Blend Labs, Inc.

Good afternoon and welcome to Blend's fourth quarter and full year 2024 earnings conference call. My name is Winnie Ling and I'm the head of legal and people for the company. Joining us today are Nima Gamsari, co-founder and head of Blend, and Amir Jafari, our head of finance and administration. After Nima and Amir deliver their prepared remarks, we'll open up the call for 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 results are not intended to be a substitute for GAAP results. Unless otherwise stated, all financial measures we discuss today, including our profitability, refer to non-GAAP. Also, certain statements made during today's conference call regarding Blend and its operations In particular, its guidance for the first quarter of 2025 and full year 2025 and expectations about our markets 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. With that said, I'll now turn the call over to Nima.

Good afternoon, everyone. Thank you for joining our earnings call. 2024 was a pivotal year for Blend, one where we sharpened our focus, delivered greater value to customers, and accelerated our path to sustained profitability as a leaner, more software-driven company. In Q4, we continue to strengthen that business. We welcomed several new customers, most notably a top 10 U.S. bank by asset size and PHH Mortgage, one of the nation's largest home mortgage servicers, who both signed multi-year agreements across our mortgage and home equity solutions. Our consumer banking business grew 42% in 2024, surpassing our 35% CAGR target as discussed at our 2023 Investor Day, with Q4 revenue growing 48% year over year, further establishing consumer banking as a key growth driver for Blend and essential for financial institutions modernizing account openings and consumer lending. Our solid revenue performance, coupled with disciplined expense management, is delivering tangible results now and generating momentum for the future. In Q4, we achieved 15% year-over-year total revenue growth, despite a challenging macroeconomic environment. We are our strongest quarter yet and posted a second consecutive quarter of non-GAAP operating income profitability with $5.2 million in Q4. And we're just getting started. Looking ahead, we see several strong tailwinds we believe will allow us to stay on offense and accelerate our plans as the market rebounds. As rates stabilize, demands for blend solution increase as financial institutions invest in technology to capture opportunities like refinance and home equity more efficiently. And we're seeing this moment in firsthand. Our pipeline is 50% larger than it was this time last year, giving us even more confidence in sustained growth. And with positive free cash flow expected in Q1, we have the flexibility to invest and to focus on driving more cost-effective innovation that attracts even more customers, expands our reach, and generates long-term value for shareholders. With that, I want to start by highlighting our progress in simplifying Blend and evolving into a software-centric platform. A big part of this shift is moving from building and managing everything in-house to partnering with specialized technology and operational providers externally. Historically, we've taken on the complexity of developing and operating products ourselves. With the launch and success of Builder and our desire to drive scale, we recognize the best way to drive high-impact, efficient innovation is to focus on our core origination platform while partnering with best-in-class technology and operational providers who are already leaders in their fields. By expanding our partner ecosystem, we're able to deliver superior solutions quickly to our customers on a single, flexible platform, while also improving our financial efficiency and greatly simplifying our business model. A great example is our homeowners insurance partnership with Covered Insurance Solutions. In just one quarter since shifting the homeowners insurance business from an in-house business to a partnership model, we have reduced our operational expenses more than the lost revenue impact, illustrating the benefits that the strategy can have here. Another example of expanding our partner ecosystem is our strategic partnership with TrueWork for verification of income. Rather than managing it ourselves, we're partnering with best-in-class providers to deliver a solution with better verification coverage that drives higher success rates for our customers. And that means our customers still get seamless income verification through Blend, but now powered by TrueWork's expertise and scale, while we get the benefit of greater efficiency and a revenue-sharing model. It's another move towards our platform-first strategy, expanding our ecosystem and driving stronger contribution profit per funded loan. Looking ahead, we plan to continue to open the platform to a wider network of partners with the aim to accelerate innovation and fueling our ecosystem's growth. As part of our ongoing simplification efforts, we recently signed an agreement with Mr. Cooper that extinguishes the put option they hold in connection with our prior acquisition of Title 365 and extends our partnership through 2028 with a meaningful commitment to each other. This agreement strengthens our relationship with our long-term partner, incorporates new features, and drives simplification of our business. Moving to our mortgage business, this remains a core part of our strategy and a key revenue drive. Despite macroeconomic uncertainty in 2024, we continue to strengthen our position by deepening relationships with existing customers and expanding our reach to more institutions. In Q4, we welcomed another major industry player with the top 10 largest U.S. bank in the nation by asset size and went live and blend in under 25 days, demonstrating the flexibility and scalability of our platform. We also signed seven new customers, renewed key contracts with existing clients, and expanded our product offerings with major institutions. These wins reinforce Blend's ability to drive