Blend Labs, Inc. Q1 FY2024 Earnings Call

Good afternoon, and welcome to Blend's First Quarter 2024 Earnings Conference Call. My name is Winnie Ling, and I'm the Head of Legal & People for the company. Joining us today are Nima Ghamsari, 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 moderated by our Investor Relations lead, Bryan Michaleski. 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 measures are not intended to be a substitute for GAAP results. Also, certain statements made during today's conference call regarding Blend and its operations, in particular, its guidance for the second quarter of 2024, 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.

Thank you, Winnie, and good afternoon, everyone. Amir and I have a lot to share today, given the company's recent strategic announcement, as well as several important business highlights since our last earnings call. We'll first discuss the investment we received from Haveli last week, which involved $150 million capital infusion, as well as the beginning of a partnership that will deliver value across our business and, most importantly, to our customers. This has several strategic outcomes for us, including the elimination of interest costs and the improvement of our balance sheet, which, for the first time as a public company, is debt-free. With this investment, we've enhanced our financial flexibility and can focus on what we've always done best, which is innovating for our customers in the Mortgage and Consumer Banking space now and for the foreseeable future. We also made progress in some important customer deployments, including the official go-live of Navy Federal Credit Union new membership and deposits that occurred last month. Early data points indicate that it was a very successful launch, and our financial results for the rest of the year will be inclusive of the Navy Federal Credit Union partnership. Beyond them, we're also working on a robust pipeline of other deployments that is active and growing, including another top 10 credit union that's in the process of a mortgage rollout. On top of that, I'm happy to announce that the team signed a new seven-digit contract with a credit union last week, and Blend is going to help them streamline their deposit account opening experience. We've been thinking through how to tailor our solutions to better fit the needs of specific segments, in particular, credit unions that come in different sizes, yet collectively serve a large swath of customers. This deal is a direct result of focusing on the unique needs of this specific customer segment. And lastly, as far as our financials go, I'm excited to report that our unlevered free cash flow was negative $1.3 million in the first quarter, which is a huge improvement from last quarter. And on top of that, that includes cash outflows exceeding this amount relating to certain non-operational items like settlements of litigation, contingencies, and restructuring actions. And so, in aggregate, we see this as a testament to our execution and a reminder that we are on the cusp of achieving our positive cash generation goal. Before I pass it on to Amir, who will go into more detail on the first quarter's financial results and our Q2 guidance, let me dive deeper into these highlights. Let's start with the Haveli investment. We started a new chapter with our announcement last week, a $150 million strategic investment from Haveli. They're a technology investor with meaningful fintech experience and a strong track record of helping companies like Blend scale and achieve long-term success. They invested in the form of convertible preferred equity, with the conversion price representing a 44% premium to the closing share price on the date of the announcement. This is a big deal for our company. By recapitalizing our balance sheet, we've taken the pressure off of any near-term capital obligations and can focus without distraction on what's most important to us, serving our customers and building for the long-term through modern solutions that enable our customers, the mortgage companies and consumer banks, to better serve their customers. And no debt for us means no outgoing interest expense. We anticipate saving approximately $18 million in annualized interest expense, which we expect will help us achieve our goal of positive cash flow generation sooner than we previously planned. And it's important to emphasize that this investment has no coupon. The Haveli team is making a long-term bet on the company's technical, financial and customer success. We are fully aligned on growing the business. This investment is also important because of the strength of the team we're partnering with. They have a history of working with technology companies, serving financial services in particular, and making them industry leading and industry-changing companies. They're going to be a strong partner for us in supporting our innovation efforts across the business. And alongside this, as we announced last week, Brian Sheth, Haveli's Founder and Chief Investment Officer, has joined our Board. He has nearly 25 years of experience investing in technology companies, and more than 20 of those were spent at Vista Equity Partners where Brian served as