Blend Labs, Inc. (BLND) Earnings Call Transcript & Summary

Good morning, everyone. Thanks for joining me. This is Day 4, the final day of Citi's 11th Annual Fintech Conference. Really appreciate you joining us. My name is Andrew Schmidt. I'm on Citi's fintech research team with a focus on software. Before we begin, just a quick logistical note, if you'd like to ask a question, you can do so using the web portal on your screen or you can e-mail me directly. The way this session is going to work is Marc is going to have some prepared remarks for the slides, and then we're going to go into Q&A. But let me introduce Marc first. It's our pleasure for this session to host Blend. From Blend, we have Marc Greenberg, the CFO of Blend. Blend is super interesting. It's a topic -- they play on a topic that we're excited about, which is digitization of FIs, particularly on the lending side. But yes, we'll jump into more later. At this point, I'll turn it over to Marc just for -- to provide a brief overview of himself and the company and then for a few prepared remarks on the slides. Marc, thanks a lot for joining us.

Fantastic. Thanks so much, Andrew, and thanks for having me, and pleasure to be here and start to get to the message about Blend out into the market. So like Andrew said, my name is Marc Greenberg. I've been with Blend about 3.5 years I had a career in financial and accounting leadership at Ernst & Young and Saba Software and most recently at Pixar, where I was CFO there. And when I connected with Nima and the Board. Nima, our Founder and Head of Blend, Nima Ghamsari, really connected with the disruptive power of the company's vision. And this opportunity to change financial services for the better for both the banks and the consumers. And I -- what I saw was an industry that was still -- largely paper-based and ready for that digital transformation. Impressed with the team, impressed with the leadership, impressed with the approach. But what's pretty unique about Blend is that we initially started in the most -- what you can argue is the most complicated consumer of financial transaction with mortgage. But since then, we've expanded and continued to grow outside of mortgage. And we started with the biggest financial institutions. Wells Fargo is one of our earliest customers. and we've expanded from there. We went public in July. I joined early enough to lead our Series E with General Atlantic and Temasek and our Series F with Canopy and then Series G led by Tiger and Coatue and then, again, that IPO in July of this year. And simultaneously, as many of you probably have observed, we purchased Title365 from Mr. Cooper in a debt and cash transaction almost simultaneously with the IPO. So we -- I'll talk about it later, but we're -- the verticalization of financial services is something that we're committed to. And again, just excited to talk with you here today. So with that, I think I'll move the obligatory forward-looking statement slide. And then really just a focus for the moment on what our vision is. We have a cloud banking platform. And our goal is to bring simplicity and transparency to financial services and the consumer and the financial institutions and the consumers they serve. And our software powers banking in a way that fundamentally -- we think fundamentally improves the consumer journey for any banking product from application to close. And what Blend is, is that software infrastructure layer that is powering that transformation. And what we are doing and what I also found unique about Blend was that the way that we partner with financial institutions rather than actually being a bank. So that is a relatively unique approach. We just did our third quarter release. We grew our customer base. We expanded our business with existing customers by -- through cross-sell, through any great vertical software company knows that across how important cross-sell is, broadened our market share through mortgage and really expanded -- continue the expansion into consumer banking and the marketplace solution sets and fundamentally increasing our quarterly revenues also through that diversification. We talk a lot about our market share. As a result of those significant customer wins and improvements in our attach rates, we continue to gain market share across our bank, credit union, nonbank lenders and fintechs as those consumer expectations in the COVID-19 pandemic fueled behavior really continue to shift the industry-wide digitization. This slide really just tries to articulate the growth in market share. In the light blue is our utilized market share. The dark blue is the market share at our customers, signed customers for signed products, and that's a rollout, that untapped share is something that is the near -- is a very opportune and near-term capture. And it's a critical source of our future growth. This just represents mortgage, I'll get into some of the other business lines that we're approaching. But we added capacity in excess of 300,000 annual banking transactions to our base this quarter and it was another record quarter for us. In Q3 2021, we introduced some new segmentation and revenue disaggregation to help investors better see and really appreciate the growth trends and potential of our business. Year-over-year and sequentially, our Consumer Banking and Marketplace revenue grew. We continue the development of those new and integrated software products, adjacent marketplace offerings. So just by way of background, right, like we have core banking products, mortgage, home equity, mortgage is separate. Consumer banking represents home equity and personal loans and credit cards and deposit accounts. really any time that a bank is attempting to verify income, assets, employment, identity, credit, tax information, we build those -- that infrastructure. And we offer things like a digital closing, that's an adjacent product. We offer an income verification product that we launched last quarter that allows banks to verify income. Every loan needs to verify income. And then as part of the verticalization efforts, we're also offering the connections, marketplaces to things like property and casualty insurance, title insurance, which is the Title365 acquisition and things like Realty. So that is going to allow our growth to continue into the future. But really, what we're also trying to communicate here is that it's the expansion of our -- beyond our core product. We've had so much success in mortgage that -- and we believe that fundamentally, there's a platform approach to banking rather than a siloed approach to banking, where a consumer can enter the bank across all their products, we're offering -- we're the only platform that's offering that consumer banking opportunity for the banks. And we're growing that as a percentage of our platform revenue, as a percentage of our total revenue. And that's where I think -- a significant amount of our future growth will come. So one on the left here, what I have is the banking transactions increased from Q3 2020 of 20,000 consumer banking, non-mortgage banking transactions, up to 84,000 transactions in Q3 2021. So demonstrating that growth in things like I said, home equity, personal loans, deposit accounts, credit card transactions that we are facilitating the engagement with the consumer for those financial institutions. And you can see the revenue increasing accordingly. And one of the most common questions I get from investors is about Title365. We just closed that transaction on June 30 of this year and we are continuing to integrate that acquisition of 365. The idea is that one of our most critical near-term objectives is to migrate Mr. Cooper and -- on to the Blend platform, which is the parent, which sold us 365 and then launching those pilots of the joint Blend and Title365, consumer digitized experience for our financial institution customers. So Title365 is a really important component of our -- the overall verticalization approach that we have to the financial services industry. So with that, I think that's my overview, Andrew. I'm happy to launch into questions or take it in any direction from here.

