Blend Labs, Inc.
Q2 2022 Earnings Call Transcript

Published: 15 Aug 2022

[Crystal Sumner:]

Good afternoon, and welcome to Blend's Second 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 Mark deliver their prepared remarks, the team will take questions. You can find the supplemental slides on our Investor Relations web page 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 risk and uncertainties and 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-Q 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 good afternoon, everyone. Thank you for joining us. I'll cover 3 things today

[Marc Greenberg:]

Thanks, Nima, and good afternoon, everyone. I'll walk through our financial results and provide context in the following order

[A - Crystal Sumner:]

Thank you, Marc and Nima for your remarks. We'll now turn to Q&A. Our first question comes from Matt Stotler from William Blair.

[Matthew Stotler:]

Maybe just to start with one on the Blend Title transition, to the Title business over the core Blend platform. You talked about that starting in mid-2022. It seems like that's kind of early in terms of progression, but we're seeing a little bit of outperformance on the Title365 side. So just any update on the expected transition to the core Blend Title platform and the updated timeline there?

[Marc Greenberg:]

So the outperformance on the Title365 side is really because they have built in countercyclical offsets, right? They have the default business as well as the home ability business. So that's where you're seeing the outperformance on the Title365 side. Otherwise, Mr. Cooper transition is going great. They've been a wonderful partner for us, and we're ready for the increase in volume in the second half of the year.

[Crystal Sumner:]

Next question comes from Joseph Vafi from Canaccord.

[Joseph Vafi:]

I was wondering if you could just give us a a little bit more flavor on the demand environment of new logos, we kind of continue to see banks do a lot of digital transformation, but I wanted to get an updated view from you on the pulse on the mortgage side.

[Timothy Mayopoulos:]

Yes, sure. Thanks for the question. On the mortgage side, we mentioned 1 new logo in PNC, but both our mortgage side and the add-ons for mortgage pipeline remains strong and specifically, add-ons around close and verification of income. And the reason those remain strong is because efficiency really matters in a time of market margin compression. And so we're seeing intense focus from our customers around implementing digital technology and implementing more digital technology than they had before. And so actually, we feel good about our mortgage side, and we'll continue to invest there going forward.

[Crystal Sumner:]

Next question comes from Ryan Tomasello from KBW.

[Ryan Tomasello:]

I guess just digesting all of the operating targets correctly, maybe you can say if there's a consolidated top line revenue growth target that's associated with these having a net operating loss and breakeven over that 2025 time horizon, whether or not that's by segment or just on a consolidated basis, I think that would be helpful just for us to understand the bridge between both the OpEx as well as the top line modeling here.

[Marc Greenberg:]

Yes. Thanks, Ryan. So we're using MBA as our guide for the mortgage volumes. They're frankly more conservative than Fannie. So we've made a transition to the MBA forecast going forward. But it's a pretty volatile market out there. So -- but all of our growth metrics are moving in the right direction. We're not going to give specific revenue guidance at this point. We'll just focus on now to the end of the year, and then we'll try and update you as best we can.

[Crystal Sumner:]

Next question comes from Maddie Schrage from KeyBanc.

[Madison Schrage:]

I was wondering if you could talk a bit about how you're thinking about multiyear conditions for the mortgage industry with respect to new mortgages versus refis and what factors you're playing on monitoring to see any signal of a rebound in demand. And then just a follow-up, what type of visibility do you have in terms of share gains based on your current pipeline?

[Marc Greenberg:]

Yes, sure. So first of all, it's hard to project forward mortgage volumes beyond 2023. There's good industry MBA forecast, for example, in 2023 and less so 2024 and beyond. So we're kind of -- we're taking a prudent approach to the beyond years and saying it's going to remain flat, which is near all-time lows through that period. And so we're managing the business as if -- even if it remains flat, we still get to that cash flow positive and profitable measures as a company. Things that we're paying attention to, obviously, interest rates, what the -- how new home purchases are going. There's been different things happening in the market. And then ultimately, at the end of the day, we're focusing on -- primarily on the things within our control, which is growing our market share. So on your second question on market share, we do spend quite a bit of time looking at how much total volume there is out there and who are the best targets are. We mentioned PNC, but there's a number of others that we've also signed in the last few months that have continued to grow our volume base as well as rolling out customers we sold before that, which is why you're seeing us outperform in the mortgage segment compared to the market. Like we said, it's down 37% year-over-year in our mortgage segment is nothing, not down even nearly that much. And so that's one piece. And the other piece in consumer banking more broadly, we continue to win there, whether it's home equity or personal loans or or other aspects of the mortgage life cycle that we haven't touched yet, we continue to increase our diversification of revenue, which has been a great way for us to not just expand our revenue base, but expand our TAM and create some countercyclical measures that make us less exposed to interest rates that might negatively impact revenue if things change.