President. He has made or advised on investments valued at over $100 billion and has served on the Board Chairman for dozens of companies. Brian and his team are already working with me and providing value across our business and helping us to continue to drive the operational and financial best practices, as well as helping us grow the business. This deal signifies a vote of confidence in Blend's journey to this point and our vision ahead. And it should leave our customers and shareholders as excited as we are about what's possible. Now, shifting over to mortgage. Let's start with some new wins. Among this group, there are a couple that I want to call out. In Q1, there was a competitive takeaway in mortgage that had to get live in 30 days. We signed them, got them live within that timeframe, and they are now actively originating on Blend. We also have another top 10 credit union that has been in the process of rolling out during Q1 and should be live in the next two weeks. These two data points are important to me because the only way to achieve something like that is with a modern, integrated platform and a prescriptive approach. Our customers want to execute quickly and with high quality, and we can help them deliver that. Looking ahead, our pipeline now has 35 opportunities for new mortgage customers, up from 30 last quarter, including a couple of the largest financial institutions in the country. Our growing pipeline is an encouraging sign. As more mortgage companies and banks and credit unions prepare for the next cycle, they are increasingly evaluating incorporating technology like ours to power their businesses and emerge stronger. New customers are only part of the story. We serve hundreds of customers today who rely on our technology to better drive operational outcomes for their businesses. The benefit of using a single platform to serve this is that as we invest and improve our solution, we create incremental value that attracts new business while simultaneously enhancing our offering for existing customers. This is a testament to what strengthening our balance sheet allows us to do, and we've already executed on some significant improvements. This includes connecting to major fee providers and mortgage insurance providers, as well as being early entrants into the Fannie Mae and Freddie Mac verification pilots, driving more automation and other early funnel tools to help first-time homebuyers see what they can afford in a tough market. These kinds of things are the things that we'll continue to invest in during the downturn to ensure our customers can benefit for years to come. This focused investment has resulted in one of our highest ROI solutions for our customers, the closing process, powered by Blend Close. Today, the closing process in a mortgage still consists of paper being mailed, manual document reviews, long post-closing cycle times, and ultimately costs and potential errors to our customers. And all of that, not to mention a terrible consumer experience in the age of everything being digital. We invested in this solution at the peak of COVID out of necessity, making the process more digital. But since then, it's become a core part of our business and one of the fastest growing parts of our business because customers are demanding a digital-first experience and regulations are now catching up to allow just this. With Blend, our customers can have all the documents presented and signed digitally by the consumer. On the surface, this means a better experience, of course, but that's just the tip of the iceberg. Because signatures are digital, there are far fewer errors that need to be corrected after signing. The documents are delivered digitally, which means they can be received by third parties instantly, and the closing can happen faster. All of these things lead to a better and more efficient process that reflects the digital age that we're in today. What's the numbers behind this? We estimate our closed solution reduces funding cycle times by almost six days. This translates to more than $150 saved per loan on hedge and carry costs for our customers. And at a time where every dollar counts, that savings presents our customers with an improved experience and improved cycle times. These are all benefits of the technology. Speaking of experience, our customers see an average of 17 points increase to their Net Promoter Scores when adding a closed solution to the lending process, showcasing the positive impact it can have for their brand. And our customers seem to understand this as we now see our close attach rates at an all-time high. We expect the growth to continue. And just last week, another one of our largest customers fully standardized on digital signings with a digital note, making this the default way they close their loans. The success of Blend Close is a direct result of being aligned with our customers. As we build great solutions that our customers love, we save our customers money and time while growing our revenue base. You'll see this expansion in our economic value per funded loan already, ahead of the $90 target for 2024 we shared with you on our Investor Day, and it has significant upside potential in the future. Now, on to the next bright spot, Consumer