Blend Labs, Inc. (NYSE:BLND) Q1 2024 Earnings Call Transcript

Blend Labs, Inc. (NYSE:BLND) Q1 2024 Earnings Call Transcript May 8, 2024

Blend Labs, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Winnie Ling: Good afternoon, and welcome to Blend’s First Quarter 2024 Earnings Conference Call. My name is Winnie Ling and I’m Head of Legal and 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 delivered their prepared remarks, we will 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.

Nima Ghamsari: 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 indicates that 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 mortgage rollout. On top of that, I’m happy to announce 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 them 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.

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Q&A Session

Let’s start with the Haveli Investments. 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 [ph] team is making a bet – 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 and 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 technology companies, and more than 20 of those were spent at Vista Equity Partners, where Brian served as President. He’s made or advised of investments valued at over $100 billion and has served in 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’re 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 to drive 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 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 funding of those 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. Put some numbers behind this, we estimate our closed solution reduces funding cycle times by almost six days. This translates to more than $150 save 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, 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 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 or economic value per funded loan already ahead of the $90 target for 2024 we share with you on Investor Day and has significant upside potential in the future. Now onto 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 and 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’s 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 TAM 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 up. 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 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 is 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 helped 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 value 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. Amir, over to you.

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. 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 is 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.