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

Good afternoon, everyone. Before we get started, if you are a member of the press or media, please disconnect at this time. This is a restricted line. Any unauthorized party in this meeting or any unauthorized use of the information communicated in this meeting is subject to prosecution to the fullest extent of the law. Any unauthorized person, including the media that is on the line at this time, please disconnect. Please note, today's call is being recorded.

Hey there. Good morning. Thanks, everyone, for joining us. This is the third and final day, day 3 of the Wells Fargo TMT Summit. I'm Michael Turrin software analyst here at Wells. We're pleased to have a great list of software companies across all 3 days, providing informative discussion. Joining for our first session this morning is Tim Mayopoulos, President of Blend Labs. I'll start off with some questions, but if anyone has anything they'd like for me to loop into the conversation, you can shoot an e-mail my way. That's [email protected]. I'll do my best to layer those in as well. Tim, thanks for joining us virtually early in the morning this morning. Appreciate it.

Thanks for having us. Appreciate it.

Excellent. So I think that Blend is still relatively new to the public market. You're a software company that touches the financial services organization. And so maybe you can start with an overview for investors who haven't spent as much time getting to know Blend and just help provide an overview of the problems you're solving.

Sure. First, everyone. It's great to be with you. Blend is a software company that's looking to create modern experiences for both consumers and lenders. The problem that we're solving is that most financial institutions have legacy tech stacks that make it really impossible for them to serve consumers in the way that they expect to be served in a contemporary way. So that is what we are looking to solve. We are looking to enable our customers, which include banks, credit unions, other fintech companies, independent mortgage originators deliver really first-rate consumer experiences across a wide range of consumer banking products and do that in real time and do that in a proactive way. We believe that consumers expect their financial institutions to understand them, know who they are and proactively anticipate what they need and want and be able to deliver that to them in real time in a proactive way. So that's the problem we're trying to solve. And our customers range from very large financial institutions like Wells Fargo and U.S. Bank and Truist to regional banks, community banks, credit unions, fintech companies, independent mortgage originators. We started in mortgage, but we had expanded across consumer banking more broadly. And our goal is to be able to support every consumer banking product on a single platform, a configurable platform that makes for a common experience across all of those products and across both channels, whether that's a bank branch, whether it's a call center or whether it's an online experience. So something that's very, very different than what most financial institutions are able to offer today given that they tend to be stovepiped across every product and across every channel. So we went public listed on the New York Stock Exchange in July. We have had really good third quarter results, which I'll share with you here. We had strong revenue growth. It was a record revenues for us. We really report in a couple of different segments. One is the Blend Platform, kind of our core software business. And we also have a separate segment around a title company we acquired called Title365. On the Blend platform side, our revenues were up 26% year-over-year and total banking transactions were up 24% year-over-year. Now that's really -- I guess, in light of what's happened in the market since we started in mortgage, we had seen industry-wide substantial decline in mortgage volumes over the course of the past year. And we estimate that mortgage origination volume industry-wide was down over 25%. So to see that kind of revenue growth and banking transaction growth over year-over-year despite that substantial decline suggests to us that we'll be able to actually grow through this mortgage reset that I know that everyone knows that we're going through with refi buying being down substantially and expect it to continue to go down in the coming year. We are able to achieve much of that by increasing our market share. So we saw an increase in mortgage market share from about 8% a year ago to now about 14%. That's the total percentage of mortgage origination volume that's being done in the U.S. It's being done on Blend, so around 14%. And then our customers also represent another substantial portion of market share that's available to us, that's signed with us, but that we're not yet -- it's not yet being done on Blend in part because it takes time to roll out products and move across these institutions. Even more impressive than our growth in mortgage was our growth in Consumer Banking. It's now about 19% of the Blend Platform revenues. It grew 110% year-over-year. And we're doing this by adding new customers of quite a wide variety, as I say, from banks, credit unions, fintechs and others. And expanding our relationships with our existing customer set. We also had good success in rolling out new products. One product that we rolled out recently is called Blend Income. It's a verification of income product. And within really a month of announcing the product, we had over 50 customers sign up for it and agree to use it. So we're excited about our ability to grow in our initial business that is mortgage despite the contraction in the market. We're excited about our ability to grow in consumer banking, which is growing quite rapidly and becoming a bigger and bigger part of our business. And we're excited about our ability to roll out new products and services. So I think the key takeaways from our point of view was we'll be able to continue to grow in mortgage. We're increasing market share, and we have a readily available expansion opportunity and additional kind of unutilized share that we've already captured with existing customers. Consumer banking continues to be a great opportunity for us. We believe that consumer banking over time can be a bigger part of our business than the mortgage business, and we're having great success in rolling out these new products. So it was a really good quarter from our perspective, and we're excited to continue to grow going into the balance of the year and into the new year.

