model with more customers, you will see the growth in RPO and free cash flow benefits in our financial performance. We are encouraged by the stability of the business and the results we've seen to date. That said, industry and macro conditions related to the mortgage origination market remain highly uncertain, and that is reflected in our guidance for Q3. We expect platform revenue to be between $27 and $30 million in Q3 2023. We expect our title business revenue to be between $11 and $12 million. Our total company revenue outlook is expected to be between $38 million and $42 million for Q3. Our total non-GAAP net operating loss is expected to be between $17.5 and $15.5 million for Q3, with the midpoint representing an 8% sequential improvement from the prior quarter and a greater than 50% improvement year over year. We expect to continue to see sequential improvement in our operating loss through the balance of this year and believe our strong business performance and cost actions we've undertaken have accelerated us reaching our non-GAAP profitability goal earlier in 2024 than originally planned. With that, let me turn the call back to Nima for his closing remarks. Thanks, Amir.