[Crystal Sumner:]

[Operator Instructions]. Our next question comes from Terry Tillman from Truist.

[Terrell Tillman:]

Yes. Two-part question. The first part of it is maybe for Marc, in terms of mortgage transactions. I think it was in the first quarter Q, it was $376,000. Can you share what the actual mortgage transactions were in 2Q. And the second part of my question is for either Marc or Nima is just -- it's good to hear there's a healthy pipeline in terms of new mortgage and consumer banking customers. Have you all tweaked your assumptions because of the macro on the timing of them rolling out or rolling -- or are those -- the rollout schedules, are they remaining resilient.

[Marc Greenberg:]

So in terms of mortgage banking transactions, in Page 15 of the supplement, we outlined is 348,000 mortgage banking transactions, 215,000 consumer banking transactions. So yes, we went from 380,000 to 348,000 in Q2, and those numbers we do update as we get more information from our customers. And then the second part of the question, Sorry, Terry, can you give us that second part again?

[Terrell Tillman:]

The second part of the question -- sorry, I missed that on Slide 15. Thanks for the reference though. The second part of the question is just related to -- you're talking about a healthy pipeline in terms of one business. What I'm curious about is sometimes what we're hearing is there can be just some slower pace of rollouts because of just macro factors, lack of staffing, et cetera. Have you all changed in the last 90 days how you're thinking about these rollout schedules that could impact platform revenue in 3Q and 4Q?

[Nima Ghamsari:]

Not materially. We're -- we've been planning some of these roll out to our customers for a while. They've staffed up for them. And then like we said, the pipeline for new business is also healthy especially around things like home equity and income and close. And so on both of those fronts, we feel pretty good. And it reflects in our guidance, I think that Marc touched on our guidance and what we changed there, but it reflects on our guidance as well that we're not materially changing the guidance despite the market coming down quite a bit. And just one other thing I'll call out is that when we roll out with customers nowadays versus maybe 2 years ago, we often roll out with multiple solutions at once. Like for example, we have a top 20 bank rolling out with our mortgage solution towards the back half of this year and they're going to have multiple solutions when they go live on day 1. So they're going to have our mortgage and come together, which is a little bit of a different situation than maybe what we did before. And that allows us to get them value faster. And also, it's obviously good good for us and our consumers as well.

[Crystal Sumner:]

Next question comes from Michael Turrin from Wells Fargo.

[Michael Turrin:]

I mean you mentioned the industry volume declines. We can see it in just the mortgage banking transactions disclosed, yet you're able to hold on to the combined revenue target for the year here still. So just wanted to spend a moment on the offset. So is this a function of having taken a conservative lens around mortgage since the start of the year is the growth you're seeing on the consumer banking transaction side, providing enough of an offset? What are you seeing that helps you hold on to the outlook here? And anything you can add around just what's assumed for rest of the year and if there's any cushion if the macro were to continue to worsen. I think it's just very useful context.

[Nima Ghamsari:]

You bet. Thanks, Michael. So there were some slightly unexpected offsets in the Title365 business in default and home equity being a little bit better than we expected. We've been able to responsibly increase prices across our customer base on renewal in particular. And it's really in line with the value that we're delivering. So that's some offset. We're not -- I wouldn't characterize our guidance as cushion, but I think it's prudent.

[Crystal Sumner:]

Next question comes from Ryan Tomasello from KBW.

[Ryan Tomasello:]

I just wanted to drill down into Title365 and the migration there. I guess following up on earlier questions. Can you talk about the margin uplift you expect when migrating 365 clients to the Blend Title product? Maybe remind us how that product is priced relative to the legacy products. And the gross margin you would expect on Blend Title transaction versus the same revenues coming from legacy Title. And I guess, wrapping that up, just the timeline for fully winding down the legacy Title365 revenues? And what percentage you would expect to ultimately capture on the blend title products.