Tim, it's a great overview. You touched on a lot of things there. I want to go back to just the customers that you work with and the trust that went into striking a relationship with those businesses, given Blend is still small in scale. And so winning the trust of a Wells Fargo or Truist or some of the larger banks that you mentioned is a nontrivial effort. So can you just talk about what it is that Blend provides that enables you to work with some of the largest financial services organizations on the planet. And then maybe in tandem with that, talk about the business model. It's a success-based model. You're tied to transactions on the platform. And maybe you can just provide an overview of what made that the right approach for Blend and how that fits with the trust element.

Sure. So I think that the key to our success is that we never want to be viewed as a vendor by any of our customers. We really look to be viewed as a trusted partner and adviser to our customers. I had the privilege of running a large financial institution at Fannie Mae before coming to Blend, and I'm very familiar with the tech vendor landscape. And there are very, very few technology providers in financial services that a large financial institution or small and medium ones as well can look to and say, "that's an institution that I know will actually listen to me, will engage with me. Will always do right by me and we can grow with them." And more than anything else and say we put our customers first in that regard. And I think what's been exciting for me personally, but for all of us at Blend, is that we're really able to grow our products and our services in collaboration with our customers. We spend a lot of time talking with them. They give us their ideas, their interest in what we can build. And so it really becomes a kind of collaborative experience where we're essentially building these products together and then we were able to with pilot customers, then we're able to expand that across a much bigger customer base. We -- I think we are also unique in that we can really attract world-class software technology talent. There are a lot of technology providers out there, but there aren't that many financial services that really the very best people coming out of the very best computer science programs around the country, around the world really want to go work with. And we're really solving problems at the cutting edge, and I think that's a real differentiator for us. So the combination of being a trusted adviser with really world-class tech talent, I think, is what's able to really account for our success.

Yes.Yes. In terms of just the product set, you've continued to add functionality around the core mortgage process. You've also talked about extending into Consumer Banking. Can you just provide a little bit more detail? Because I do think once you hear what it is, that Blend enables it's very intuitive, right? It streamlines a lot of processes that we've all dealt with the pain of the number of sort of paper-based and manual data collections that are required to go through some of these processes. So maybe you can just help bring it to life by kind of describing what it is Blend does on the mortgage and consumer banking side from a user perspective.

Sure. So we're really focused on 2 sets of users. There's the consumer, and then there's the loan officer, the loan team or the banking associate who's helping with that transaction. And rather than doing what many technology providers have tried to do, which is basically take a paper-based system and just replace that paper-based system with digital enhanced, but nonetheless, the same paper-based system, we've really tried to reimagine what these processes could be. So we look to enable the consumer to give access to the information they already have, pre-populate as much of an application as possible. But also to integrate various data sources in a curated way to make it simple and easy for both the consumer and the loan team to underwrite a product and fulfill that. So we are essentially an open technology platform where every -- all of the best data and technology providers can integrate into Blend. We think that we build the infrastructure for that and we build many of the interfaces for that. But we're really integrating all the best technologies onto a single platform that covers all consumer banking products across all channels, as I mentioned earlier, and it really makes this an intuitive experience for both the consumer and for the bank employee, so that they're not stuck going back and forth between different systems. The information is delivered to them in a seamless way. There's a checklist of things that either the consumer or the loan team needs to ultimately address and in an intuitive process for getting that done. So we're really trying to not just pave over the cow paths but really reimagine what these experiences could be. From our perspective, at the end, consumers shouldn't have to apply for anything. They should be -- their financial institution, their financial services providers should be able to proactively offer them what they're likely to need and want without any need for an application whatsoever. And all the consumer will need to do is to say, yes, I want that in a one click or one tap, say, yes, you do that to fill that for me and tell me what else you might be able to do for me as well. So that's a different kind of banking world than we've had in the past, but that's what we're looking to build.

