Doma Holdings, Inc.

Good day, and thank you for standing by, and welcome to DOMA's 2Q22 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Beatrice Bartolome. You may begin.

Thank you, operator. Good afternoon, everybody, and thank you for joining DOMA's second quarter 2022 earnings conference call. Earlier today, DOMA was announcing its second quarter results, which is also available at investor.doma.com. Leading today's discussions will be DOMA's founder and chief executive officer, Max Sinkoff, and chief financial officer, Mike Smith. Following management's prepared remarks, we will open up the call to questions. Before we begin, I would like to remind you that our discussion will contain predictions, expectations, forward-looking statements, and other information about our business that is based on management's current expectations as of the date of the presentation. Forward-looking statements include, but are not limited to, DOMA's expectations or predictions of financial and business performance in conditions and competitive and industry outlook. Forward-looking statements are subject to risk. uncertainties, and other factors that could cause our actual results to differ materially from historical results and or from our forecast, including those set forth in DOMA's Form 8-K filed today. For more information, please refer to the risks, uncertainties, and other factors discussed in DOMA's most recently filed annual report on Form 10-K and other SEC filings. All cautionary statements that we make during this call are applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks and uncertainties and other factors discussed in DOMA's SEC filings. Do not place undue reliance on forward-looking statements as DOMA is under no obligation and expressly disclaims any responsibility for updating, altering, or otherwise revising any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Additionally, during this conference call, we will also refer to non-GAAP financial measures, including retained premiums and fees, adjusted gross profit, and the other measures described in our earnings relief. Our GAAP results and description of our non-GAAP financial measures with a full reconciliation to GAAP can be found in the second quarter 2022 earnings relief, which has been furnished to the SEC and is available on our investor website. And with that, I'll turn the call over to Max Demkoff, CEO of Doma.

