Blend Labs, Inc.
Q1 2022 Earnings Call Transcript

Published: 12 May 2022

[Crystal Sumner:]

Good afternoon, and welcome to the Blends' First Quarter 2022 Earnings Conference Call. My name is Crystal Sumner, Head of Legal Compliance and Risk for the company. With me today are Nima Ghamsari, Co-Founder and Head of Blend; Tim Mayopoulos, President; and Marc Greenberg, Head of Finance. After Nima and Marc deliver their prepared remarks, the team will take questions. 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 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-Q, 10-K 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.

[Nima Ghamsari:]

Thank you, Crystal, and hello, everyone. We appreciate you spending time with us today. Blend delivered a solid first quarter in a tough market with revenue ahead of expectations. In many ways, this quarter validates our view of both 2022 and Blend's long-term potential. For this call, I'd like to cover four topics; first, a summary of our Q1 highlights and our general operating environment; second, an update on current market conditions and how this impacts our business; third, how we're executing against our long-term growth thesis; and lastly, an update on how we're thinking about near-term management of the business and capital allocation. After that, Marc will review the quarter in more detail, and then we'll take questions. Tim is also with us for Q&A. Starting with Q1 highlights, we are encouraged by our top line performance, which reinforces our confidence in our 2022 outlook. Revenue of $71.5 million was ahead of the range we gave you at the end of March, and Marc will take you through that in more detail. But the takeaway is that we did better than we expected in both mortgage and in consumer banking. In fact, we delivered 3% growth in Blend Platform segment revenues as compared to Q1 2021, despite Q1 mortgage market volumes being down an estimated 44% year-over-year. Additionally, declines in Title365 were less than anticipated. This was largely due to the timing of interest rate impacts. Refinancing activity has begun to meaningfully decline in Q2. In addition to benefiting from growth in mortgage market share, we continue to cross-sell and increase our wallet share of our existing customer base. At the end of the quarter, about two-thirds of our existing customers subscribe to two or more software products. Consumer Banking and Marketplace revenue, therefore, was up 55% year-over-year, and we are seeing continued adoption of this suite of products. At the end of Q1, 22% of our Blend Platform revenue came from Consumer Bank and Marketplace and approximately one-third of our total customer base now use one or more of these products. So we've exceeded our expectations for the first quarter, and we're continuing to build momentum in the business. Nonetheless, we are mindful that the broader economic environment is going to continue to be challenging. Here's what we've observed since we last spoke to you six weeks ago. Mortgage rates rose quickly in the last two months, as you all know. And for these and other macro reasons, we are now projecting a 41% year-over-year drop in mortgage origination volumes in 2022 versus a 35% outlook in place at the time of our call in March. Given persistently strong housing demand, these declines are disproportionately hitting the refinance market, a decrease that started in earnest in April. While this is a difficult time in our industry, Blend is well positioned to help our customers navigate this reset. It's in moments like this that customers are compelled to focus on efficiency and technology, both to preserve margin and be better positioned to take advantage of the eventual upturn. I'll touch on this more later. At Blend, we're increasingly diversifying our revenue base with Consumer Banking and marketplace now starting to grow more quickly. And with that as an industry backdrop, let's shift how Blend is operating in this environment and why we think we're in a good position to continue executing on our growth thesis despite the current market volatility. There are two important indicators, one internal and one external that we watch closely to monitor our progress. An important pillar in the Blend growth thesis is our ability to acquire and retain customers. In Q1, we reported gross revenue retention of 98%, roughly in line with our 99% in Q4 and market adjusted net revenue retention of 159%, up from 147% in Q4. Our unique differentiation is our focus on delivering a full platform solution that accelerates the digital transformation process for our customers. This platform solution, coupled with our business model, positions Blend to build relationships rooted in a shared journey of growth with our customers. Externally, a key leading indicator is our customers increased investment in digital transformation and automation. Investing during downturns positions companies to gain market share and come out stronger on the other side. For banks and lenders, getting stronger is about investing in improving the customer experience and driving efficiency. Technology is the most effective, scalable way to do that at a lower cost with a clear ROI. Our platform is designed to achieve that goal, allowing customers to significantly improve their profitability and be more competitive. This is especially vital in a downturn when margins tighten. Shifting to how we're executing our long-term growth thesis. We feel very good about the key indicators for long-term growth at Blend. We are focused on the following three growth areas

[Marc Greenberg:]

Thanks, Nima. Hopefully, everyone on the call has had a chance to review our release. I will go through our release in the following three categories

[A - Crystal Sumner:]

Thanks, Marc and Nima for your remarks. We'll now turn to Q&A. Our first question comes from Ryan Tomasello from KBW. Ryan, you may un-mute yourself and ask your question.

[Ryan Tomasello:]

Hi. Can you hear me?

[Crystal Sumner:]

We can.

