Blend Labs, Inc. Q3 FY2024 Earnings Call

Thank you for standing by. My name is Jeannie, and I will be your conference operator today. At this time, I would like to welcome everyone to Blend's Livestream. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would now like to turn the conference over to Winnie Ling. You may begin.

Good afternoon and welcome to Blend's third quarter 2024 earnings conference call. My name is Winnie Ling, and I'm the Head of Legal and People for the company. Joining us 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. You can find the supplemental slides on our Investor Relations webpage at investors.blend.com. During the call, we'll refer to certain non-GAAP measures that 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. Unless otherwise stated, all financial measures we discuss today, including our profitability, refer to non-GAAP. Also, certain statements made during today's conference call regarding Blend and its operations, in particular, its guidance for the fourth 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 as conditions change, except as required by law. With that said, I'll now turn the call over to Nima.

Welcome everyone and thank you for joining our third quarter earnings call. I'm excited to start by announcing that this quarter marks our first positive non-GAAP operating income quarter as a public company. Over the past few quarters, I've emphasized our commitment to building for the long haul while achieving profitability regardless of macroeconomic conditions. And this quarter, we delivered on that promise, which I'll expand on shortly. Despite mortgage rates remaining high, around 7% on the prevailing 30-year mortgage, we're seeing a positive sentiment shift in the industry. The mortgage industry outlook is improving with renewed willingness to invest in our businesses, and this optimism is reflected in both our pipeline and growth within our existing customer base. Lastly, our Consumer Banking business also continues to grow meaningfully, surpassing our previously shared growth target of 35% and reaching over 50% growth this quarter compared to the same time last year. We're now on the precipice of eight figures of quarterly revenue in consumer banking. This steady growth is fueled by our success with existing customers and the addition of new ones each quarter. In short, I would characterize Q3 with one word, momentum. Profitability is a milestone, but it's not only our ultimate goal. We aim to reshape the industry, and we're still at the beginning of that journey. We're executing on that vision every single day. Just this past week, we closed two significant deals. The first was with a leading mortgage servicer, and the second was a consumer banking deal with a top 10 bank by assets. We're also closing in on another top 10 bank to join our mortgage platform. As you can see, we're committed to leveraging this momentum for efficient profitable growth over the long haul. Diving into the quarter, let's begin by discussing profitability, how we achieved it and why we're well-positioned for the future. Philosophically, we're transitioning to a simpler software-focused model. Our strength lies in our platform, which enables best in class origination experiences across a whole suite of solutions. We invested in creating a broad customer base across millions of applications annually, and our Blend Builder platform allows us to innovate faster and more cost effectively for our customer base. This combination is part of our unique advantage, helping us create frictionless low-cost origination experiences, like for example, our next generation rapid refi solution, and bring them to market regardless of the macroeconomic environment. But this is just one piece of the puzzle. The platform also enables our partners to build net new value for our customer base. In Q3, we entered into a strategic partnership in Homeowners Insurance Origination which is a key part of the mortgage journey, allowing our customers to have an amazing experience through this partner with minimal operational complexity and cost on our end. Amir will talk about the positive financial impact of this later, but we aim to take this blueprint and enable partners to do this broadly across our software base. As more partners build on Blend, they can create new value for our customers and share this value creation with us as well. We expect to see an acceleration of these partnerships going forward as we open up our platform to more partners. These things together are what ultimately create operational leverage for us. You're seeing the outcome of years of work to create that first real quarter of platform profitability in a tough market, and we hope to continue this momentum going forward. Now let's shift to the mortgage industry. As I mentioned earlier, we're seeing renewed life and momentum in our mortgage customer and prospect base. While rates remain high and volumes are muted, we're seeing optimism for what's ahead. And now that we've delivered our first profitable quarter in this tough market, I'm not going to dwell on the macro on this call and instead I'm going to focus on what we can control, our products, our pipeline, and our customer base, areas where we're committed to being the best. Starting with our products, our customers rely on us to invest ahead of the curve. Our pilot Next Gen Refi solution, which we're calling Rapid Refi, is an example of just that. It's a solution that we've been developing this year to