Title

Presentation

Blend Labs, Inc. beats earnings expectations. Reported EPS is $-0.15, expectations were $-0.18.

Winnie Ling: Good afternoon, and welcome to Blend’s First Quarter 2023 Earnings Conference Call. My name is Winnie Ling and I’m the Head of Legal for the company. Leading today’s call 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, the team will take questions. You can find the supplemental slides on our Investor Relations webpage at investor.blend.com. During the call, we will refer to certain non-GAAP measures, which are reconciled to GAAP results in today’s earnings release and in the appendix to our supplemental slides. Non-GAAP measures are not intended to be a substitute for GAAP results. Also, certain statements made during today’s conference call regarding Blend and its operations, in particular its guidance for 2023 maybe 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-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: Hello, everyone and thank you for joining. I want to start by briefly summarizing the quarter. The headline is, we came in well ahead of our revenue and cost saving targets and closed one of our largest platform deals in Q1, which was also one of our highest revenue deals in our history. We are focused, we have a sense of urgency and we are getting leaner and stronger. We’ve been building the muscles necessary to execute and this quarter is a testament to the work we have done and we will continue to do. To elaborate on our results, our platform revenue came in at $27.9 million based on our prior segment structure on which our guidance was based. Amir will walk through our new presentation that better aligns with our business focus moving forward, but the headline for Q1 is that our performance is well ahead of our expectations, largely driven by the strength of our mortgage customer base.

We expect Q2 platform revenue to be even better than Q1. We’ve always said our customers will be best positioned in a downturn given their position in the market and the cost saving benefits of our technology, and we’re seeing that play out in practice. Our mortgage market share grew to 23.2% in the second half of 2022, up from 14.5% in the second half of 2021 based on third-party market origination data. In addition to that, we signed one of our largest consumer banking suite deals ever, which we believe is a major validation of our Blend Builder platform and now have close to 20 active customer projects going live on Blend Builder Solutions. This part of our business is growing and Blend Builder will be the foundation platform for all aspects of our business over time, including our mortgage customer base.

We came in well ahead of our expectations on operating expenses with a sequential improvement of $11 million and down $21 million from the same period last year. This was driven by our concerted efforts to continue to optimize our cost structure. We expect this to continue to trend in this direction going forward. As a result of all of the above, our net operating loss came in at $31 million. Also well ahead of our expectations, but is still a big area of focus for us to continue to improve. This is a sign of us ushering in a new era at Blend, we are leaner and more intentional than ever. We’re even more focused on our customers all while driving meaningful innovation with Blend Builder. This is what you can expect from us going forward. We won’t stop until every aspect of the way banks originate products become digital and data driven, and we’ll take it one step at a time starting now.

Now that I’ve shared some highlights, let me deep dive into our results. To remind everyone of our three key priorities for the year, we’re focused on, one, continued improvement of our cost structure, building towards profitability despite a tough mortgage and macro environment. Two, driving success in our mortgage customers so they can grow market share and lower their costs in a lower margin environment. And three, proving out our Blend Builder platform with key customers to serve as the foundation for the future of Blend Mortgage, as well as expanding our total addressable market across every line of business within banking. First, let’s talk about our cost improvements and path to profitability. I want to start with the punchline, we are ahead of schedule on our path to profitability.

Amir will go into detail on this so I won’t spend too much time, but here are the key facts. Our operational cost improvements in January are making a big impact on our profitability targets. We’re breaking out our software gross margins, which is tied to our products, not including professional services or title for the first time this quarter. They’re 75%, up from 72% last period, and we expect to continue to improve these over time. As a result, our gross profit came in ahead of our expectations. We view ourselves as a software company first and foremost, and this is why we decided to share this information starting now. Between that and our outlook for sequential revenue growth throughout the year, we expect our net loss will continue to decline each quarter from here forward.

On the debt, our debt is due in July of 2026. More than three years out. We expect to be free cash flow positive well before then. Given the performance of our business in Q1, we are ahead of our previous long-term plan and now show that we expect we’ll generate positive operating income in the fourth quarter of 2024. In summary, we believe the company is fully funded. We feel good about our balance sheet as we continue to strengthen our operations. As we stated last quarter, we’ll remain diligent to protect our balance sheet while being opportunistic to strengthen our position. Now let’s talk about our next major year objective driving success in our mortgage customer base. Our goal this year has been to help our customers lower their costs to originate by leveraging more technology, including many of the expanded features and capabilities we’ve built out over the past few years.