Banking. We spent last year focused on our critical early adopters and the very top end of the market. And we had pretty good success validated by our customer wins, the notable announcements of Navy Federal Credit Union and Citizens Bank and a few others. And we're going to continue to see progress as we execute against the value outcomes that are important to those customers. We now have more than half of the top 10 credit unions by total assets in the platform. And this year, we're offering our product suite to the broader market, making sure a credit union or a small bank that serves a local community can get the benefits of Blend as well. This strategy is already showing early signs of success. An example of that, just last week, as I mentioned earlier, we signed a seven-figure committed deposit account opening deal with a new community credit union customer. We have plans to get them live quickly, and there's upside to the commitment as we execute. The deal was a three-month sales cycle in an industry where sales cycles can stretch to a year and beyond, and this sale is indicative of both the strength of our offering and the velocity with which we can execute. For this part of the market, we built a specific implementation plan that is prescriptive and standardized, which means we believe we can get customers live in weeks, not quarters or years. On top of that, our pipeline grew to 80 new opportunities, up from 70 last quarter. This includes opportunities that suit the vast majority of the market that we support on our platform with out-of-the-box solutions to grow their deposits and offer consumer lending products. But importantly, it also includes customers who want to use our platform's flexibility and power to address bespoke lending products outside of our current suite of consumer lending applications, which further expands our total addressable market of the problems that our software can solve. The flexibility embedded in our platform also sets the foundation for us to work with system integrators to solve a variety of use cases for financial institutions, and we continue to explore avenues in which we can expand our reach into new customer domains and problem sets. There are two things that are important indicators for the future of Consumer Banking: one, we are growing our pipeline and executing quickly; and two, there's a lot of opportunity in the market and we're only starting to scratch the surface. On top of the work that we're doing to maximize the applicability of our solution and find new customers, we have a number of critical rollouts with customers in progress. As I mentioned earlier, we're in the midst of a rollout of Navy Federal, one of the largest financial institutions in the country, with an intense focus on member experience coupled with a complex account opening process. And as I said earlier as well, I'm happy to announce that we've rolled out the first phase of that solution and are now seeing applications running through successfully. The feedback from the customer to me has been exceptionally positive, and for what it's worth, this is probably the largest rollout we've done of any kind for any customer. And while the progress over time will be measured, I expect that we'll continue to see volume grow and start turning to meaningful revenue in the back of the year. All these things together are leading to positive outcomes for us in Consumer Banking, and we're seeing that in our numbers and we'll continue to keep pushing the boundaries and expanding our capabilities. And lastly, I'm excited to highlight the improvements we made to our free cash flow and profitability. This was our best quarter ever in terms of operating profitability and free cash flow as a public company. Amir's going to explain how we made this happen in his section, but I want to take a moment to reflect on this. Just a year ago, we were getting questions about the longevity of Blend in this tough macro. Now, with the new financing as well as the numbers I just mentioned around our unlevered free cash flow, we're confident in the strength and resilience of our company and our ability to continue to transform Mortgage and Consumer Banking. In tough environments like this, it's taken a lot of work and change to make this happen internally at Blend. And for this, I could not be prouder of the Blend team and our customers who all make this possible. To wrap up the summary of Q1, we're encouraged by our progress in the last quarter and energized to focus on innovation in partnership with our customers. First, we're debt-free and have a balance sheet calibrated for long-term growth. We're still committed to achieving non-GAAP profitability this year. With the equity investment from and the partnership with Haveli Investments, that's only going to accelerate our growth. And second, we're on track to grow our Consumer Banking business and increase the value for our Mortgage customers, despite this challenging macro. We're well-prepared to ensure our customers will take advantage of the market recovery when that time eventually comes in Mortgage, which hopefully comes sooner rather than later. Now, I'll pass it over to Amir, who'll go over our financial results and our outlook.