support the return of refinance volume at scale. This solution is designed to be the most integrated frictionless experience we have ever created and the goal is to drive higher conversion and higher retention for our customer base, which are two very important goals for them. As a result, the demand for this has been strong. Our hope with solutions like this is that the increased value we drive for our customers—better unit economics for them—will, in turn, transform into increased revenue for us with every loan. And for prospects who are not on Blend yet, it gives them another entry point to get started with us. Speaking of our pipeline, our mortgage prospect base is maturing along the lines we discussed in prior calls. It reflects the broader optimism we're sensing in the industry. I can tell that people are trying to invest in their mortgage business again, and one of our recent wins was with Pentagon Federal Credit Union for our mortgage product, which brings us to seven of the top ten credit unions by number of member accounts as customers of ours. Our Q4 pipeline is also strong and includes a range of independent mortgage banks, servicers, and mid to large-sized banks and credit unions. Institutions that were largely dormant through 2023 are now preparing for the future, and we're poised to close this year strong, adding more large logos as the industry looks ahead to 2025 and a brighter future. Our customer base, it's no secret they went through significant challenges in 2023, with some of them using that time to implement new technology for their consumers, but most of them holding off. Now that the industry is achieving profitability again, we expect that adoption will accelerate going forward. We're seeing that in our data, where we're observing increased implementation of our built-in features like our Spanish language intake and also our revenue-generating add-ons like Blend Close. For instance, South State Bank, a $44 billion bank with over 1 million customers, recently adopted Blend Close, cutting their loan processing time from seven days to just 48 hours and enabling customers to close their loan digitally from the comfort of their home. This kind of adoption strengthens our partnership with those banks, enhances customer value for every loan they do, and over time helps us grow our unit economics. The combination of our products, our pipeline, and our customer base makes me very excited about the future. I recently returned from the Mortgage Bankers Association Annual Conference, and the energy and tone reminded me of 2019—a time before COVID when there was a real responsibility for transforming the mortgage industry, building new things, rolling out new technologies, and we at Blend are happy to be part of this journey. Switching gears to Consumer Banking, on the product side, we recently refreshed our deposit and member onboarding solution. We've integrated things like mobile carrier authentication, passwordless login, and seamless cross-sell features, allowing consumers to open accounts in just a few taps. This kind of smooth, transparent, frictionless experience is what today's consumers expect, and our hope for our institutions is that it will ultimately lead to more and deeper consumer relationships for them. As a result of this innovation, our consumer banking pipeline is strong. In recent weeks, we signed Pentagon Federal Credit Union for home equity lending and another top 300 financial institution by customer accounts for deposit account opening. And this is just the beginning for Q4 with a pipeline that includes two top 10 banks for home equity lending, a large regional bank for unsecured lending, and ongoing growth across credit unions of all sizes. Our customer base is feeling the benefits of partnering with Blend. We're delivering real value to our customers through this work. For example, the passwordless authentication that I mentioned earlier drove significant conversion increases for BCU, conversion being so important to them and that's one of the largest credit unions in the country by customer accounts. Another recent customer, Andrews Federal Credit Union, recently went live on our platform within weeks, a deployment they described as one of their easiest with any technology partner. To top it all off, one of our largest credit union customers is now fully rolled out with onboarding for every new online member and plans to expand to all channels next year. We're going to keep executing on our consumer banking suite and building on the momentum we have now. This is just the beginning for Blend in this space. While we're on the precipice of eight figures of quarterly revenue in this area, our customers need more from us over the next decade, and we intend to innovate here and deliver on that in a methodical, high ROI way. We're going to lead the charge on what great looks like for origination software. To summarize the quarter, profitability was a key milestone, but it's just one step on a very long journey for us. We expect to continue to grow profitably, supported by our platform and our momentum in both mortgage and consumer banking segments. While we're seeing the mortgage industry start to recover from the challenges of 2023 and early 2024, consumer banking is building solidly on our success. We'll maintain this momentum through customer expansion, pipeline development, and innovation, the same ingredients that have gotten us thus far. With that, I'll turn it over to Amir to walk through the financials.