long-term value for financial institutions of all sizes. We also recognize the unique challenge that independent mortgage banks face, from operational pressures to the need for greater branch-level flexibility, and that's why we're investing in providing access to the same great technology that top-tier institutions rely on to these smaller institutions. This quarter, we launched a dedicated business unit focused on delivering tailored technology to support IMBs, hiring Justin Van Hoosen, a mortgage industry veteran and former chief operating officer at Compass Mortgage, which is one of our customers, to lead this effort. With over 12 years of experience, Justin brings firsthand insight into what the IMBs need to succeed. As part of this initiative to better serve IMBs, we're also proud to offer new features, including branch-level configurations, increased disclosure functionality for loan officers, and enhanced hybrid closing offerings. These features, along with our core mortgage product set, are being packaged for IMBs. We have expanded our relationship with Cross Country Mortgage, the nation's largest retail mortgage lender, and are excited to collaborate on these new solutions. By democratizing access to the powerful solutions used by top-tier lenders, we're leveling the playing field, helping IMBs compete more effectively and deliver exceptional service to their customers. I want to take a moment to talk about competition. I don't usually talk about competition publicly because I believe Blend has a standalone in our merits. But this quarter was a turning point. We're seeing our competition falter. Succeeding in this industry is all grit. It takes a decade of ongoing focus, passion, and perseverance to truly succeed, and then it doesn't stop there. We've weathered the highs and lows, and we're still here, continuing to invest, innovate, and expand our position. And that resilience is driving some results. While we've seen some churn in the past quarters, which we discussed during our 2022 earnings calls, when there was a significant turmoil in the market, we also signed several large mortgage lenders in Q4. As these customers ramp up and start originating on our platform, we'll expect to offset that churn, further strengthening our market position. Our grit is why we continue to win, and that's part of why Blend was successful in Q4, and why I believe we'll continue to be successful in the future. Speaking of innovation, I want to highlight our rapid refinance solution, which became generally available yesterday. This launch is well-timed with our customers trying to capture refinance volume in the market with greater speed and flexibility. In mid-2024, declining rates triggered a surge in refinance volume, revealing significant pent-up demand. While a forecast suggests that the rate environment will remain largely flat with slight rate improvements, there could be successive mini-moves with each rate cut as we saw in 2024. It's critical in this environment that our customers retain borrowers and capture market share quickly. There are 7.2 million borrowers with rates above 5.5%, according to the ICE Mortgage Monitoring Report, and with purchase activity in 2025 expected to increase, we expect demand for refis in the future will continue to grow. We currently have three customers using the rapid refi solution. The first refinance types have been released to general availability, and as adoption accelerates throughout the year, we anticipate a positive impact on our economic value per funded loan. While our mortgage suite has been the cornerstone of our business, our consumer banking suite has emerged as a transformative growth engine. This area has been growing and outpacing our original projections. This represents a significant opportunity for Glenn to deliver even more value to our customers and their end users. In consumer banking, we're providing institutions with solutions that go beyond mortgage lending, including both consumer deposit account opening as well as tailored lending solutions. And we've seen these solutions deepen customer relationships and help institutions create seamless, modern banking experiences. Our efforts in this space are centered around innovation and scalability. By ensuring institutions of all sizes have access to robust capabilities, we're enabling them to compete effectively and grow alongside their customers. The deposit offering, along with our ability to offer tailored consumer lending modules within the same platform experience, provides our customers a differentiated experience. We believe the market opportunity is there and we have the tools and team needed to win. A part of our consumer banking suite revenue line is our home equity business. Building off the success of our flagship home equity product, we have developed a new rapid home equity solution that incorporates next generation speed into the home equity lending workflow. We have moved this to general availability and are thrilled about the potential this product can offer our customers. With nearly 100 total customers using our flagship home equity solution, including seven of the top 10 home equity originators in the country, we believe this upgrade represents a tangible ROI opportunity for our customers. Early results are showing 1.5x pull-through advantage and decreasing application to funding cycle times by at least 20%, as well as enhancing utilization of home equity lines by consumers for debt consolidation. At Blend, our customers are at the heart of everything we do. Whether through our mortgage suite or our consumer banking suite, we work to enable our customers to meet that evolving need that the consumer has with confidence and agility. Our approach is rooted in listening to our customers and understanding their unique challenges. We are committed to developing solutions that our customers and prospective customers provide seamless, intuitive, and personalized experience for their end users. From streamlining loan processes to enhancing consumer banking transactions, our platform is designed to