[Ryan Tomasello:]

Great. Thanks for taking my question. And nice to see the progress on the cost structure realignment, I was wondering if based on the progress you've seen to-date, if you're able to provide an outlook for earnings for the year, but perhaps in terms of non-GAAP operating income as well as cash burn? And then, beyond that, it would also be helpful whether on this call or on the call, if you could provide more defining guardrails on how you view the margin trajectory of the business over the intermediate term and long-term, the margins you expect to be able to support. Thanks.

[Marc Greenberg:]

Thanks, Ryan. At this point, we're just reaffirming the revenue guidance, and we're anticipating spend in line at this point with what you saw in Q1. And then we'll look to update you later in the year as the plan comes together.

[Crystal Sumner:]

Thanks. Our next question comes from Maddie Schrage. Maddie, please feel free to un-mute yourself and ask your question.

[Maddie Schrage:]

Hey guys, sorry. Can you hear me now?

[Marc Greenberg:]

We got you. Thank you.

[Maddie Schrage:]

Awesome. Just quickly, thanks for taking my question. I was wondering how you guys are thinking about the pace of share gains, as we model out the rest of the year? And then, the long-term trajectory of share gain potential? Thanks.

[Marc Greenberg:]

Maddie, do you mean market share?

[Maddie Schrage:]

Yeah.

[Marc Greenberg:]

Yeah. Yeah. So the majority of the market share gains come from rolling out within a year. So between now and the end of the year will come from existing customer rollouts I'm happy to announce that in the last 60 days, we had a few -- a couple of large customers in particular rollout, one large bank and one large non-bank and obviously smaller ones. And so we'll see share gain grow. We're not going to share an exact number, but we do project share to grow as those rollouts come to fruition in terms of volume on the platform despite the market coming down. I mean, our share is sort of independent of the market volatility right now.

[Crystal Sumner:]

Next question comes from Joseph Meares from Truist. Joseph, please feel free to un-mute yourself.

[Joseph Meares:]

Great. Thanks for taking my question. Last quarter, you noted that the current market environment is leading to thin margins at lenders and the slowing down adoption of new products, just wondering, if there's been any change positive or negative in this trend over the last six weeks since you last reported. Thank you.

[Marc Greenberg:]

Yeah. What we're finding -- thanks for the question. What we're finding is that for certain product areas and areas of our product that drive efficiency, we're seeing a lot of -- we're seeing a lot of interest around those specific areas. Blend income is particularly interesting because it's a cheaper way for them to verify income and they're paying that cost right now. And then also for other product lines. I mentioned home equity a couple of times, but there's a lot of urgency around that product because homeowners have a huge amount of equity in their home, and they want to be able to tap it at the lowest possible cost to them, which in a lot of cases, will be home equity line alone. And so now we're seeing specific areas get a lot of focus from our customers because there's an absolute need to save money to be able to stay competitive in this environment or offer different products to be able to get more revenue...

[Crystal Sumner:]

Thanks. Our next question comes from Matt Stotler from William Blair.

[Matt Stotler:]

Hey, thank you for taking the question. Maybe just one on the title piece. I think very helpful color around kind of the Q1, Q2 dynamic. In the press release, you mentioned, I guess, beginning the effort in earnest to move Title 365 customers over the core platform. Any color you can provide in terms of the plan there, the strategy to execute on that, the ability to do that? And any visibility into how you'll be able to carry out those migrations into the second half of the year?

[Tim Mayopoulos:]

This is Tim. Thanks for the question. We expect that the largest customer of Title 365, that's Mr. Cooper. We’ll go – we expect that they will go live on our Blend side of platform before the end of the second quarter, so before the end of June. And we are working with other customers to make progress on that in the second half of the year. But the single biggest driver of that transition is Mr. Cooper, and we're pleased with the progress that we've been able to make on that this quarter.

[Crystal Sumner:]

Thanks. Our next question comes from Arvind Ramnani from Piper Sandler.

[Arvind Ramnani:]

Thanks for taking my question. I just wanted to clarify a quick data point. I think you indicated on this earnings call kind of a 41% reduction in overall mortgage volumes -- and does it compare to the 35% you all had talked about on the last earnings call?

[Marc Greenberg:]

Yes, that's right. Yes. So previously, we thought that volumes would be down in 2022, 35%, in terms of number of units compared to 2021. So another way to say that is 65% of the same -- of the number of units in 2022 compared to 2021. And now that number looks more like 59% or a 41% decline. So a pretty significant decline in how -- in our overall volume forecast for the market, and we primarily Fannie Mae and MD&A [ph] for that, but we're still reaffirming our guidance because we still feel good about those numbers.

[Crystal Sumner:]

We'll take another question from Ryan Tomasello from KBW.