We saw that happen in Q1. Our mortgage suite revenue came in at $17.8 million. This was well ahead of our expectations as outlined above. We believe we have significant upside in our revenue from here. As markets are consolidates, industry volumes returned and our add-ons gain traction. We believe these three will compound to drive meaningful results to Blend’s top line. We had three major customers go live with Blend Mortgage in Q1 and Blend Income, our add-on which helps customers save money on income verifications has given us additional momentum. However, I want to be realistic about the macro challenges we and our customers are facing. The mortgage margins for our customers are exceptionally challenging, and a few of our smaller customers have gone out of business.

Some of our cost conscious independent mortgage banks have gone to lower cost or free solutions. While we are not going to compromise on delivering the best and most comprehensive solution in the market, what we are doing is focusing on helping our customers take full advantage of all the cost saving features available to them from Blend. We recently saw one of our larger lenders, Atlantic Coast Mortgage recommit to Blend after briefly going to one of our competitors for lower costs, but came back to us for a richer set of capabilities we offer and the benefits the platform delivers to them. Some of our other cost saving features, which are included in our base platform such as soft credit pool capabilities and automated condition management are gaining adoption with our customers.

In aggregate, these help our customers do things cheaper and better on Blend than would otherwise be possible. These are the kinds of things we are focused on ensuring our customers can benefit from in this environment. As a result of this, we believe we have a lot of upside in our mortgage fleet. We are investing significantly in our customer base and our product. Continued improvement is critically important in a time like this, and we want us and our customers to grow market share and as a result come out the other side stronger. We will continue to invest throughout the down cycle and can do that simultaneously with the cost savings I outlined above to manage the profitability. Lastly, I want to talk about our Blend Builder platform and the expansion possibilities that that enables.

We’ve taken most aspects of building financial products from data sources to verifications to the user experience across every channel and made it no code, drag and drop, highly configurable with automated processes. Following three years of intensive development, we started offering composable origination to our customer base. It’s my belief the broader market is underappreciated part of what our long-term revenue growth prospects are. According to IDC’s worldwide banking IT spending guide, tech spending of loan origination was $7.3 billion in 2021 expected to grow to $9.7 billion by 2025. Our original platform was built for English speaking countries and was only able to touch a small part of the origination tech stack. Blend Builder allows us to solve more of the origination tech stack today and allows us to solve for international originations over time.

We believe this gives us a clear opportunity to drive towards a billion dollars in revenue. Let’s use our new instant home equity solution. As an example, our original home equity solution was built on our first platform and that was a big step forward for our customers who wanted a more data-driven way to take home equity applications. It meaningfully helps our customers and is a leading solution in the market, but our instant home equity solution built on Blend Builder is a considerable leap and functionality even compared to that because we are able to drag and drop almost every aspect of the process, including identity verification, income verification, credit scoring, debt consolidation flows, home insurance verification, real-time pricing and decisioning and ending with digital closings.

The solution is materially more valuable to our customers. That shows up in our unit pricing, which is a multiple of our original home equity platform pricing. And the best part for us and our customers is that we built the initial instant home equity version in months instead of years at a materially lower cost and can maintain and improve it faster and cheaper than before. With Builder, Blends addressable market will get bigger as we expand from selling a few specific financial products to enabling almost all types of financial products in deeper waves. That’s already beginning to show up as of Q1, we did $5.2 million in revenue in our consumer suite in Q1 2023, up from $3.9 million in Q1 2022. We signed Navy Federal Credit Union not yet showing up in our revenue to our deposit account solution.

This is one of our largest deals ever at a critical time for banking institutions striving to grow their deposits and Blend Builder made it possible. Our entire consumer suite is now available on Blend Builder, giving existing products a vast amount of flexibility. For our customers, that means that many of the front and middle office capabilities that they struggle with are rapidly becoming encapsulated by software, our software, saving them time, money, and technical diligence. For a large mortgage customer base, we anticipate that all of the complex compliance requirements and integrations needed for the application process will eventually be drag and drop, lower no code. And this applies to both automated and manual approvals. Services that used to require many months and dedicated technical teams are now available in a library of modules for almost every major consumer banking function, while allowing for extensive personalization and branding.

Besides making our customer’s lives easier, it means our platform engineers don’t need to do customization work or even build in additional configuration points. We can deploy faster, speeding time to revenue for our customers in Blend and funding accounts in days, not weeks. And for Blend that means high quality, pure software revenue that we believe will drive meaningful value for shareholders. To summarize all of the points above, we are making material visible progress towards our path to profitability, we are dedicated to our mortgage customers, who are showing their strength through these tough times, and we believe Blend Builder has laid the infrastructure for a bright future for us and our customers to create massive value across the banking software stack.