empower institutions to stay out of the pack. The deals we closed in the fourth quarter and our natural expansion of product adoption within our customer base are setting us up for a strong year. We also feel great about the health of our pipeline, which is now 50% larger than this time last year, and we expect to invest in our sales and marketing function during the year to continue our momentum and capitalize on that pipeline. As we look at the 2025, we're continuing to embrace the opportunity to shape the future of Blend with clarity and discipline. While we remain focused on balancing innovation with financial discipline, we acknowledge that the path forward requires us to be both agile and intentional in addressing the challenges and opportunities ahead. We expect to continue to make progress in all areas of our business, but a new initiative that I'm excited to talk about is how we plan to incorporate AI into our platform and solutions. Right now, mortgage resignation is extensive and a very manual process. costing lenders around $12,000 per loan. And that's largely because many steps still require human input, reading documents, taking data off the documents, and doing simple calculations. But that's starting to change. AI is already making a big difference, helping streamline key steps like identity verification, cutting down on manual checks, and making fraud prevention stronger and more efficient. We estimate that AI can automate up to 90% of the process of what banks and credit unions do today to serve their customers. At Blend, we see an opportunity to help lenders take advantage of this shift in opportunity, and we're already doing that by embedding AI into our core banking processes. One example is our Dock AI solution, which is transforming post-closing operations for lenders. By automating document validation, flagging discrepancies, and streamlining verification, it not only improves accuracy, but also significantly reduces manual workloads. This means lower operational costs, faster loan processing, and ultimately a more scalable and efficient lending model, key drivers of long-term value for customers. As we continue to scale, our focus on delivering immediate efficiencies for our customers while laying the foundation for more personalized, intelligent experiences in the future. To lead this effort, Srini Venkataramy joined us in Q4 to drive safe, scalable AI across all our products. We're excited to keep pushing AI forward and we'll have more updates to share throughout the year. During that time, we'll continue to double down on our core growth areas, such as mortgage, IMB, consumer banking, and our rapid products. We believe these represent transformative opportunities for Blend and our customers, and at the same time, we're committed to refining our operations to ensure sustained profitability and build a foundation for long-term success. While we believe our near-term guidance reflects the measured approach in light of the current macroeconomic environment, we remain confident in the strength of our strategy and the value we are creating for our customers and our shareholders. We expect to achieve our next major financial milestone of becoming free cash flow positive in the first quarter, which we expect will enable us to invest back into the business expand our sales and marketing organization to capitalize on the growing pipeline and continue to develop new products. We plan to do this while maintaining profitability in the face of these challenging macroeconomic conditions. From here, we'll talk about this more, but we are paying close attention to our rule of 40 for our platform business. We define this as our year-over-year revenue growth plus our non-GAAP operating margin. Our vision is bold, but it's rooted in the proven success of our platform-based strategy and the trust we build with our customers. Together, we're creating a future where financial services are not just more accessible, but truly transformative for the institutions and individuals we serve. With that, I will turn it over to Amir to walk through the financials.

Thank you, Nima, and good afternoon, everyone. I'm pleased to be joining you today to discuss our financial results for the fourth quarter of 2024. Our fourth quarter marks another period of strong execution, and you can see it in our results. We've continued with another quarter of year-over-year revenue growth, Our consumer banking business continues its acceleration. We made significant progress on our mission to simplify Blend, and we set new records for RPO and operating profitability. There's a lot to discuss, but let me just remind you that, unless otherwise stated, including our references to profitability, all results are non-GAAP. We made another announcement around the simplification of Blend that I'd like to dive into first. As we continue to simplify Blend, we have partnered with TrueWork, which Nima mentioned earlier. We expect this partnership to provide greater verification of income capabilities for our customers and allows us to further simplify Blend by moving certain operations to our partner, thereby freeing up internal resources that can be directed elsewhere in the business. This partnership will enable us to expand the product scope while still participating in a portion of the revenue stream, but with the expanded profit to Blend. Going into 2025, we are focused. We have conviction in our short and long-term goals and plan to continue to execute We are taking strategic action as a way to maintain and improve the profitability of our business and deliver scale for the future. We continue to execute toward our mission of becoming a platform for all financial institutions. Now let's get into the numbers. Total company revenues in the fourth quarter were $41.4 million ahead of the midpoint of our guidance and representing 15% year-over-year growth. We reported platform revenue of $30.1 million ahead of the midpoint of our guidance and representing 16% year-over-year growth. Our mortgage suite revenue was $18.2 million, representing 