Awesome. Thanks a lot, Marc. That was a really good overview. I think the leading question is it seems to be a little bit of a disconnect with the stock price performance at the -- right now. I guess the main question is, what do you think the market is not getting about the story or not understanding, it is the lead-off question?

Sure. Look, we're very early in our development. We are a vertical software company. We've had a ton of success in mortgage. But I think over the long term, consumer -- the broader consumer banking landscape is really what we're about. It's about a single platform through which a consumer can enter. It's about a suite of products. It's about the underlying digitization that's happening, you can't resist it. The pandemic only fueled it. It's about verticalization, offering products across the consumer banking suite and then a consumer doesn't come and really -- and they sure they want a mortgage, what they want to do is own a home. And what we're doing is allowing that consumer through a single platform, all those third parties are coming together on a single platform to help them own a home. And we fundamentally believe that the greatest software engineers on the planet. Over the long term, would work at fintechs, right? They'll work at software companies, not necessarily banks. So we're bringing that incredible engineering talent to the bank in a way that offers scale. We want to offer personalization so that banks can be proactive. We find we drew a parallel between TikTok and banks at one of our recent customer forums. Personalization is very important. And to attract today's consumers, banks need to be prepared to offer them the exact product they need at the exact moment they need it.

Right. Yes, that's an interesting point you raise. We've had that conversation actually throughout the fintech conference in terms of moving what used to be bottom of the funnel to mid-funnel to top of the funnel in terms of demand set. And I think -- That's where a lot of these products sets are growing beyond the efficiency component. You can just take a step back again and talk about Title365. And I think it's probably part of what you mentioned in owning the end-to-end process. The goal was not to originate a mortgage, the goal is homeownership. So it's probably, as you mentioned, is probably part of that. But just talk a little bit about the deal, a little bit more into the opportunity with T365 and just the rationale there.

Absolutely. Yes, thanks for this opportunity. The title is an incredibly paper-based process. What Blend Title, our vision for Title is our product is, first, it's a single portal experience. It's a consistent look and feel for the consumer, 1 platform, 1 portal, 1 password, they need to remember to facilitate the entirety of the mortgage transaction. It's about operational efficiency for both the consumer and the lender, automate the title order process directly at the moment you're engaging with the bank. Instant title commitment, there's a lot of companies out there that are providing instant title commitment. And then automate that screening for title defects that would eventually hold up the closing. And then third, it's about transparency, real-time updates through the -- our Title dashboard, easy communication back and forth to schedule, leveraging LOS, loan origination system, integrations to pull fees up to the layer with the consumer. And then we're pushing all that data back into the lender's loan origination system. So really, it's about those 3 things. It's about that single experience, it's about operational efficiency and it's about transparency.