Now let me turn it over to Amir to talk through our key numbers for Q1.

Amir Jafari: Thank you, Nima, and good afternoon, everyone. I’m pleased to be joining you today to discuss our financial results for the first quarter. The results we’re reporting today are a testament to the resiliency of our business model, amidst an exceptionally low volume environment for industry mortgage originations. We owe our performance to the commitment of our employees and our customers who are critical partners in helping us build a more simple transparent banking future. As I walk through the financials, I will provide context surrounding the outperformance relative to our Q1 guidance, along with an update on our outlook for Q2. Before getting started, as we previewed in our last quarter call, we are changing the way we present our financial results effective Q1.

We’ve made these revisions to give you better clarity on the progress we’re making on our strategic objectives that Nima recapped in his remarks. The constitution of these new reporting lines in comparison to our old ones can be found in our supplemental update. I’ll briefly touch on how we are thinking about them here. Our two segments consist of platform, which comprises our Software businesses and Professional Services and Title, which now also includes our software-enabled title offering in addition to Title365. Within our Software business, our Mortgage Suite revenue line now includes our marketplace activities as well as value-add products like income and close that attached to the same loan we charge for our mortgage product. As you recall, these were formerly reported in our Consumer Banking and Marketplace revenue line.

Our Consumer Banking Suite reflects the lending, deposit and broader banking technology products that are powered by our Builder platform. We understand that historically it has been challenging to follow along with this growth, and I’m optimistic that as we continue to see meaningful progress, this presentation will provide you with greater clarity. We also want to be clear about the margin profiles we have for each of our different business lines. We set different goals for our platform and title operations based on the different operating characteristics of each. Our goal is to improve on each of these independently and this new presentation should provide you line of sight to our progress here. With that all said, let’s move on to the results for the quarter.

As a reminder, unless otherwise stated, all results are non-GAAP. Total company revenues in the first quarter were $37.3 million, beating the top end of our outlook by 7%. We reported platform revenue of $24.7 million and title revenue of $12.6 million. As a reminder, our prior guidance reflected the previous presentation of our Platform business, which included our software-enabled title business in the Platform segment. Our first quarter results included $3.2 million in software-enabled title that is now classified in the Title segment. Adjusting for this, our platform business was 9% above our expectations and our Title business performed at the top end of the range. We credit this outperformance to the resilience of our customers who acquire share through the market, compounded by slightly better industry volume than our expectations.

This is the realization of the point Nima made earlier. When our customers win, we win alongside them. Furthermore, we believe this validates the leverage that our deepened wallet share has even with a small outperformance on loan volume. Our Consumer Banking Suite also performed well benefited by a stronger than expected home equity volume in the last one to the first quarter. We want to emphasize that our results represent a beat against the top end of our guidance in the new and old presentation of our reporting segments. Our Mortgage Banking Suite revenue declined by 33% year-over-year to $17.8 million amidst the 58% mortgage market volume decline over the same period. Our aggregate Mortgage Suite revenue per transaction was $98 up from $71 in the same period last year, an increase of 38%.

This improvement reflects the benefit of additional cross-sold products and the rollout of value-add features to our base product that enables us to realign the prices we charge at renewal. While we are encouraged by this number, we want to highlight that there were some benefits related to the accounting treatment of multi-year contracts that influenced this calculation this quarter. Normalizing for these impacts, we expect our revenue per transaction to be in the mid to high 80s this year. Our Consumer Banking Suite revenue totaled $5.2 million in Q1, an increase of 34% as compared to the prior year period. This was primarily benefited by higher home equity volume I mentioned and contribution from new deployments on our Builder platform over the past year.

Closing up the revenue discussion, we reported $1.7 million of professional services revenue. Moving on to gross profit. Blend non-GAAP gross profit was approximately $16.3 million down from $29.4 million last year, primarily impacted by lower mortgage origination activity I mentioned previously. Our software gross margins were approximately 75% in the first quarter, up from 72% for the same period last year on both GAAP and non-GAAP basis. Our gross margin improvements reflect the continued cost optimization programs we’ve implemented, the benefit of higher margin consumer banking revenues and the ability to continue to expand on the value of our mortgage product through innovation and the enablement of additional feature sets. Given the level of effort and focus, we are ahead of our target ranges for this year and anticipate the continued cost optimization programs we are undertaking will have additional effect improving our margin sequentially this year.