Thank you, Bia, and good afternoon, everyone. Before we get started, I'd like to congratulate Mike Smith on his promotion of Chief Financial Officer of Doma. As you know, Mike had been serving as Doma's Chief Accounting Officer and Acting Chief Financial Officer since mid-May of this year. I'm very excited to welcome Mike to the Doma leadership team, and I look forward to continuing to work with him to deliver an instant and frictionless home closing experience for buyers and sellers. Turning now to our business, We now have a full year as a public company under our belt, and I am proud of how we've adapted to and managed our business through a set of macroeconomic and housing industry headwinds in the first half of 2022 that are unlike anything in the last 20 to 30 years. In rare times like these, it's important to separate the cyclical from the structural. The challenges we are facing today are cyclical, but the investments we have made and the progress we have seen towards making the home buying process better, faster, and more affordable are structural and sustainable And we are just at the beginning stages of producing meaningful growth and returns for many years to come. And today, as we operate the business in a very different market than the one we went public in one year ago, we have quickly adapted our plans and our investment prioritization to ensure that we remain on track to get the business to positive adjusted EBITDA by the end of 2023. Now, as I like to do with my opening remarks each quarter today, I will focus on the following three main themes. First, we delivered resilient top-line results in the second quarter against the mortgage market that continues to be challenged by extremely difficult conditions for homebuyers, namely rising inflation and interest rates, high home prices, and unprecedented low housing inventory. Second, getting to adjust to the EBITDA profitability has become our top priority. We believe that the current market environment is likely to persist for some time, and that the companies that come out of this economic cycle in a financially sound position will be those that can serve customers through and beyond this challenging time with the same quality and consistency established during brighter days in the market. Third, and my final theme, we continue to make steady progress in growing our footprint in the purchase market. This entails both getting our newly formed customer acquisition engine up to full productivity and rolling out our DOMA intelligence technology to our local channel. Our plan, as we have previously communicated, is to migrate substantially all of our purchase volume onto our DOMA intelligence technology by the end of next year, and we remain highly confident that we are on track with that timeline. I'll now dive into these three themes in more detail, and after that, I will turn the call over to Mike Smith to cover our second quarter financial results. Let's begin by walking through our business performance in the second quarter. Our second quarter performance was in line with our expectations, and while the continued developing headwinds in the mortgage market may put our 2022 forecasted performance for retained premiums and fees at risk, We will be able to better assess that after the third quarter. We believe that our more intense focus on getting the profitability will help ensure that we still meet our adjusted EBITDA targets for this year. But given the risk to our retained premiums and fees and related impact to adjusted EBITDA, we are now guiding to the lower end of our range of adjusted EBITDA for our full year 2022 guidance. Now on the specifics of this quarter. While our performance in the quarter degraded significantly when compared to the prior year, last year was an abnormal year for the housing market. And given the significant shift in the market this year, we believe it is more important and insightful to understand quarter-over-quarter trends versus year-over-year trends, so we'll be focusing our remarks on a comparison to prior quarter. In the second quarter, we delivered $49 million of retained premiums and fees, down 24% versus prior year, and down 5% versus last quarter. Our year-over-year decline in retained premiums and fees, or RPS, was driven by a 48% decline in refinance closed orders, and a 32% decline in purchase closed orders. Our quarter over quarter decline in RPF was driven by lower refinance closed orders, which fell by 47% quarter over quarter as the mortgage market readjusts to a higher interest rate environment. Our purchase closed orders grew 16% sequentially versus Q1, as the second quarter is typically the peak selling season. While our purchase volume increased quarter over quarter, the rate of increase was impacted by the performance of the overall purchase market, which had a slow start in the first quarter and continued to struggle in the second quarter with weekly purchase mortgage applications as measured by the MBA's weekly application survey, declining 14% on a seasonally adjusted basis from Q1 to Q2. Also affecting our closed orders were lower pull-through rates, meaning fewer open orders are converting to closed orders versus typical historical trends. This behavior has been observed now across the broader purchase market, with Redfin data showing that in June, purchase transaction cancellations reached 15%, the highest level of purchase cancellations industry-wide since April of 2020. It's likely that this lower pull-through rate industry-wide is being driven by a combination of rapidly rising interest rates. Essentially, more consumers are backing out of home purchases as mortgage rates continue to climb, as well as home sellers losing negotiating leverage and not yet being able to be flexible to increase in buyer demands to get deals closed. During our previous earnings call in May, We communicated our belief that this downturn was likely just the beginning of something far more significant. We formed our own internal outlook of how the mortgage market would perform for the remainder of the year, which differed from industry forecasts, but reflected the reality of what we were observing on the ground. And the year is playing out as we expected. Our outlook was also the primary basis used for revising our 2022 guidance on our last call. And as I mentioned earlier, we are reaffirming our 2022 full year adjusted EBITDA guidance today, at the low end of the risk while noting that there may be some risk to our top line. Shifting now to market share, against our internal outlook of how the market performed this quarter, we continued to gain share in our enterprise channel, which comprises the majority of our refinance volumes, as we had a net gain in wallet share across our enterprise accounts, and we also onboarded several new partners in the quarter. In terms of purchase, our market share was essentially flat versus last quarter, but should grow in the back half of the year as our investments in customer acquisition reach higher productivity and more of the purchase transactions start benefiting from our DOMA intelligence technology. I'll now turn to my second theme for today. We are confident that we have taken definitive actions to remain on our path to adjusted EBITDA profitability in 2023. In May, we took several actions aimed at preserving our cash position and accelerating our path to profitability. These actions included both reprioritizing the deployment of our capital towards home purchase-focused strategic initiatives, and a reduction in force that primarily impacted our fulfillment organization. Since May, we have continued to observe the deterioration of the housing and mortgage market, and we expect it to contract even further over the next 12 to 24 months. To adjust for this reality, last week we took additional actions to even further realign our cost structure with our commitment of getting to positive adjusted EBITDA by the end of 2023, if not earlier, and reaching positive cash flow generation by the end of 2023. These actions included a significant downsizing of our corporate support functions and a more streamlined management structure, which we expect will result in a charge of $3 million in the third quarter and will generate annualized cost savings of $40 million. These annualized savings are in addition to the expected $30 million of annualized savings from our May reduction in force. We believe that these aggregate expense actions position us well to manage through the current cycle while preserving our differentiated business model so that we can continue pursuing our longer term strategy. And as we continue to navigate a very dynamic market environment that has the potential to continue deteriorating in the near term, we are committed to take additional actions as needed in order to remain on our stated timeline of profitability. While there are many companies in the mortgage technology space that went public over the last 12 to 24 months, we think that what sets us apart is that the fundamentals and the positive unit economics of our business have already been tested and that we have defined our path to near-term profitability. In the past three to six months, we have significantly shifted the balance of our investments toward those that will get us to near-term profitability while still remaining able to drive meaningful investments in R&D and customer acquisition to deliver on a much larger, longer-term market opportunity. The majority of the investments we set out to make 12 to 18 months ago as we were preparing to take the company public, were indeed made and are now starting to bear fruit for us. As the broader housing market started to experience headwinds earlier this year, and which intensified in the second quarter, we were swift in reducing our cost structure to align with a lower mortgage volume environment. We have been deliberate and disciplined with our actions and investments as we build towards our vision of driving change through technology, while also ensuring that we have ample capital to manage through the ups and downs of the cyclical mortgage market. We will be looking at all investments in the business for the foreseeable future through the lens of how they will either accelerate or de-risk our path to profitability and do so while enabling us to manage the business with a comfortable cash position in a challenging market. This takes me to my third and final theme, our progress in growing our footprint in the purchase market, where we already do meaningful volume today, and which is key to reaching adjusted even of profitability. As a reminder, purchase transactions are our more profitable business And we have been generating purchase orders for quite some time now. While the deployment of our DOMA intelligence technology was initially focused on our enterprise refinance business, we have always generated meaningful purchase volume. In fact, as of Q2, purchase orders made up 38% of our direct residential order volume and 66% of our direct retained premiums and fees. During our first quarter earnings call, we announced our plans to refocus our resources and capital to a discrete set of strategic initiatives that we think will accelerate our growth in the purchase market, thereby accelerating our overall path of profitability as a company. While it has only been a few months since we made those changes, we have already started to see early progress, and we remain confident that we are focusing our efforts on the right areas. In our local business, where today we source the majority of our purchase orders, We have continued to add new features and functionality to the DOMA Intelligence platform for purchase while working with our escrow and fulfillment teams across the initial rollout locations to ensure that we are seeing the expected increase in the quality and efficiency prior to accelerating our rollout to other markets. We've also found that the close involvement of our local escrow teams and how the product gets implemented and institutionalized has become an essential component of our rollout strategy. In the back half of this year, we expect to continue methodically adding new markets in our local channel to the rollout of DOMA Intelligence for Purchase. Separately, in Q2, we also identified several potential enterprise partners who are now working with us on a version of DOMA Intelligence for Purchase that can be offered directly to their customers as part of their purchase workflow. We will be moving towards rolling out an initial version of this product with a small group of these enterprise partners later this year and believe this initiative may unlock an additional new distribution channel for DOMA for purchase. Across both of these efforts, we remain confident that we will significantly grow our higher margin purchase volumes and that we will have the majority of our purchase transactions on the DOMA intelligence platform by the end of 2023. I would now like to turn the call over to Mike Smith, who will take you through the details of our financial performance this quarter.