Got it. That's good context. And then as we think about cross-sell opportunities, I think one thing that comes to mind is the income verification product. So maybe you could talk a little bit about that. And I think you've had some success in expanding that to new customers pretty rapidly. So maybe talk a little bit about what you're doing there from a verification perspective? Why that's been so successful so far?

Really, we're about solving problems. And what we heard from our lender customers was that income verification is incredibly difficult and often unsuccessful in initial grant, right? When you're using today's products, oftentimes small variations in the name, like if I work at Blend Labs, Inc., but if you put in Blend, you might not be able to verify my income. What we're doing is creating -- what we've created is a waterfall that allows our financial institution customers to verify income by first looking to payroll providers and then looking to 1099s. And then our product vision is to have a full waterfall that allows even a manual verification facilitated through our platform. So it's really -- I mean the easy button is a tired analogy, but like we'll work on the APIs, we'll do the relationships at scale, we'll make it easy for the bank, for the financial institution to verify income without having to build, maintain or operate all those APIs to all the entirety of the waterfall. The military -- obviously, the military has a separate income verification. What we're doing is making it simple and easy, and we're really happy with the uptake, how quickly that uptake has happened.

So what's the normal process of income verification? Is it as simple as me getting a letter from my employer like maybe pdf-ing it and sending it to the mortgage lender, mortgage lender uploads it in -- it verifies it. Is that the legacy way? And then what is the -- how are you creating -- making that process more efficient on the back end with your income verification product?

Exactly. It's often paper-based. It's scanning your W2 or call my employer. And what we're doing is facilitating an API call that allows automated -- and automatic and instant, right? Like I mean that's -- speed is so important. If you're a bank and you are going to get back to your consumer in a week or 2 or 3 or 5 about your personal loan or your deposit account or your home equity line. There are too many options, I think, for it to happen immediately. And what we're about is that facilitating that -- the speed of the relationship there.

That's helpful. And then on the back end, is this integration with third parties are you integrating yourself? Just a little bit of the secret sauce [indiscernible]

Yes. No, we're integrating with third parties. We've built the relationships and the integrations with our really fantastic business development team. and really building a platform. I mean it's about that platform, right? Like we built a platform that allows these kinds of integrations to happen. And it's an incredibly difficult engineering challenge, but we're up to the task.

Yes, yes. And that's the importance of the flexibility of the platform to be able to integrate seamlessly like that versus other platforms that might take a little bit longer to do. Okay. Maybe you mentioned this a couple of times, but the broader opportunity in consumer finance relative to mortgage. And you mentioned that the platform, the sort of the vision of the platform is not disported. It's beyond that. So maybe you could elaborate on that a little bit. So the obvious adjacencies are other lending verticals, maybe we can start there in terms of where you see the opportunity? And then beyond that, just your vision for how more broadly, Blend can interact from a consumer -- broader customer finance perspective versus just mortgage?

Sure. For the first time this quarter, we built more capacity in consumer banking than we did in mortgage. And consumer banking revenue is very high volume. There's -- you might only do, I don't know, 2, 3, 1 mortgage in your whole lifetime. But personal loans and home equity lines and credit card applications, that's a much -- a different approach. It's less cyclical, obviously. So -- while mortgage was the initial problem that we set out to solve, our customers really drew us into those other problems that they're trying to solve and they really found a way for us -- because of those core components, right? Verifying income assets, employment credit, those are things that you have to do for every consumer financial transaction and building a flexible modular platform is very, very difficult. But a lot of the work that we have done in mortgage, we have now been able to leverage into the consumer banking and it's fueling the growth and the opportunity that we have broader. It's -- I mean, this doesn't take 1 news cycle to appreciate what buy now, pay later means to the banks, why fintechs are having success in grabbing market share is because, although, I will say that we've had a lot of success, especially recently with helping fintechs build out products with our core infrastructure.

Yes. PNTL is definitely one word for the most overused acronym for the year. It's only good, but there's a lot of opportunity from a finance perspective. Just to put a just put a finer point on consumer banking, just definitionally, just to level set. Could you just help us understand what's in the consumer banking product set versus what's in the mortgage product suite? Just as a help the level set for those who are less familiar.