While we are all excited about the progress here, there are a couple areas of focus I want to point out as well. First, while we don’t aim to generate a sizable services business within our Platform segment, we are evolving our model to ensure it covers its own cost and continuing to accelerate our timeline to value for our customers. We believe Blend Builder will provide a meaningful benefit here as we leverage the power of composable origination to simplify and accelerate our deployments. Second in our Title segment, we are continuing to align the cost to deliver this product in a very low volume environment. Our current outlook indicates the refinance market has stabilized and we expect a return to modest growth next quarter. As a result of the right-sizing efforts we have implemented, we expect this business to generate a modest gross profit next quarter and sequential improvement thereafter.

Non-GAAP operating costs for the first quarter totaled $47.1 million compared with $68.9 million in the previous year. The decrease as a result of the cost reduction initiatives we have undertaken to date and our commitment to driving operational excellence through the organization. With this, we saw meaningful sequential improvement across all expense departments. Our non-GAAP loss from operations was $30.7 million versus $39.5 million in the prior year. The improvement in our operating loss is ahead of our expectations, benefiting from higher than expected revenue, better margins and greater financial leverage through operating efficiency. I’m encouraged and optimistic about the progress we’ve made towards our $20 million quarterly operating loss exiting 2023.

We believe that business has the ability to provide further operating efficiency as we continue to execute on our existing initiatives and identify new opportunities through the lens of operational excellence on our path for profitability. The company has adopted a culture of velocity in optimizing performance for profit, and as we continue to begin, we are finding new ways to do this better every day. We said last quarter that we expected to see sequential improvement in our operating loss through the balance of the year. We also said last time that we will not report another quarter with a three-handle, and we are on track with this goal. Now turning to our balance sheet. Our cash, cash equivalents and marketable securities as of March 31 totaled $307 million with total debt outstanding of $225 million on our five-year term loan due July of 2026.

Our $25 million revolving line of credit remains undrawn. We have re-examined our business and feel that we have ample runway and liquidity based on our current outlook. As we accelerate our path for profitability, we will continue to look at our capital allocation plans and provide further optimization and leverage. In light of the current share price, we have optimized certain internal equity programs in order to limit our overall dilution. While these changes had a modest cash impact in the quarter, we made this trade off in order to preserve long-term value for our shareholders, which include our employees. We will continue to evaluate the best allocation of our cash in this market environment alongside our business priorities and balance this with any opportunistic activities to improve our overall balance sheet.

We are encouraged by the resiliency of the business and the results we’ve seen to date, but industry and macro conditions remain highly uncertain. Because of this, we will continue our practice of guiding quarter-to-quarter for the time being. We will revisit this as the broader industry conditions clarify. We expect platform revenue to be between $27 million and $28 million in Q2 2023. We expect our title business revenue to be between $12.5 million and $13 million in Q2. Our total company revenue outlook is expected to be $39.5 million and $41 million for Q2, which at the midpoint would represent 8% growth quarter-on-quarter. Our total non-GAAP net operating loss is expected between $26.5 million and $25 million for Q2, representing a meaningful step towards our end of year $20 million or lower target.

Overall, we are encouraged by the ongoing strength of our business model in light of this dynamic market. We believe that our strategy of aligning strength with strength and fortifying our business model is just beginning to take effect. While we have more work to do, we are excited to be able to share more detail, including an update to our longer-term outlook at our inaugural Investor Day event this fall. Stay tuned for more information on this in the coming months. With that, let me turn the call back to Nima for his closing remarks.

Nima Ghamsari: Thanks, Amir. I’m encouraged by our results for this first quarter and optimistic about our outlook for the balance of the year. We are executing with renewed focus, driving toward our goal of profitability while growing market share as we deliver superior value to our customers. We now have clear line of sight to positive operating income and believe we are positioned to manage all future liabilities, while continuing to invest in our business. As I’ve said in the beginning of my prepared remarks, we are a different Blend today. We’re more focused and have a greater sense of urgency across the company. I appreciate the level of execution we’re seeing by our team in these critical times. With that, thank you again for joining. Winnie, we are now ready for questions.

A – Winnie Ling: Thank you, Nima and Amir for your remarks. We’ll now turn to Q&A. Our first question comes from Matt Stotler from William Blair. Matt, please feel free to unmute and go ahead.

Operator: Thank you, Nima and Amir. That concludes our Q&A today and – sorry, I’m just seeing, Ryan, I think you have a follow up question, so if you want to unmute, please go ahead.

Operator: Thank you, Nima. I believe that concludes our Q&A for today, and that’s a wrap for our conference call for today.