[Ryan Tomasello:]

Hey, thanks for taking the follow-up. I guess just circling back on the embedded title solution. Can you talk about how that product will be priced in terms of refi or purchase? Is my understanding that initially you'll be focusing. We see more refis low hanging fruit there. And I guess the types of attach rates you think are achievable for that product over the next few years and maybe helping to guide some of our modeling into 2023 and thanks.

[Tim Mayopoulos:]

Sure. So you're right. I think we look at refi as the more immediately available opportunity for us versus purchasing the title space, although obviously, refi volume is coming down this year. And in terms of pricing, we expect that we will keep the pricing consistent with what it has been at Title365 in the past. And in terms of attach rates, I think it's too early for us to be able to give you any clear estimates around that. But we feel good about the amount of volume that we'll be able to capture clearly with the biggest customer, Mr. Cooper, and we'll see where that takes us.

[Tim Mayopoulos:]

Let me just add one quick additional point there. Another area, another product line that needs at least a title property report is home equity. And so it fits nicely into our instant home equity focus around helping our customers offer that product digitally as well. So it's another area that we're looking at.

[Crystal Sumner:]

Next question comes from David Unger [ph] from Wells Fargo.

[Unidentified Analyst:]

Hi, thanks. Okay. We got to talk about that. Marc, so I know given the challenges in the industry and chief valuations broadly, it's a very tough question, but $500 million on balance sheet in terms of cash. Just thinking about the upswing future, philosophically, how should we think about M&A go forward? Thank you.

[Marc Greenberg:]

When you say upswing, do you mean -- are we thinking about our stock price? Sorry I missed that.

[Unidentified Analyst:]

Hopefully, an eventual recovery in the mortgage market?

[Marc Greenberg:]

Yes. No, this is -- in some ways, I mean this down swing, I think we've -- the fact that we're growing through the downswing, or our declines are not as great as what the market is. I think it goes to our customer selection, and we're really happy with that. It also goes to the additional products we've been able to add on, things like income and close already and what's planning in homeowner insurance and elsewhere. But we're focused on driving value. We're focused on doubling down on the investments that we're making that are working for our lenders and the stock market will hopefully take care of itself. We're not the only public company, I think, in the situation. And we're -- we have a very sort of mission-oriented employee base, and we're working on just being focused and being connected to our customers.

[Crystal Sumner:]

Next question comes from Joe Vafi from Canaccord.

[Joe Vafi:]

Hi guys. Thanks for taking the question. I was just wondering, in the current environment, what you see right now in terms of bank behavior, it sounds like they're kind of still moving forward with new technology initiatives, just kind of the most updated real-time, I guess, update on how banks are thinking about rolling out new technology here. Thanks.

[Marc Greenberg:]

And banks are -- I guess, I like that you called out banks specifically because banks/credit unions behave somewhat differently than independent mortgage companies in this regard. But banks, in particular, are investing heavily in technology right now. I mentioned home equity a couple of times just because we've spent so much time thinking about it a blend. So it's very top of mind for me personally. And of course, top of mind for our customers. But it's not just that. Personal lending is getting a lot of focus from customers, new membership or deposit account opening for credit unions and banks is another area that we hear a lot about. And so, there's quite a bit of energy behind these areas because, yes, while the mortgage market is down, these companies offer a wide array of products and especially in times like this when consumers need access to capital when there's high inflation and there's more need for individuals to have access to more capital, that's what the banks and credit unions are there for. And so we feel good as the preferred provider, and it goes back to our underlying thesis of make your customers successful and they'll want to do more with you. And we see that in our market adjusted net revenue retention number as well.

[Crystal Sumner:]

Thanks. We'll take a second question from Maddie Schrage from KeyBanc.

[Maddie Schrage:]

Hey, guys. Thanks for the follow-up. So you mentioned that two-thirds of total customers are using two or more software products. Could you maybe give us a little more information on your more heavily adopted customers? How many products they're using today and how applicable that might be to the rest of the installed base? Thanks.

[Marc Greenberg:]

One thing that we've seen historically is that some of the largest institutions buy one or two products at a time and then some of the smaller ones, credit unions and banks, will often buy a whole suite of products at once. So they'll buy mortgage, auto, personal loans, deposit accounts, home equity altogether and maybe even some of the add-ons like close and income. So it sort of depends on the on the size of customer. That being said, we did just announce the credit card products being live with Wells Fargo. And so it's -- we're even seeing traction at the top of the market with some of these more broader consumer banking offerings as well. And so I guess, it's a long way of saying the top of the market behaves a little differently in the bottom of the market. And often, we shared a number in the past quarters that we didn't share this quarter around how much we're buying two or more products in the first sale, which that number has been higher than it was a few years ago, and we didn't have multiple products, of course. And so both -- all those things are positive trends, and we're excited and helps reinforce our long-term thesis around growing with our customer base.