Sure. So consumer banking, the top 2 contributors to our consumer banking platform are personal loans and home equity lines. Mortgages, we -- and maybe I can go back a second. Our revenue model, and we associate -- we have aligned our success with our customer success on the banking side. And what that means is that when a loan funds or deposit account is opened, that's when Blend earns revenue. So we -- it's like a per fund -- we can talk about it in terms of per funded loan, per deposit account open. So in that consumer banking line, like I said, is personal loans and home equity, but also what's gaining traction is deposit accounts and credit cards and other I mean, banks are being creative about building additional products with our platform. And then mortgage is simply per funded loan mortgage, but then we have add-on products like income that applies across consumer banking and mortgage. We have a digital closing product that today mainly applies to mortgage, but also applies to consumer banking. And then in our marketplaces, we're offering Title, which applies to both home equity and mortgage and property and casualty insurance that mainly applies to mortgage.

Got it. And then now that we have that sort of definitional point out of the way. So it sounds like based on current growth rates, consumer banking revenues can grow from, I think, they're around, let's call it, 10% to 15% of segment revenues to a much bigger, let's call it, over the next year or 2. What's the right way to think about how big CB can ultimately get and then the pace at which it gets there?

I think for us, the trends are clear. Consumer banking is going to be -- continue to be a bigger share of our platform revenues. It's growing over 100% year-over-year. Mortgage is still growing, but there are -- there is cyclicality in the mortgage market. We happen to be able to grow through, right? We grew through the cyclicality. So we're adding capacity in a way that allows us to grow through that cyclicality. But again, like the consumer banking side is, we believe, we'll continue to outperform on a growth rate. And we believe over the long term, it gets to a place where it is actually bigger than the mortgage component of our revenues.

Got it. Okay. Understood. And if you could just think about just the market share -- this market share figures that you mentioned, how do you -- can you just level set, how do you define market share, first of all? From a definitional standpoint.

Sure. So what that market -- so our market share that if you remember the graph, right? The lighter blue on the bottom, that's transacted capacity on our platform. The dark blue on top was capacity at signed customers on our platform. And then the denominator is -- we're using volumes. So it's a combination of Fannie and MBA volumes published. We look at it -- those volumes adjust over time. We look at it on a semiannual basis to take out some of the smoothing. But yes, we're just using industry figures to calculate the denominator and then that's transactions on our platform on the top.

Perfect. Understood. And then maybe walk through the process. I mean, clearly, you're -- based on what you've outlined, you're underutilizing your current -- your current clients. So is it a matter of clients starting out small with Blend in a certain -- either a region or a segment of the business and expanding from there. How do you gain share from existing clients? I think there's a lot of good implications for sort of net revenue retention here with this opportunity. So Marc, if you can just talk about that opportunity?

No, of course, included in our earnings supplement is a discussion around net revenue retention, gross revenue retention and network retention. So -- Those of you -- there's a lot of people probably on this call that understand the way the banks buy software. It's a highly regulated, methodical approach to rolling out software. Some of that volume capture just recently signed customers. So that's -- they're in a change management. So it's not just software that we work with our customers on, it's about the people in the process that also need to change as a result of that evolution or required as part of that evolution.

Yes. That's really good point.

That's recently -- it takes between 1 and 3 quarters usually to start to see the volume process through our platform. And the -- if you looked at that on a cohort basis, you would see that our -- the customers we signed more than a year ago are largely fully rolled out, right? Like they're at 100% utilization, but more recent customers are in a process. And so that's really what we're about is capturing that, demonstrating value to the loan officer and to the bank. And we do that for banks, for credit unions, for fintechs. We have some great builder captive customers that also use our software.

Yes. You made a lot of good points in there. I mean, mortgage is not easy -- I mean, lending in general, mortgage, in particular, it's not an easy segment to play in. A lot of regulatory constraints. I mean, federal state local things to deal with on the bank and so it's not an easy decision for -- there's a lot of things that need to be addressed on the back end to do that.

Yes. We've had a lot of success on the -- with dealing with like Fannie, Tim Mayopoulos is our President, former CEO of Fannie Mae. We have really strong relationships with Fannie. So when it comes to the decisioning engines and the desktop underwriter and the relationships we've built to make sure that a bank has certainty -- day 1, we have a relationship for day 1 certainty. So bank has certainty that Fannie is going to purchase that loan on the back end.