Thank you, Nima, and good afternoon, everyone. I'm pleased to be joining you today to discuss our financial results for the first quarter. We started the year strong. I'm encouraged by the momentum of our go-to-market efforts. We are managing to grow our pipeline across our business while executing to complete deployments faster for our customers. While the economic headlines may be reading that higher rates are here to stay for a bit longer, our customers are busy getting ready, building out their technology suite with Blend as the core solution to enable automation and scale as markets stabilize and prepare for the next rebound. We continue to make sure our business is poised to do the same. Before I jump into the results, let me just remind you that, unless otherwise stated, all results are non-GAAP. Total company revenues in the first quarter were $34.9 million, near the high end of our guidance. We reported Platform revenue of $23.8 million, also near the high end of our guidance range. Our Mortgage Suite revenue was $15.1 million, in line with our expectations for the seasonally low first quarter of the year. As you heard from us before, determining our market share amidst changing estimates of the total origination size has proven to be challenging. With this quarter, we have evolved our thinking and modified the presentation of our share slightly here to incorporate the different forecasts available to us until we have the Home Mortgage Disclosure Act data available, which we expect to be later this year. The main takeaway here is that our market share has remained relatively stable amidst a challenging mortgage industry for the past year. We calculate that we ended the second half of the year with a market share of 20.2%. Additionally, incorporating the various forecasts for the first half of the year tells us that our market share was 21.2%, which was 140 basis points greater than what we previously reported. This change illustrates that sizing the market based on estimated data instead of actuals can lead to volatile results that are challenging to interpret their true meaning. As we shift forward, rest assured, we are focused on the areas that will grow this business and lead to further market share expansion. We are encouraged by the early traction in Q1. Our mortgage pipeline is as healthy as we've seen it since the beginning of the cycle, and we're observing early signals that our customer base has set up to be winners as the market improves. Over the long run, we know executing on these items will drive further share growth, and in the future, we will update you on our progress when we receive the finalized Home Mortgage Disclosure Act data each year. Turning to another highlight. Our Mortgage Suite economic value per funded loan rose by approximately $7 over the same period last year, reaching $92. The step-up in the per funded loan rates are primarily the result of higher attach rates on our value accretive add-on products. Shifting to the other key part of our platform, Consumer Banking products continue to drive expansion of our footprint with customers, with revenue for those products growing 29% year-over-year to a total of $6.7 million. Our pace of growth is accelerating as we launch new deployments and add incremental platform fees, as well as more adoption of our full suite of solutions. We saw strong increases in the funding for a large credit card customer and the benefit of our closing solution being applied to more home equity loans. More importantly, we are continuing to execute at a pace that will deliver results in line with the 35% CAGR that we shared at our Investor Day. We also generated $2.1 million of professional services revenue, up 21% from last year due to fees associated with our ongoing slate of Consumer Banking and Mortgage deployments. We reported Title revenue of $11.1 million, also beating the midpoint of our guidance range. Moving on to gross profit. Total company non-GAAP gross profit was $18.3 million. Our non-GAAP Blend Platform segment gross margins were 68% compared with 67% a year prior. For Software, we reported non-GAAP software gross margins of 76%, up from 75% from the same period last year. Our non-GAAP Title margins came in at 19% for the first quarter, increasing meaningfully year-over-year from this time last year when we reported negative gross margins for Title. This improvement reflects the optimization of all of our processes and highlights our ability to deliver differentiated benefits to our customers. And we've done a lot of the work on improving the margin profile for our Title business, and we are now in a position to provide financial