Very different, but makes a lot of sense. When you think about growth, you highlighted just the share that's available just from some of the customers that you have established relationships with. We've also seen the expansion rates that have been provided from time to time of the business. They're tremendous 140% plus consistently. So can you just talk about the share gains, the potential for just continued expansion? What drives the growth profile of Blend, both today and into the future.

Sure. So we have really world-class gross retention rates with our customers. So we rarely lose a customer. And then we also have world-class net retention rates in terms of being able to grow our business with customers over time. So our goal is to make sure that we provide a great experience, whatever that first entry point is, historically, that was mortgage, but now we're seeing that there are now new entry points for customers to start with Blend. And our goal is to do an amazing job in that initial point and then expand that over time. We're also -- we have built a configurable consumer banking platform that allows financial institutions to basically start with all of our products across the entire spectrum, if that's what they choose to do. So we -- all of this is based -- you mentioned earlier that our success-based model. All this is based on a premise that we should always be looking to align our customers' interest with our interest and vice versa. Like we don't want to make money or charge a customer for a service or a transaction unless that transaction is actually successful for the lender and for the consumer. So we charge on a per successful transaction basis. We don't have -- we don't lock people into long-term subscriptions. Some people might say that might introduce some volatility into our revenues, and it might, but we think that it's really the right way for us to build a long-term business. We're not looking to capture this quarter or next quarter's revenues. We're looking to build decades-long relationships with these key institutions and grow with them over time. So we always want to be reducing the friction for adopting our products so they don't have to sign up to some very significant volume commitment. And we want to make sure that if we're being successful, they're also being successful. So there's never this conflict of interest between us.

Yes. That's great. Then you have a very relevant background in around the space. I think Nima has a great story for starting the company and has the complementary background, too. So maybe we can just spend a couple of moments just talking through your background, what brought you to blend and just the sort of the complementary attributes to the management team as well.

Sure. So I've been really pleased to be at Blend for now almost 3 years. Before joining Blend, I had a long career in financial services. I grew up actually as a financial services lawyer. I was the General Counsel at Bank of America. I joined Fannie Mae in the wake of the financial crisis, and the board asked me to become the CEO in 2012 and served in that capacity for more than 6 years, helping to bring Fannie back to sustained profitability. But even more exciting for me was helping to introduce quite a few new technologies into the housing finance space that made it much more modern and better serve consumers and lenders, but also better protected taxpayers. And I became excited about coming to Blend, I've gotten to know Nima bit while I was at Fannie. And I've really viewed Blend as the company that was best positioned to really revolutionize consumer banking. Obviously, initially in mortgage, but then more generally across all consumer banking products because I think Nima has brought a really visionary perspective to all this. I mean he and I are -- we're very different in many ways. We're experientially different. We're generationally different. We're stylistically different but he's got this great vision for what the future of banking ought to look like. And I hopefully bring a perspective having worked in many of these large institutions of really what the practical day-to-day challenges are for these companies. And I think that from the perspective of our customers and from our employees and our investors, they appreciate the fact that we bring very different things to the table. And hopefully, and this is a case where 1 plus 1 plus all of my other colleagues, it produces a whole lot more than 2. And I think that, that's really worked very well for us. We bring very different things, but we're good sounding boards for each other. And -- but I think the long-term vision for the company is really based on this idea that consumer financial experiences should be every bit as easy and elegant as what people do on Amazon or on their Apple device or in getting entertainment from Netflix, that's what a consumer financial services experience ought to look like. And from my perspective, when I was leading Fannie, I thought Blend was the company best positioned to actually deliver that to the market.

That's great. That's great. The other topic I think to touch on is Title365. Given your experience in and around the sector, you probably have a better perspective than most on the reasons Title365, and Blend fit well together. Some investors on the software side may not have as clear a view. And so maybe you can help just couple those 2 together and what Title365 brings to blend and what the future vision of that combination looks like.