What's the -- I don't know it's probably -- it depends on the mix. But what's the average time for a customer to, let's call it, to get to 80%, 90%-plus utilization. Because based on your statistics, it sounds like, obviously, mortgage market is what it is from an origination perspective. But in the meantime, you have a lot of visibility as you onboard these customers increase utilization. So what's the right way to think about kind of implementation time frames and then productivity timeframes?

Yes. It depends on the customer. It depends on the size, it depends on their internal IT teams because there are connections we need to build and align with their -- in their internal IT org. For a smaller bank, it might be 1 to 3 quarter to full utilization. For a large bank, it might -- you might only get through the proof of concept in 2 quarters, and it might be 4 quarters to full adoption and full utilization. But it does -- it is a very, very sticky product and banks make decisions about software for the long term, and we intend to be a decades-long provider of software to the financial institutions we serve.

Yes. It often takes a long time to get in, but they don't switch very easily.

That's right. [indiscernible] our gross retention, yes. We -- our churn is really, really shockingly low for a software company, and it's really world-class.

Yes. No, that's -- it's a great point. When we think about how the mix of customers have evolved between let's call it bank and nonbank and then within bank just the size of customers that you're serving between small and mid to large. How is the mix from a customer perspective evolved, either from current signings or bookings, however you want to characterize it?

Yes, sure. We're about 60% banks and credit unions, about 40% independent mortgage banks and captives and fintechs. We had some great announcements this quarter with fintechs, Valon, UpEquity, Accept, built. So we're seeing significant uptake among fintechs, who want to bring unique products to market but don't have the infrastructure to build out the underlying software connections, the underlying software. So I mean we -- although we started with some of the biggest financial institutions -- We have expanded into smaller -- much smaller institutions. And the software gained enough experience on the rollout to be able to help those even the smallest institutions to be successful with our software.

Yes. Yes. It's -- Yes, it's a good testament to the scalability of the platform where you can move up and down markets so easily and serve different audiences too. That's a good point. I think the last question before I turn it over to you for final thoughts, and this is very, very basic. But let's talk about just go-to-market real quickly. Is there a referral component because is there -- Obviously, there's a big sales component. Are there third parties that you're working with to sort of to push this? Maybe talk a little bit about the distribution strategy and how that might evolve?

Sure. We use a relationship manager approach. So we combine kind of the account -- exactly the account manager when it goes to the go-to-market. We make sure that we have a single point of contact for our prospects and customers on the initial sale as well as the cross-sell. If you look back a year or 2, we were mainly starting with mortgage. But as you look at the sales in 2021, we now are selling much more in bundles where mortgage and a consumer banking product, maybe mortgage and home equity and mortgage and personal loans on the upfront. And then with mortgage or with personal loans, we're often now selling a digital closing product, the insurance allowing the connections to our property and casualty insurance brokerage or things like income verification, right? Or are connected in that initial sale. And the time to second sale is really compressed. It's down by about 1/3 on second sale because I think the emphasis on speed and go-to-market for the banks is as important to them as it is for us. It really does depend on the institution. Sometimes, we'll start with 1 vertical. Sometimes, it will be more of a consumer banking approach, where we're going to do mortgage plus home equity plus personal loans, all in the same breath.

Got it. And just a couple of minutes left here. Any final thoughts you want to leave us with, just on the story or just anything in general?

I guess I would emphasize those 3, the way that we talk about digitization, the way that we talk about verticalization, the way that we talk about personalization. We want a fully digitized experience, we want verticalization in terms of fully integrated journeys that is not just the lending product and then we want to personalize so that the bank can offer something that the consumer wants at the exact moment that they want it. And I think that, that is the future of banking. It's the future of many industries, I think. When you talk about, right, like what Amazon gives you, what Netflix gives you or what a ridesharing app would give you like that instant gratification. I think that with modern software -- with a modern software platform, we can power that future.

It's a great -- good framework and a great note to leave it on. Marc, this has been a great conversation, appreciate the time to take more into Blend. Thanks for your thoughts and for your insights. I look forward to catching up again.

Thanks again, Andrew. Take care.

Thanks, Marc.

Bye.