leverage. Non-GAAP operating costs for the first quarter totaled $29.5 million compared with $47.1 million in the previous year. This improvement reflects the full realization of all cost savings initiatives we started last year and additional programs that boost efficiency and generate additional synergies across the business. As we move forward, these initiatives are gaining momentum, and we continue to identify more areas for efficiency without compromising sustainable growth and investment. Our non-GAAP loss from operations was $11.2 million in Q1, coming in well ahead of the high end of our guidance range. We expect more improvement in Q2 and reiterate that we're tracking towards reporting non-GAAP operating profitability in Q4 of this year. While we continue to take efficiency actions that we believe could accelerate this earlier in the year, the timing continues to depend on the level of our origination activity. We are also scaling up certain areas where we see an immediate payback for our investment. As Nima shared already, the depth of our pipeline and increasing speed of our go-to-market motion is an encouraging signal for us to begin to reignite our investment in this area and are doing so with a focus on sales efficiency and scale. That said, we're unwavering in our pursuit of profitability, and our consistent execution here should leave you confident that we're doing everything in our power to achieve this important milestone by the year's end. For the first quarter, our remaining performance obligations landed at $93 million, which represents an increase of $49.1 million compared to the first quarter of 2023 when RPO was $43.9 million. RPO in the first quarter decreased by $1.9 million compared to Q4 of 2023. Keep in mind that the first quarter of the year is typically a slower period for sales activities and their associated renewals. New customer signings and renewals have already picked up to date in the second quarter, including the seven-digit contract we closed on last week that Nima shared earlier. Q1 resulted in significant improvement in our cash burn as measured by our free cash flow. Free cash flow for the quarter was just $5.8 million away from breakeven, which compares to negative $47 million in the same quarter last year. Our unlevered free cash flow, which excludes the impact of interest expense, was only $1.3 million away from breakeven for the quarter. Given the proximity to breakeven, it made sense to remove the interest burden from holding debt, which we accomplished following the Haveli investment. We achieved this free cash flow improvement as we executed with discipline across contract standardization with more customers opting to make meaningful commitments and pre-purchases upfront. Additionally, we've moved some of our cost structure towards a variable basis, aligning the timing of the expense with revenue. In combination, these changes have resulted in favorable outcomes for our free cash flow profile. These items, along with a removal of our cash interest burden, are expected to have meaningfully accelerated our timeline to generating positive cash flow and providing the business with a sustainable cash profile. We've been guiding you to non-GAAP operating profitability by the year's end and assume we'd reach positive free cash flow sometime shortly after that. This quarter's financial results and our unlevered free cash flow in particular is a positive indicator in this area and a step in the right direction for our financial goals. Now, turning to the balance sheet. Our cash, cash equivalents, and marketable securities, inclusive of restricted cash, totaled $135 million as of the end of the first quarter. Given the actions we've undertaken, we are confident our business remains well-capitalized and that we have sufficient liquidity based on our current projections and in this macro environment. Lastly, let me move to our outlook for the second quarter of 2024. We expect Platform revenue to be between $27 million and $30 million in Q2 2024. We expect our Title Business revenue to be between $10.5 million and $11.5 million. Our total company revenue outlook is expected to be between $37.5 million and $41.5 million for Q2. Our guidance is based on an internal assessment of customer-level growth as well as our own outlook of Q2 origination activity based on the application volume observed to date through our customer base. Our total non-GAAP net operating loss is expected to be between $7.5 million and $10.5 million for Q2, with the midpoint representing approximately a 50% improvement year-over-year. With that, thank you again for joining, Brian, we're now ready for questions.