[Nima Ghamsari:]

Sure. So we're really in the early days of the transition to software-enabled Title. So there's no change in pricing and we're not really offering any guidance on the eventual margins. We think this builds in -- it's a comprehensive product that makes it better for consumers and better for lenders. It's an integrated product that delivers more value, particularly in the instant home equity that we've been talking a lot about with an integrated Title solution. So at this point, there's not much more I can say. I don't think about the margins on the title side. I think we're in early days here, Ryan.

[Crystal Sumner:]

Next question comes from Matt Stotler from William Blair.

[Matthew Stotler:]

Just maybe one on the marketplace opportunity here. Obviously, Consumer Banking and marketplaces where you're seeing a lot of growth. And you mentioned a couple of components of that on the consumer banking side. Any update on, I guess, the marketplace ecosystem generally? And then any plans to monetize that going forward?

[Marc Greenberg:]

The marketplace -- I mean the consumer banking marketplace includes all nonmortgage consumer banking transactions, so personal loans, home equity, credit cards, deposit accounts. So those dollars are in there. It includes things like property and casualty insurance that are coming to scale that we've been at for a couple of years now. And then going forward, it will eventually likely include the software-enabled title, right? So I mean the -- there's not -- that has been a great offset, a diversification of our revenue. It's countercyclical to the underlying -- many of those are countercyclical to the underlying mortgage transactions. Is that where you're going? Matt?

[Matthew Stotler:]

Yes. In terms of -- I think what I was more focused on is as you think about things like homeowners insurance and things like that, that you're building into the consumer journey and being able to monetize that kind of part of the journey where that fits in. Obviously, there's a number of different places where the marketplace -- or you can establish marketplaces within that journey and you talked to them at length historically. But yes, more on just that component of the broader journey, being able to add those in and monetize those ecosystems as part of the broader consumer journey.

[Marc Greenberg:]

Yes. The ones that are -- the one that's probably being monetized the most today, Matt, is the homeowners insurance, property and casualty insurance. And so that one is already in our flow used by a number of our customers. We also have a bunch of partnerships on that front as well. since that's the one that's probably furthest along. Next is Title, which like we said, we're migrating over as another marketplace. I don't have anything on the valuation side quite yet, although we're talking to a number of partners on that valuation being whether it's automated or automated valuations, ABMs or appraisals. And then there's a few other things that we've talked about in the flow that could help for identity and fraud that might be able to help us continue to add value to the -- whether it's the homeowners -- sorry, the home ownership journey or the broader consumer financial journey. So we'll continue to do that opportunistically. I will say, just going back to our -- my commentary around ROI for products. We are being very thoughtful about the things that can drive the most value for our customers and consumers. -- in a short time horizon. And so we're making sure we focus our energy around those kinds of things and make sure we deliver on those things to the end before we go and expand to too many new things that we can be focused on the company.

[Crystal Sumner:]

Next question comes from Terry Tillman from Truist.

[Terrell Tillman:]

Marc, it's a question for you. I think you're all talking about $60 million worth of comp expense coming out of the model through the various actions. I hope I have that right. It's kind of a timing question in terms of -- I mean, some of this takes time to flow through the model. But is there any general sense you could give us on how kind of the loss profile could look like 3Q versus 4Q, maybe in relationship to what we saw in 2Q with the $39 million loss.

[Marc Greenberg:]

You bet. Thanks, Terry. Yes. It is -- some of those costs were not fully annualized, obviously and we grew a lot in the second half of 2021. In terms of the net loss, I wouldn't assume a materially different net loss in Q3 and Q4 relative to Q1 and Q2. Remember, there are some challenges on the revenue side that we're also trying to offset. So on a net-net, costs do come down marginally, but we're also addressing a volume decrease, particularly on refinancing at Title365.

[Crystal Sumner:]

Now we'll be addressing submitted questions from investors from via the SA platform. Our first question is, "Is Blend Labs adding other financial products to its line of offerings?"

[Nima Ghamsari:]

Yes, this is a good question. It goes back again to our ROI. We're making sure we figure out the products that mean the most to our customers and consumers. And so we're going to be constantly adding new financial products. I want to make one side note, which is our investment in Blend Builder, which we've talked about quite a bit. It's our low-code, drag-and-drop platform to make it possible to create these new products with fewer R&D resources, which makes the ROI equation that much more appealing for us to be able to deliver those things. So expect to see some announcements for us in the coming months as we respond to changes in the environment. There are some new products that make a lot of sense given the new market environment and all the vertically integrated capabilities we have. And so stay tuned on that, we'll come out to market with some things here in the next few months.