6% year-over-year growth. We were cautious with our guidance of the mortgage industry last quarter and expected volatility and are happy with our results in the face of this challenging macroeconomic environment. Our view is that our core growth in Q4 is at or above the mid-20s year-over-year, as measured by price times units. As a comparison, Our recurring customer growth, which normalizes for churn, grew in the mid-30s as measured in units. These customers have historically grown in line or faster than the market. This implies the market grew somewhere in the mid-30s year over year. The discrepancy between our core growth and its implied market growth is primarily a function of the churn notices we received in 2023 that were realized in 2024, which we talked about in past earnings calls during the market turmoil of 2023. As the market stabilized, our notice of churn in 2024 was down significantly, and the logos we have announced in Q3 and Q4 of 2024 have yet to meaningfully contribute to volume. Our pipeline going forward continues to be strong. These factors give us confidence in the future of our mortgage business. In consumer banking, revenue grew 48% from Q4 2023 to a total of $9.5 million. For the full year, revenue grew 42% ahead of the 35% compounded annual growth rate target we shared at our investor day in 2023. We also generated $2.5 million of professional services revenue, up slightly from the $2.3 million we generated during the same period last year. We reported title revenue of $11.3 million ahead of the midpoint and near the high end of our guidance for the quarter. Moving on to gross profit, Total company non-GAAP gross profit was $25.1 million, up 26% from the same period last year. Our non-GAAP blend platform segment gross margin was 75% compared with 71% for the same period last year. We reported non-GAAP software gross margin of 79% in line with the same period last year. Over the long term, we maintain our expectations that the software business will be generating at least 80% margins, Our non-GAAP title margin came in at 21% for the fourth quarter, compared with 15% that we reported the year prior. Non-GAAP operating costs for the fourth quarter totaled $19.9 million, compared with $33 million in the previous year. We continue to benefit from the efficiency programs implemented over the past year and our commitment to simplifying the business as part of our Platform First strategy. We improved our efficiency as we continue to simplify our business and focus on increasing our margins. Along with continuing year-over-year revenue growth, we expanded our non-GAAP operating profitability in the fourth quarter. We reported non-GAAP operating profitability of $5.2 million, significantly beating the high end of our guidance, improving by $18.3 million from the same period last year, and setting a new record for Blend. With an operating margin of 13%, we are well on our way to achieving our investor-a-day target range of 15% to 25%. We believe this is an important turning point for Blend. We are focused on building a sustainable growth business that allows us to reinvest and generate significant shareholder value. Even in the midst of a very challenging macroeconomic environment, we are very proud of our accomplishments and the fundamentals of our business. Free cash flow for the quarter was negative $7.2 million, which compares to negative $20.8 million in the same quarter last year, an improvement of $13.6 million. We ended the quarter with approximately $106 million of cash, cash equivalents, and marketable securities inclusive of restricted cash and no debt. We believe the strength of our balance sheet is also a differentiator in allowing us to focus on achieving our strategic initiatives and continue to innovate across the financial industry. Shifting gears to some of our key metrics. In the fourth quarter, our remaining performance obligations landed at $123 million. This is another record for Blend. It represents an increase of $28 million, or 30% compared to the same period last year, when RPO was $95 million. This marks the seventh consecutive quarter where our RPO balance increased year over year. RPO in the fourth quarter also grew sequentially, with the balance increasing by $16 million, or 15%, compared to the third quarter of 2024, as we've closed a number of important renewals and new deals. As part of our simplified blend strategy and software-first initiative, we are expanding our focus from solely measuring economic value per funded loan to begin measuring the contribution profit per funded loan. Contribution profit per funded loan is the gross profit of a loan less the direct expenses. Our announcements today are made through the lens of increasing contribution profit per funded loan. As we turn to our discussion of economic value per funded loan, we will start describing the impact of the decisions on contribution profit per funded loan and our business. Our mortgage suite economic value for funded loan declined sequentially to $96 compared to $99 in the third quarter. This decline was expected and driven by the sale and partnership of our homeowner insurance business, referred to as our HOI business. The sale and partnership of our HOI business is an example of a declining contribution to economic value for funded loan, while drastically improving our HOI business contribution profit for funded loan by 1.7 times. This aligns with our strategy to monetize our platform and focus on pure software-centric applications. We've launched a dedicated line of business focused on the independent mortgage banks. We built several new features that continue to differentiate our solution, and more importantly, have already been adopted by IMB customers. This initiative requires catering our solutions specifically to IMBs across the country, which come with a different product package and price point. As we target this customer base, we are focusing on winning logos and getting these customers in the door. These new relationships typically begin with a single product skew and expand their product