[Crystal Sumner:]

Take another question from Matt Stotler from William Blair.

[Matt Stotler:]

Thank you for taking follow-up. So maybe just one on -- or a couple of things on Consumer Banking. So obviously, looking at the -- what we saw in Q1 and what seems to be the updated expectation for 2022, maybe a little bit of an uptick in expectations for consumer banking. I know a lot of that was probably from what you guys had talked about last quarter about maybe some delays in rolling out some of those products at your customers. Would just love some more color on what you're seeing in terms of those rollouts, new additions in terms of customer banking products? And if you're seeing stand-alone customer banking wins or if it's still largely an upsell on mortgage? Thank you.

[Marc Greenberg:]

Sure, yes. So we're -- I didn't understand the very first part of the question, but to answer the second part and maybe you can reiterate this -- the first part to answer the second part. We typically just because we have such a broad mortgage customer base, and we've been successful with them, and that's why they trust us with the next product line. And I gave the example about Wells Fargo, but there's, of course, others as well. It typically ends up being attached to an existing mortgage customer, because that's the first product line we went out to market with and actually attach becomes a separate sale to an existing mortgage customer. And that's a trend that we're pretty happy with. I mean making our customers successful and having them do more with us, as I think it's a good thing. It's a good sign. And so, -- and what was -- I didn't understand the first part of the question. So could you reiterate that.

[Matt Stotler:]

Yes. The first part of the question just being, it seems like the Consumer Banking segment has performed better than expected in Q1, and it seems like the expectation for the full year is that it is also improving relative to the last time we got an outlook from you guys. So is that largely just the customers from last year that are rolling out and then actually catching up. I know some of those have been delayed. Is there anything new that's being learned in there this year? Just how to think about kind of the driving factors behind that kind of uptick in expectations for that part of the business?

[Nima Ghamsari:]

That part of the business is primarily our home equity, our personal loans product, our deposit account products and then income and close. I'd say the majority of the uptick is from personal loans, and that's a function of a few of our customers who do those lending products are doing more volume than we had and maybe more dollars per unit than we had previously anticipated.

[Crystal Sumner:]

Take a follow-up question from Joe Vafi from Canaccord.

[Joe Vafi:]

Hey, guys. I know this year is a balancing act between managing costs and keeping the road map and everything going. Just -- and I know we're going to get more of an update on the numbers later in the year. But could you give us a little more color on what may be dialing back in the current environment in terms of your investment spend across, I don't know what maybe customer service, new product initiatives, sales, et cetera? Thanks.

[Marc Greenberg:]

A big part of that, Joe, is rightsizing based on volumes. So if title volumes are down, then the production of title costs obviously has to come down alongside it. And then just generally rightsizing for where we are in the cycle and the size of the company. So we're just being extra prudent and we're looking across the entire company, both revenue and cost, but really focused on making sure that our costs are in line with what the volumes are in -- based on refis.

[Crystal Sumner:]

Our last question comes from a retail investor. Emily asks what is Blend's most important goal and focus for this year. Nima, do you want to take this one?

[Nima Ghamsari:]

Sure, yeah. And I would say I like questions like this because it makes you pick one thing. Obviously, we do multiple things with our customers. And so it's always -- I like questions like this because it will help us just focus on one thing and what's most important to us. And as we're reflecting on this question, a lot of what is going to make us successful in the long run, especially if you go back and look at our history, is our existing customers continuing to do more with us. And so especially in the mortgage part of the market, like I said, margins are really tight, and I made a couple of comments about it in the prepared remarks. Margins are tight for our lenders, making sure that we can drive efficiency for them and make sure that their winners does really three things for us. One, it makes sure that they not just stay flat in market share, but they grow market share, which leads to more growth for us. Our market share doesn't have to just come from signing new customers, as we make customers more successful or they consolidate other mortgage companies, that's a win for us as well. And we're seeing some consolidation in the industry as well. Two, that will be the foundation if they're a bank or credit union for them to do more products with us. Like we've seen this story play out time and time again where -- and you see in our net revenue retention, our market adjusted net revenue retention, that number is so good because our customers want to do more with us because we make them successful. And then the third thing is they last with us for decades. These are the kinds of things that we believe they'll last with us for decades if we do this. And so I've really reaffirmed to our team the importance of making sure our existing customers are successful. That's unique for us as being a vertical software company and something that we have to never lose sight of. Most of those happen to be mortgage, but that also means for everyone who are signed up for consumer banking, we need to make sure they're just as successful. And so that's something that we're paying close attention to, and we're spending a lot of time managing on his leadership team, making sure we're very close to our customers more so now than when times are booming and they have less time to spend time with us, it was not as important, and now it's extra important. That's what we're focused on.

[Crystal Sumner:]

As that was our last question, the conference has now concluded. Thank you all for your participation. You may now disconnect your lines.