[Crystal Sumner:]

Another question from investors via the state platform, "Is Blend Labs -- how are you managing the current tension between growth and profitability?"

[Nima Ghamsari:]

Yes. And I hope I addressed a little bit of this earlier in my remarks, but I want to explicitly call out that managing profitability as a stand-alone, it's relatively straightforward, managing growth as a stand-alone is relatively straightforward. It's much easier to do those things in a vacuum. But doing it together, figuring out that right harmony between those 2 things is extremely difficult. And so that's the hard part. That's the thing that we've been spending a lot of time on, and you've kind of heard a little bit about what we're cutting back on, what product lines we're cutting back on, what internal corporate support we're cutting back on. And so we're -- you're seeing some of the plans to become more profitable by cutting back on some of those things, and we'll continue to do so as well as driving those high ROI products for our customers in the short and medium term. And combined, those 2 things will give us enough fuel to continue to grow while not overly consuming the precious capital that we have, and we want to make sure that we retain for the long term.

[Crystal Sumner:]

Another question from the Say platform. "How would you characterize the competitive environment?" And related, "What are your perspectives on consolidation in the sector?"

[Nima Ghamsari:]

Well, we certainly pay close attention to our competitors. We're a very paranoid company in the sense that we're constantly looking at what's going on in the market. That being said, I think nothing has materially changed in the competitive environment during the last few quarters. And just to reiterate what some of the competitive environment looks like. At the top end of the market, our primary alternative to Blend is -- a primary alternative to Blend is an internal build. At the medium and lower end of the market, it's typically point solutions that we compete against. In both cases, Blend is sort of a premium offering that can work across products, and we'll continue to invest in that to continue to win and grow market share, which we've done historically, and we've shown even in this quarter that we've been able to do. We have seen consolidation, we have seen some consolidation both in terms of our customers merging together, which is ultimately good for Blend as it becomes a more concentrated industry with customers that rely on us across the bank or lender. And we've also seen some point solutions out in the market become part of larger platforms. And I actually expect both of those trends to continue. We'll pay attention. We'll continue to be paranoid and react where necessary accordingly. But overall, I will say that materially -- there's nothing that's materially changed in the competitive landscape for us in the last few quarters.

[Crystal Sumner:]

And the last question I'll take is also from the same platform. "What has the sales environment been like in this downturn? Are customers pushing off digital transformation initiatives?"

[Nima Ghamsari:]

Yes. And this -- maybe this is a corollary to what Terry from Truist was saying, just are people pushing off these implementations and rollouts or bought these new buying opportunities. And I'll say, one, I think a lot of those -- those software companies where the rollouts are getting pushed out or people are getting negotiated down are nice to have platforms in the sense that they feel like the organization can live without a new data warehouse or without a new BI reporting tool. And I'm not specifically calling those out as things that are not important, but I just think if those things slip 2 or 3 or 4 quarters doesn't materially affect the revenue of the organization. Whereas Blend, given where we sit for our customers and how we try to help them modernize acquiring customers and serving their customers, we're not a nonessential solution. We partner very closely with our customers to be that essential solution that helps them deliver better experiences across the bank at a lower cost. And cost is something that they don't want to be spending more money than they need to for a longer period of time, we actually help them lower their costs as opposed to adding to their cost base. So we're not a nonessential solution. And so two, I think to add on to that, I think our customers will continue to invest in the downturn as some of the customers that we have, given where we play in the market, that we have often some of the largest lenders and banks in the country as customers they take a long-term view of the market. I've been very encouraged by the fact that when I talk to our customers, they are really -- they're on offense. I mean I said we're planning to win is Blend to be this platform that can be used across all these products to serve these modern banking experiences to consumers through our customers, our customers are taking the same approach. They want to play to win. They're not the same in the next cycle, but they're even bigger and better than they were in the last cycle. And lastly, because we are a company that drives ROI for them, we often are somebody that they want to bet on to help get them there. And just one supporting sort of anecdotal data, we track quotas for sales reps and we're beating our quotas and the verification of income and home equity, which are really important business lines for us. And in Q3 so far, we're tracking strongly for those business lines again. And so we'll continue to invest in those products as long as they can drive that ROI for our customers.

[Crystal Sumner:]

Being that was our last question. This conference has now concluded. Thank you all for your participation, and you may now disconnect your lines.