Thank you, Nima, and good afternoon, everyone. I'm pleased to be joining you today to discuss our financial results for the third quarter. Our third quarter marks another period of strong execution. We returned to year-over-year revenue growth. Our Consumer Banking business accelerated even faster. We achieved a new high for our economic value per funded loan, and our RPO landed above $100 million, another record for Blend. And last but certainly not least, we achieved operating profitability one quarter ahead of our target. There's a lot to talk about, but before I jump into the results, let me just remind you that unless otherwise stated, including our references to profitability, all results are non-GAAP. Total company revenues in the third quarter were $45.2 million, ahead of the high end of our guidance, and representing an 11% year-over-year growth. We reported platform revenue of $33.1 million, which exceeded the high end of our guidance by 7% and grew 16% year-over-year. Our mortgage suite revenue was $21.5 million, representing a 6% year-over-year growth and a 17% sequential growth, in line with the expectations we shared in our last call that industry originations would be higher in the third quarter. In Consumer Banking, revenue grew 54% year-over-year to a total of $9.5 million. Our pace of growth is now well ahead of the 35% CAGR target we shared at our Investor Day. We also generated $2 million of professional services revenue, down slightly from the $2.1 million we generated during the same period last year, and we reported title revenue of $12.1 million ahead of the midpoint and near the high end of our guidance for the quarter. Moving on to gross profit. Total company non-GAAP gross profit was $26.3 million. Our non-GAAP Blend Platform segment gross margins were 75% compared with 71% a year prior. We reported non-GAAP software gross margins of 80% compared with the 79% we reported both a year prior and in our second quarter. Over the long term, we expect our software business to generate at least 80% margins, so we're back on the right track here. Our non-GAAP title margins came in at 12% for the third quarter compared with 17% from the previous year. While our title margins are up quarter over quarter, there is still room for improvement. The year-over-year pressure came from a mix shift in title transactions we expect to normalize over time. Non-GAAP operating costs for the third quarter totaled $26.3 million compared with $38.2 million in the previous year. We continue to benefit from the efficiency programs implemented over the past year and our commitment to simplifying the business as part of our platform strategy. We added more efficiency in the business as we simplified our focus, and our margins increased across the board. Along with a strong quarter for revenue, we achieved non-GAAP operating profitability in the third quarter, a full quarter ahead of our target. In generating non-GAAP income from operations, we significantly exceeded the high end of our guidance range, which was for a non-GAAP loss from operations of $4 million. This is an important moment for Blend. Now that we've reached this milestone, our focus will be on sustainable profitable growth and generating excess returns to reinvest in our business and create even more shareholder value. Free cash flow for the quarter was negative $1.4 million, which compares to negative $25.9 million in the same quarter last year. Having achieved non-GAAP operating profitability earlier than our target, we're also closing in on generating positive free cash flow. Although we are not sharing guidance on positive free cash flow just yet, it is important to note that our non-GAAP operating profit was our first step in being able to transition and focus on being free cash flow positive. With our focus on prioritizing longer commitments and larger pre-purchases in our contracts as well as better revenue and expense alignment, we're confident we're right on the cusp of reaching this milestone. We ended the quarter with approximately $124 million of cash, cash equivalents, and marketable securities inclusive of restricted cash. We believe the strength of our balance sheet is also a differentiator in allowing us to focus on achieving our strategic initiatives with a focus on innovation. Shifting gears, I'd like to share our latest thinking on our market share as we continue to evolve this metric to ensure accuracy. We determined that the best way to do this is to no longer rely on third-party estimates and to shift our measurements of the market to the Home Mortgage Disclosure Act data, also known as HMDA. No measurement is perfect, and there are still some small limitations here that we are aware of. For example, this data does not include some small lenders, and it can only be presented for annual periods instead of the semiannual increments we've shown previously. Despite this, we believe this bottom-up data set represents the best way we can understand how our business is performing within the market in a detailed way. Based on the HMDA data, in 2023, Blend achieved a 21.7% share of HMDA originations, a 120 basis point increase from 2022. However, given heightened industry churn in 2023, especially among some small lenders and independent mortgage banks, we expect that Blend's 2024 HMDA share will be somewhere in the range of 19.7% to 20.2%. We're confident this trend is behind us and expect minimal impact from 2024 churn due to the strong customer retention, a robust pipeline, and recent customer wins. Furthermore, our churn has stabilized to the low levels that we have seen in previous years and customer health is recovering. When comparing this minimal churn to this year's customer wins and