Sure. So our goal, whether it's in mortgage or in any other product, but let's just take mortgage. Our goal in mortgage is to take what's a really difficult, complicated, very sort of strange experience for most consumers and turn it into a very simple, elegant, fast, convenient experience for them. So take all the friction out of that process. And Blend started really focusing on making the initial consumer interaction much easier, helping consumers apply for these products. But our goal has been to simplify every part of this process from the time that consumer starts even thinking about [ pointing ] a home all the way through closing on their home and moving into it. And if you want to simplify the totality of that journey, you must, at some point, tackle title escrow and settlement services. It's part of every mortgage transaction. It's a product that most consumers don't need to really understand. They have no really opportunity to shop for. They -- it's not very convenient. It's a pain in the neck actually for the lender because they're interacting with the title, escrow and settlement agent typically by e-mail and spreadsheets. And we -- so we looked at all that and said, if we actually want to create this frictionless end-to-end experience, we must tackle among other things, title, escrow and settlement services. And we want to be able to make that a much more intuitive, simple, easy process for everyone. And so we decided that -- we had already decided that we were going to tackle the space. We had already started our own Blend title agency, but we wanted to accelerate our vision in this space. So in acquiring Title365, we were able to get a few things done. One is we can get licensed in every relevant state. A process that would otherwise [ had ] taken us years. We'd be able to get to operational scale very quickly. We'd have real market credibility with -- even among the biggest lenders in the country, and we would acquire talent that was really expert in this space. We were not looking to acquire Title365 for the technology solution. There's really talented people there, but they're not technologists. We are building the technologies to make this into much more of a software experience a digital experience than what it has been historically, and also integrates really well into the ultimate closing experience, which we think in the end will be a digital experience as well. So that was the rationale behind the deal. We continue to be very confident that that's the right vision. We're making good progress on the integration, and we expect to make continued progress on that through the balance of this year and into next year.

When you talked about the technology side and how you're taking something that is really complicated from just a regulatory standpoint, streamlining that, but you have the technology. When investors look at the difference in margin profile, does that mean that you can drive efficiencies out of a business like Title365 and help the margin profile gets a little closer to what Blend's core software platform enables as well.

Over time, we think we can do that. But I think that the thing we're most focused on at the moment is how to create more value for the consumer and for the lender by simplifying this process. It will make our product more valuable to them that will make it stickier with them. And frankly, it will allow us -- if you think about revenue per mortgage transaction allow us to capture much more of the total revenue opportunity per transaction. So rather than thinking about title in isolation in terms of what is the margin on that really think about what is the revenue accretion opportunity for us and the value creation opportunity for consumers and lenders by tackling this problem. So -- we do think that we can improve margins in that business over time if you think about it as a stand-alone business, but we don't really think about it as a stand-alone business. We think about it as an integral part of an overall home buying home ownership journey that we won't be able to solve for that problem if we don't tackle title, escrow and settlement.

That makes sense. We have time for one more, and I want to leave it back to you like we did at the intro just for the takeaway and really the longer-term vision that you touched on earlier. I mean you mentioned that Blend is really focused on the long-term solution and removing friction from many processes. For investors who are watching you along that journey, what are some of the milemarkers that they should be focused on? What defines success? And what are your key priorities, not just in the next quarter or the next year, but just longer term as well?

So first, I'd say is continue to increase our market share in the mortgage space. This was the space that we started in. It's the most complicated, most difficult consumer banking transaction out there for both the lender and the consumer. So the fact that we've been able to do that has earned us immense amounts of credibility in the financial services sector. So we want to continue to gain share there and continue to deepen our product offering there. And as I mentioned, we've been able to increase market share very substantially over the last year or 2, and we expect we'll be able to continue to do that despite whatever happens in terms of overall mortgage volumes. Second is really the expansion into consumer banking. As I mentioned at the outset, we believe this is actually a bigger opportunity for us over time than mortgage. You should expect that in coming years, that consumer banking will become the majority of our business, and we'll be able to support every consumer banking product across every channel, for every type of financial services provider, and that's an immense opportunity. And really one that we don't see too many others out there trying to tackle. And we've been at this for a while, it requires a big investment in terms of time and money and talent to make that happen. So we think we have a truly unique opportunity there. And then I believe that we will also be able to continue to expand our marketplace offerings. Things like title, various insurance products, whether it's homeowners insurance, auto insurance, life insurance, others, realty services, moving services, lots and lots of ancillary marketplace offerings that will make for a better consumer experience, make it a more holistic experience rather than just a financing transaction.

Tim, this is great. You've got a lot of exciting opportunity ahead. So I appreciate you taking the time here. Thank you, and thanks, everyone, for joining as well.

I appreciate the opportunity.