Our first question today comes from Dylan Becker with William Blair.

I guess, to start off, Nima, obviously, a lot of emphasis on the capital injection and kind of the flexibility that affords the business. I guess, what's the right way of thinking about what that enables you guys to utilize those savings towards, whether that's reinvesting in product, go to market to capitalize on the consumer opportunity? Maybe help us digest kind of what this helps unlock.

Yes. So, I think, part of it is the new capital and then, to your point, the interest expense as well was quite significant in terms of the savings there. And so, I think, what we're looking at is growing the business on two fronts, one is investing more in the platform, investing more in our Mortgage product and Consumer Banking products, and the underlying platform itself that allows our customers to get more value from our suite. But on top of that, yes, we're also going to invest more in the go-to-market side. We're seeing our pipeline grow. I haven't seen a pipeline this strong and, I think, maybe because the macro is stabilizing a little bit. I haven't seen a pipeline this strong in a long time, probably since COVID times. And so, we want to make sure that we're there for our customers. We want to make sure our customers get ready for when interest rates come down, have better automation in place so they can take advantage of the lower interest rate environment themselves. And so, yes, I think those are kind of the primary areas that we'll look at. But just to reiterate, we're also still committed and we believe we can achieve the non-GAAP operating profitability by the end of the year as well.

Sure, that makes perfect sense. You mentioned in your prepared remarks the consumer suite and the high velocity and high ROI you're delivering there. How are you envisioning the opportunity to see that dynamic grow? The pipeline appears to be expanding very well, but what can you say about customers driving adoption, seeing incremental share gains and benefits, and how that might create a positive effect on the broader ecosystem, which seems to have solid momentum?

I believe that even though we're experiencing significant momentum, it's somewhat overshadowed by the tightening of lending markets. As interest rates rise, concerns about personal balance sheets have led to fewer personal loans and home equity lines from banks and credit unions compared to a year or two ago. However, we are still growing our business because we're attracting more customers. I'm seeing early signs that this growth is starting to accelerate. There's a strong demand for digital solutions, and few options effectively serve both large institutions and small community banks and credit unions. Our solution stands out as class-leading, guiding consumers through the process quickly in a digital and automated manner. We're starting to notice this growth reflected in our pipeline and the execution of Consumer Banking transactions, and while we currently do not disclose specific numbers, we are aiming for significant internal growth in this area. We are eager to build on this momentum. Additionally, I want to emphasize that the most fascinating aspect of our business is not only the initial use case we establish. When customers find success, they often return seeking support for additional needs. This results in a geometric growth pattern; for example, as we sign on 10 customers and implement 10 products, they might request another 10 solutions while we bring on more customers, leading to exponential growth. I am confident our platform is optimally positioned to leverage these opportunities, and we are enthusiastic about the future.

Our next question comes from David Unger with Wells Fargo.

Can we please double-click on the key operational best practices you plan to explore at the partnership? Anything initially pop out to you? Obviously, you've made a number of great efficiency saves in the past couple of years, but would love to hear more about the next strategic review.

What we plan to do is really just to double-down on the momentum that we've been creating, David. So, first and foremost, I'm going to carry from what Nima mentioned. On the go-to-market side being incredibly just intuitive in terms of where we need to spend and ensuring that we get the right ROI that serves our customers and also serves what we're solving for will be a key area, making sure that we build and leverage. Really what we've said a few times now is that builder actually unlocks opportunities for how we build internally, how we deploy at a faster rate, but also how our customers think about their future deployments. That's another area. These are probably the two biggest kind of, I would say, opportunity areas for us. And then, just to close it out on the G&A side, just know that that's an area that we're going to continue to kind of keep focused on and be best-in-class in terms of what we do.

I have a follow-up question. I understand you're not providing full-year guidance, but could you outline the expected trends for the remainder of the year based on your internal forecasts, including aspects like volumes and market share?

Yes. Absolutely. I think, to your point, you probably said it better than I will. One, there's very little visibility when you think about the full year, and we see a lot of this volatility back and forth. And so, what we do is, we try to stay focused on the things that we can control. I'll speak to market share in just one second. I think what's really important for us as we share this is the following, though. Putting aside what's happening on a macro basis, which again what we control is what we deliver for our customers, you're seeing that come to fruition with our economic value per funded loan. You're seeing what the progress has been on the RPO side, which is really how we're, in essence, able to sign new logos and really expand on the historical practices that we've had from a contract standardization perspective. And then, from a Consumer Banking, to be able to see an uptick in terms of just the overall pipeline that we spoke to about a quarter ago and really what Nima referenced this quarter, that is how we're seeing this year kind of come together. We're seeing strong execution so far. We want to continue down this path. And then, David, to your point, though, about macro, we see this kind of band of events that can happen. We see a lot of data points coming into us. We always say to you though that we're not economists. What we try to really just become very focused on is what's happening at our customers, the data that we have visibility to with regards to applications, where they're continuing to win and how we kind of help them do so, so that we can be balanced in market share, but then really again just take advantage of the unit economics, which again, come across in things like our economic value per funded loan.

Our next question comes from Ryan Tomasello with KBW.

Just on Consumer Banking. If you can elaborate more, Nima, on the go-to-market strategy there, in your prepared remarks, you talked about broadening the reach of that product beyond the top tier of SIS that you originally were focused on. What additional opportunities does that open up in terms of other categories of customer sets that you think this might resonate more with? And also, how you might look to lean more on systems integrators to expand the reach there?