deals in our pipeline that we believe have a high probability to close by the end of this year, we believe we're back in a position of gaining share again. This gives us confidence we can achieve the market share targets on an equivalent basis that we shared at Investor Day over the next two years. Detailed historical HMDA transaction data is available in the latest disclosures. Moving on to some recent developments, we entered into a strategic partnership to help fuel the next phase of growth in our platform business. As part of the agreement, Blend's home insurance agency operations have been acquired by Covered Insurance Solutions, a premier provider of embedded insurance solutions, and we've granted Covered a license to integrate their solutions directly into our platform. In return, we receive cash consideration, an annual platform fee during the term of the license, and a share of the future revenue in connection with the insurance solutions provided through our platform. This partnership transitions Blend Insurance Services from an exclusively in-house model to one that leverages a specialized partner to provide an even more comprehensive insurance marketplace. We expect to deliver the same best-in-class experience to our customers while removing the cost we previously incurred to operate this business. Now almost every dollar earned by Blend in this business flows to the bottom line. With a simpler cost structure, we expect our overall profitability to increase starting as soon as the fourth quarter of this year. As we continue to focus on simplifying Blend and our cost structure while executing on ways to enhance our platform, we expect to announce similar future partnerships. Shifting gears, our mortgage suite economic value per funded loan increased by over $2 compared to last quarter and approximately $13 year over year reaching $99, just shy of our $100 target for the end of 2024. With the transaction I noted above, there will be a reduction in the insurance business contribution to our economic value per funded loan. However, each transaction's contribution profit will ultimately increase because of it. This shift will drive a slight decline in our economic value per funded loan in Q4 with an expected level of around $95 by year-end. To reiterate, the decrease in economic value is fully offset by the gain in contribution profit, allowing us to simplify our operations while expanding our operating leverage. These points underscore our focus on the core business centered around our platform and software applications. In addition, we expect that our ongoing expansion and execution of our suite of value-add offerings will more than offset the trade-offs in economic value, and thus we are keeping our combined fully utilized value unchanged from the $170 we shared with you at our Investor Day. When we report earnings for the fourth quarter, we plan to issue new short-term and long-term targets that reflect the impact from the insurance partnership as well as the inclusion of Rapid Refi for the first time. This is an incredibly positive milestone for Blend on several vectors. One, it allows us to operate with more leverage as we simplify Blend. Even more relevant, though, is that we have executed against the strategy we shared at Investor Day on our vision of building a partner ecosystem with positive unit economic opportunities. Last but not least, we will continue against these goals as we drive further leverage in our operating profit through similar motions. Moving to another important metric for us. In the third quarter, our remaining performance obligations landed at $107.4 million. This is a record for Blend. It represents an increase of $48.5 million compared to the third quarter of 2023 when RPO was $58.9 million. This marks the sixth consecutive quarter where our RPO balance increased year over year, with Q3 growing by 82% compared to the same period last year. RPO in the third quarter also returned to quarter-over-quarter growth with the balance increasing by $20 million compared to Q2 of 2024 as we've been busy negotiating and closing a number of important renewals and new deals. Given the strength of our pipeline for deals closing in the fourth quarter and some of the newly signed customers committed to large multiyear deals, our current outlook for RPO exiting 2024 is to exceed $110 million. Lastly, let me move on to our outlook for the fourth quarter of 2024. We expect platform revenue to be between $29 million and $31 million in Q4, with the midpoint representing a 16% year-over-year growth. We expect our title business revenue to be between $10.5 million and $11.5 million, with the midpoint representing an 8% growth year-over-year. Our total company revenue outlook is expected to be between $39.5 million and $42.5 million for Q4, with the midpoint representing a 14% year-over-year growth. Our guidance is based on our own internal assessment of customer level growth, as well as our own outlook of Q4 origination activity based on application volume observed to date through our customer base. Despite the Fed's 50 basis point cut in September, mortgage rates haven't gone down. We're waiting to see what the impact of the Fed's decisions this week will have both on the federal funds rate as well as on the mortgage rates in the next few months. But for now, we're cautious about origination activity in the fourth quarter, and our platform revenue guidance reflects this. Our total non-GAAP net operating income is expected to be between zero and $3 million for Q4, as we expect to maintain our third quarter non-GAAP operating profit into the seasonally low fourth quarter. With that, I want to thank you again for joining. We are now ready to take questions.