scope over time. As such, this results in a lower economic value per funded loan. However, we anticipate significant market share growth in this area, increased logo wins, and ultimately will drive a higher contribution profit per funded loan over time. Our strategic partnership with TrueWork for income verification will also have an impact and lower economic value per funded loan over the year as our customers transition to using the platform feature. This partnership will improve efficiency by moving the operational workload to TrueWork while also providing automation in our verification of income process. Ultimately, this will lead to a higher contribution profit per funded loan over time. As we continue to simplify BLEND, we want to provide a very clear outlook for our economic value per funded loan over the year starting with a new baseline. The new baseline for our economic value per funded loan will be $94 starting in Q1 2025. The decline is attributed to the IMB customer base that we are targeting and moving our operations to a partnership model with TrueWork. Despite the decline, these are changes to the business that we view positively as it underscores our focus on simplicity and we believe it will lead to a more profitable business. We expect this metric to return to the high 90s to exit the year as we expect to see an additional uptick of our overall close attach rates with a shift to more hybrid and remote online notarization, as well as the ramp of rapid refi throughout the year. We reaffirm our long-term economic value for funded loan of 170 that we shared with you at our investor day in 2023. Currently, our top five customers by economic value for funded loan have a weighted average economic value for funded loan of $177, showing a path to achieve this target as our customers fully utilize our platform and we expand with new products. This is a positive point in Blend's journey. We've demonstrated our ability to generate leverage as we have simplified blend and executed on our partner ecosystem and platform-first business model. We will continue to execute against our goals, cross-sell our products, and drive operating profit, which we expect to result in further improvement to our business. We are accomplishing these actions at a very low level of activity in the mortgage market and are setting up the business for success at scale. Let me move on to our outlook for the first quarter of 2025. Our guidance is based on the internal assessment of customer level growth, as well as our own outlook of Q1 origination activity based on application volume observed to date through our customer base. Despite the Fed's rate cuts to date and expected future cuts, mortgage rates haven't gone down. They have in fact gone up. Since we last met, Fannie Mae and MBA agency forecasts for mortgage originations have come down on average 20% for the first quarter of 2025. While we do not solely base our forecast off of these projections, this is an external resource that shows the magnitude of change in a short period of time and indicates why we are cautious about the overall macroeconomic environment. However, we find these third-party forecasts to be lagging, and we believe that the market will be below the range they provided. Since we report our share of originations based on HMDA data, as discussed in our last earnings call, we believe that the HMDA market size is going to be between 800,000 and 900,000 units in Q1. We expect platform revenue to be between $25 million and $27 million in the first quarter of 2025, with the midpoint representing 9% growth year over year. As with every year's Q1, we'll be exceedingly high point for expenses, but we continue to manage these expenses very tightly. Our blend platform-only non-GAAP net operating income is expected to be between negative $1 million and $1 million for the first quarter of 2025, as we expect to offset the macroeconomic pressure in our revenue with diligent expense management. We are continuing to execute, and our next goal is positive free cash flow margin. We expect our first quarter free cash flow margin to exceed our market normalized rate of 18% as shared at our investor day in 2023. We are doing this at a dramatically different point in the cycle when compared to that expectation, and it is enabling us to invest back into the business. We also want to provide some updates on how we are thinking about the full year 2025. As anticipated, the mortgage market remains subdued so far in Q1. Looking ahead, we project moderate origination growth for the year, though uncertainty remains. Our Q2 outlook anticipates mid-30% sequential growth compared to the agency projections of 40%. We believe their full-year outlook of 12% to 13% may be overly optimistic, and internally we are taking a more cautious approach for annual planning. We'll continue to monitor market conditions very closely, and we anticipate any stronger-than-expected recovery will be beneficial to our performance. Due to the annual revenue growth performance in our consumer banking suite for 2024, we are increasing our projected compounded annual growth rate to 40% from 35% target we gave at our analyst day in 2023. As a reminder, this is based off of our 2023 financial results growing through 2026. As we enter the year, we want to provide an overview of our investment thesis and non-GAAP operating expenses. We believe our product roadmap is well defined, and we expect to continue to invest in innovation. With the pipeline opportunity ahead of us, you will see us increase our investments in sales and marketing functions. We believe that tightly managing our investments in these areas will continue to optimize our overhead cost structure. We will set ourselves up for success. And finally, we expect to exit the year with a positive rule of 40 for our platform segment based on the macroeconomic outlook for the year. This will be a big milestone for us as we focus on driving top line results and profitability. With that, I want to thank you again for joining and hand it back to Nima for closing remarks.