Yes. Regarding Consumer Banking, over the past couple of years, as we've developed that product suite, I want to provide some historical context. When we entered the mortgage space, we started at the high end of the market. This is reflected in our customer base, which includes more than half of the top 10 credit unions by assets, several large regional banks, and some of the biggest independent mortgage banks. After achieving success in that area, we created a repeatable model to apply to the broader market because we believe this technology should be accessible to all consumers and lenders. We've been focusing on the top 20, 30, and 40 financial institutions in Consumer Banking to create a scalable product for the highest tier of the market. It's noteworthy that many companies offering fintech solutions rarely engage with the top few banks. We, however, have a solution that can be effectively used by the top bank in the country and can also be utilized by the 1,000th largest financial institution in a more straightforward manner. To quantify this, last year our efforts were directed towards the top 30 or 40 financial institutions, and now we are expanding our focus to the top 1,000. Recently, one of the institutions that signed a significant contract with us was not among the top 100 financial institutions. They have considerable needs and represent an underserved segment of the market eager for new technology. We believe we can provide them with solutions that are financially advantageous, helping them to increase their deposits and lending while also benefiting us financially. Continuing on the topic of Consumer Banking, could you provide more details about the type of deals you usually execute? Specifically, I’m interested in whether these deals involve replacing a legacy competitor or an in-house solution, and how these arrangements generally appear for your current clients in Consumer Banking. Additionally, at your Investor Day last fall, you mentioned aspirations and the possibility of expanding into commercial banking and international markets. Could you share any updates on those initiatives as well? Thank you. Certainly. Let me begin with your question about system integrators. In international markets, the SIS could be particularly beneficial. On the commercial side, we don’t have any updates, but it's an area with potential and we see significant demand from our customers. We aim to be thoughtful and focused in our approach and ensure that when we launch something, it's top-tier. We will not release a product unless it stands out. Therefore, when the right moment arrives, we will investigate that solution and introduce it to the market. Regarding the solutions we typically replace, it often involves a type of overhaul where an existing system, usually quite basic, is replaced. For instance, if you check the website of a local bank or credit union, you may find a few fields to fill out when opening an account, only to be told to visit a branch later. Similarly, for personal loans or credit cards, they may use forms, but often don’t provide digital issuance of credit cards. Generally, their approach to these products is simpler and relies heavily on internal personnel, which strengthens relationships but falls short of meeting customer expectations and efficiency needs. Hence, we frequently replace such solutions. Additionally, we recently launched a customer who switched from a more modern competitor, highlighting that investment in these products is an ongoing process. Our Blend Builder platform enables us to engage in these markets effectively, and as stated about commercial banking, our goal is to excel in each product segment over time. We're beginning to see progress in that area as well.

Our next question comes from Joseph Vafi with Canaccord Genuity.

Congrats to the whole team here on good progress operationally and on the balance sheet as well. Great progress. Just one, just listening to your prepared remarks, Nima. I mean, there was a lot of credit union in there, both on mortgage and deposits. And I think, you might have actually stated that maybe you've tailored those solutions a little more to the credit union market. But maybe, without giving away any secret sauce or anything, why are we hearing so much about the credit union channel right now? I know that there's a war for deposits, and credit unions have kind of been losing ground compared to other financial institutions. But this was kind of maybe less discussed back, I guess, when you did your IPO. Now all of a sudden there's a lot of credit union action. Just be helpful to get a view of this particular market. And then I'll have a follow-up.