Thank you. The floor is now open for questions. Your first question comes from Seth Gilbert with UBS. Please go ahead.

Hey, thanks guys and thanks for the question. Maybe I'll start with consumer banking. You mentioned a lot of success with consumer banking on the call, maybe specifically a top 10 bank by asset. So I was curious, can you help us understand a little bit more about that deal as it relates to consumer banking? Are they starting small with one product? They're starting with a few products? And then maybe on the same topic more broadly, are you able to comment at all about the split of consumer banking, maybe top three products by revenue or by growth rates, just to help us understand what products are having success? Thank you.

Yeah, sure. Thanks, Seth. To answer your first question about how that customer came on, they already use us for mortgage and they're expanding into consumer banking. They signed with us for mortgage probably three or four years ago and we've been working to get into the other side of their business for a long time. So it's a really good team win for us. They also expanded their mortgage work with us, which is positive. That's the trend we're seeing with some of our existing customers who existed four or five years ago, where over time as our solutions mature, they're taking a closer look at our consumer bank solutions. For your second question regarding the parts of the business that are the biggest and fastest growing, they align with the timing of our releases. The earliest released consumer banking product was home equity lending, which is our largest business line, and it's growing well. We have a number of solid deals closed and in the pipeline. I think we've secured a large chunk of the top 10 home equity lenders by volume as customers. Then there’s the deposit account opening membership product, which is gaining traction due to a customer rolling it out fully over their online channel. So those are areas with continued growth and are our next frontier as a company.

Hey, Nima. Hey, Amir. Really nice job here, guys. I guess maybe starting with you, Nima. Given we've seen rates retrench a bit here, you talked about positive sentiment continuing from customers. I wonder to what extent that's driven by a lot of these new offerings you're introducing, that's helping incentivize adoption and how you think about that business leverage on the per funded loan side to help contribute to growth on top of whatever trajectory recovery might look like in 2025 and beyond?

I think the sentiment shift is sort of twofold. The first half of 2023 and pretty much all of 2022, our customers were just fighting to become profitable on their mortgage business. Now that they're profitable in the back half of 2024, it allows them that breathing room to invest in the future. So many of the solutions we built and matured during this time, like Blend Close, help with operational efficiency, but they didn't have the resources to onboard those capabilities. Some of those solutions do expand our unit economics, while others do not. Our primary goal is to drive the best ROI for our customers. The most significant portion of our funded loan growth comes not from us raising prices, but from them adopting new functionalities like Blend Close. That's driven notable growth in the last year, generating real results for our customers and for the mortgage industry. We are excited to continue investing in ways to drive them value moving forward.

Okay. That's really helpful. Maybe if we consider the consumer strength, could you touch on part of the competitive differentiation? We’ve discussed the Blend Builder platform, but it feels like there's ample room to continue building that on the consumer front as well too. Any insights or thoughts would be appreciated. Thanks.

Yes, I believe our competitive differentiation lies in our ability to help financial institutions offer long-term, sticky relationships with consumers. We're one of the few viable platforms that serves across product lines. We enable institutions to offer a frictionless mortgage and an equally smooth account opening process. This seamless integration helps institutions drive better economics over time. Our platform enables us to build and also collaborate with partners for additional offerings. Together, these efforts make us distinct and value-driven in the market.

Great. Thank you for taking the questions. I'm wondering how potential consolidation in your end market, now that we have a more favorable regulatory environment could impact your go-to-market motion. I'm thinking through the dynamics of potentially higher rates and offsetting that with a more favorable regulatory environment.

Yeah, it's interesting. The rates are definitely higher today than they were yesterday. I'm really excited that our customer base in the mortgage industry has taken the time to get their business to a scalable model. I'm sure they’re not happy about these rates going up, but they're set up for success in a lower volume environment. I haven’t had anyone tell me they’re pulling back on investments. In fact, we've even signed a good deal today. On the consolidation side, we've seen a lot over the last couple of years, mostly smaller players but some larger ones as well. If consolidation increases, it could be favorable for Blend as we tend to play at the higher end of the market.

Appreciate that. And just a follow-up question. When we consider your Investor Day disclosures and the developments since then, how much surprise has there been to your forecast today and looking out to 2026?

David, there are a few areas to highlight, and we'll revisit this in 2025. We've seen some surprises from a macro perspective, but we expected that, which is why we gave the ranges for mortgage. On economic value for funded loans, we're ahead of where we shared at Investor Day, which is a positive outcome driven partly by Blend Close. For Consumer Banking, the growth rate we're witnessing is ahead of the 35% CAGR target we shared at Investor Day. Additionally, our ability to expand our platform and partner ecosystem aligns well with our vision from Investor Day. These are all pleasant surprises.

Thanks for the questions. You mentioned the idea of opening up the platform to more partnerships. Can you provide insights into what that could look like over time?

We are aiming to enhance not just our mortgage offerings but also our consumer banking suite. When you're opening accounts, you deal with vendor partners in fraud, anti-money laundering, or payment processing. The natural evolution for Blend Builder means opening our products up to partners who want to enhance user experiences. This creates a win-win for everyone—better experiences for consumers, higher value for our customers, and shared economics for us. As for the title business, we see it as a critical part of the mortgage process. We're innovating in that space and figuring out how to work with partners to enhance operations effectively.

Your next question comes from Joe Vafi with Canaccord. Please go ahead.

Thank you. This is an unidentified analyst on for Joe. Nima, maybe we can get an update on the refi piece. Any additional color you can provide there and the adoption of the refi product?

Yes, we started working on the refi product this year, and we have some initial mortgage customers going live with it, specifically servicers preparing for a potential refi wave. They want to provide consumers with a high conversion, low-cost, frictionless experience. We’re closely focused on pilot data to ensure maximized ROI. Coming back from the Mortgage Bankers Association Conference, the demand for this is incredibly high, and I'm keen to align everything for when we launch it to meet that enthusiasm.

That's helpful. Thank you. And just a follow-up here. With the improving mortgage outlook and the consumer banking momentum, how are you thinking about your sales team size? Could that be an area of investment as we look to next year?

We typically start at the top of the market, showcasing solutions at scale for large institutions. Many of our wins are in that top-tier segment, but we see real opportunity in serving the midmarket segment. We’re looking closely at whether we need to invest more in our sales team to effectively serve that broader range of financial institutions.

Thanks, guys. Just a quick one here. I saw a line in the press release about the short-term negative impact of revenue from the sale with Covered Insurance Solutions. Could you provide a quick update on that, and was your Q4 guidance impacted by the sale of the insurance business?

It's accurate that following the sale of our Homeowner insurance business to Covered, you'll see a decline in overall revenue. Yes, this was factored into our guidance. Despite this expected revenue decrease, the profit on a per unit transaction will see an equal size, if not greater, increase as we simplify our operations.

Thank you. There are no further questions at this time. This concludes our question-and-answer session. Thank you for joining today's conference call. You may now disconnect.