Yes. And, I think, some of this comes down to timing, Joe. We have four of the top 10 banks by assets as customers too, and many more of the top 50. So, I don't want to say that our solutions only work for credit unions, but maybe the reason why now with credit unions is, one, it is a historically underserved space by technology providers, and I do believe that they want to continue to grow and they're member-owned organizations and so they want to continue to serve their members in the best way possible. And one nice thing that's common among every credit union I've talked to is, they are all very focused on member experience. And so, some of these questions, they come down to prioritization and so they prioritize member experience first, whereas we have also a number of the top 10 independent mortgage banks as customers as well. And so, you layer all these things together and they'll have differing priorities sometimes. And right now, the credit unions all have priorities around that member experience. And so, that's really good for us, good for our product suite, and we're going to make sure we make them aware that we have this amazing solution that can change their business. And so, we're excited to work with a lot of them and take a leadership position in that industry.

Joe, I know you mentioned you had a follow-up question. Just pause and see if you got one.

Yes, I do. Regarding the closed product, it appears to be performing very well. You mentioned securing an attachment with one of your largest customers, and I'm curious about the penetration level of this product across your mortgage customer base. Additionally, could we explore how the regulatory environment is facilitating the transition to electronic closings? Are we fully compliant in all states, or is this still an ongoing process?

There are some good questions. A significant portion of our customer base is utilizing digital closings for the applications and closed loans that pass through our product, but it's not yet the majority. Although we won't disclose specific figures, this area of our business is growing rapidly. From a regulatory standpoint, we monitor the percentage of loans eligible for fully digital closings, and approximately 90% of the loans processed through our platform meet those criteria. An even higher percentage is eligible for what is known as a digital note, enabling hybrid closings. This presents a substantial opportunity and significant savings for our customers. The operational complexities involved mean that minor issues, like a consumer's signature being slightly misaligned, can lead to delays and added costs, as these documents must be returned for re-signing. This not only incurs expenses but also creates a poor experience for users. Therefore, enhancing this aspect of our service is crucial, and we are investing in it to ensure our customers benefit from a unified platform. Additionally, as mentioned in our press release, we have updated the Spanish language intake form, which will assist our customers in expanding their business by reaching a wider consumer base. We are also developing more tools for loan officers on their mobile app, having added new features in the last quarter to enhance service for customers on the move. This is especially valued by many of our clients, particularly independent mortgage banks. Overall, we recognize there is still a lot to accomplish, and while some offerings may come with an additional fee due to their complexity, others will be included in our existing unit pricing, such as digital closings and the mobile app for loan officers.

Our next question comes from Seth Gilbert with UBS.

Maybe just one for me. The free cash flow improvement was nice to see, and I'm wondering if you can talk about the upfront pre-purchase agreements that you mentioned that led to the strong free cash flow results. It's still a very hard macro environment, and so I'm wondering if discounting plays at all into this or if maybe there was a different strategy there?

On free cash flow, it's a few fronts. It's just really like, it's the discipline of what we've been sharing in multiple quarters really coming to fruition. As you saw the update that we shared obviously in Q4 in terms of our overall pipeline and execution, what you're seeing come to fruition is the ability for us to execute against that. What it translates to is not as much discounting at all. That's not the issue, as we're signing more and more customers that either have an element of their contract be what we consider a platform centric, which leads to the ability to collect that annually. It has more and more customers that are coming to us and, in essence, being able to give larger commits than they gave historically. That's both due to the Blend Platform, but it's also due to where they see the macro bringing those two together. Just a small example is with what we've done internally to just be better aligned from a cost perspective, when you think about variable to fixed, it's those types of motions and movements that are creating just our ability again to deliver on free cash flow.

I would like to ask for an update on the $50 million run rate in Consumer Banking. I noticed that it aligns with our model, which is a good outcome for Consumer Banking. I'm curious about how this is progressing and whether there are any risks associated with it given the current macroeconomic conditions.

No, that number only reflects our existing signed customers. While there is always some risk involved, especially considering the macroeconomic factors we are facing and the fact that a significant bank almost went out of business last year, we are optimistic. We expect to see growth in that number as we continue to sign new customers. We are actively working on this and will keep everyone updated as we receive significant updates and as the year goes on. Overall, we feel that we are on track at this moment.

Seeing no further questions, this concludes today's earnings call. Thank you all for joining. Have a nice rest of your day.