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

Well, thank you, everybody. We are honored to have Nima Ghamsari, the CEO of Blend. Nima, thanks for joining, and congrats on your recent IPO, and thanks for allowing UBS to be a part of it.

Thank you for having me.

Yes. Good. Well, let's start a little bit high level if we can, Nima. Maybe starting with the TAM that you're facing to help investors maybe that are newer to the story to understand the megatrends that you're going after? And I thought maybe it might be helpful for you to just explain how far along you are in penetrating, let's say, the top 100 or top 500 banks? And what are the big drivers that get you excited?

Well, I think going back to why we started the company in the first place, we started because we saw that most of banking was done on paper, and it was very manual. A lot of error -- more error-prone things and that manual work made products more expensive and less successful to consumers. Meanwhile, there was a mobile and digital revolution that was happening in other areas of other industries, and finance just hadn't had that chance to go through that yet. And so we started the company to make banking more digital, more data-driven, more consumer-centric. And we started in the mortgage industry, and then we've kind of expanded all of bank in the last 4 or 5 years. And think of Blend as sort of infrastructure that powers that bank or the software infrastructure that powers that transformation in banking. We work with banks, we work with fintechs, we work with credit unions. We work with companies of all sizes, some of the biggest financial institutions in the world and some of the smaller ones. And the way that I think about our TAM is really anything within banking that's sort of driving a more modern, more digital future, which is -- I think that's all of banking these days. Everything is sort of responding to the need from consumers to go more digital and all the services around that, that are required to make that a reality. So real-time verifications, real-time identity, real-time fraud, all those services surround the areas that we participate in as well. Today, we would more service the digital onboarding layers. So think of us as the infrastructure or strike for digital onboarding. So if you're a customer who is signing up for a new product at a bank, you'll probably be powered by Blend at some point in the future, hopefully. And today, we work with about 1/3 of the top 100 institutions, maybe a little bit less, but a lot of room to grow, both within those customers. A lot of our growth happens within our customers as we introduce new products and services as well as outside of that, of course, many more institutions that we don't work with yet.

Got it. And Nima, tell me about the other 2/3, is it the fact that they simply don't have a digital onboarding platform? Do they use a third party that potentially Blend can work to displace? What does the opportunity look like in the rest of those top 100?

Well, believe it or not, financial services is a fairly methodical -- it's not a super fast-moving industry because a lot of money is changing hands, and there's a lot of compliances, a lot of regulation. And so there's still a lot done on legacy systems or paper entirely. And we've only been around for 9 years and really only been in market for 6. And so the amount of headway we've made, while I'm proud of it, I know there's a lot of work left to do and getting more products out to our existing customers and more customers on the Blend platform. And so to answer your question, I think a lot of it -- most of it is probably still done on paper today. And by on paper, I don't mean physically someone filling out a form that is mailed to them necessarily, although that still happens a lot, too, but it could be just a digital PDF that somebody fills out or it could be an old-school web form that then feeds into a back office system that's been managed over the phone, where somebody keys it in after they call you to get you onboarded for a new product or you walk into a branch and somebody keys it into a branch system. And so a lot of it is still that way today. I think in the future, everyone is driving towards where they can put the entire financial services firm in your pocket. This is my phone up holding up here, and you can't see it. And the idea of making everything build a fit in your pocket is obviously a great idea, but we're so far from that. There's so much -- the layers of complexity in financial services are so great that the transformation from here to there, it's a lot of work, it's a lot of work and there's a lot of things that have to be built, and they're all software. And that's where Blend plays that software layer for banking, for digital onboarding.

Nima, I know personally that I must not be dealing with a blend customer because I'm doing a home refinancing right now. And I feel like I'm on the phone with the loan officer and scanning PDFs and setting them to her way more than I should be. So I totally get it.

Yes. And by the way, I think that's not an uncommon experience because, again, even though we have roughly 1/3, we only power about 14.5% of the mortgages in the country today. We still have a lot of room to grow even within our customer base. But -- so yes, it's even though where we've made a lot of penetration, there's still a lot for us to grow.

Got it. And Nima, how did the COVID crisis create opportunities for you? What stresses might that have created on banks to lean into Blend a little bit more? Or perhaps the banks themselves under competitive pressure such that they needed Blend to help them digitize faster? Maybe they're suffering from cost pressures or labor shortages such that the extent to which Blend can help those loan officers be more productive, that has a benefit. How did it change?

Well, I think of it as a short-term tailwind for Blend. It was a short-term pain for Blend. It was a medium-term headwind and a long-term huge tailwind for us. And so I'll talk about all 3 of those things. In the immediate moment, all of a sudden interest rates plummeted, the number of mortgages that were being done were growing. The other loans were also growing. People needed financial services, PPP loans for small businesses. And so financial services stepped in and said, "We're going to help consumers get to this time," which I think that meant more usage of Blend for customers who are already on Blend. So that was a huge tailwind for us in the short term. On the flip side, though, in the medium term, it was -- I think it was a headwind for us. Now that was because the financial services firms had so much work on their plate, the digitization efforts that they knew were even more important than they were pre pandemic, some of them had to take a back seat because they were focused on making sure they could get through this time. A lot of them weren't sure about hiring, they weren't sure about growth, they weren't sure about investing because they weren't sure what the impact of the pandemic was going to be long term for the country. And so it was a medium-term headwind, where I think we had fewer customers maybe in that time who want to sign with us, until really early this year when we had our biggest growth, we showed our market share numbers in our most recent earnings report. And so we showed that H1 of this year was our biggest half in terms of growth in our disclosures. And so then -- but long term, it's a huge tailwind because 2 things have happened during the pandemic: one, consumers are demanding digital services in a way that has never been demanded before. Why would you want to walk into a branch if you don't have to? Now some people still prefer to, and we still want to make them options. And 1 thing I'll say about Blend is, we work in all channels. When you call in, it's on Blend. It's just the person on the phone if the consumer is on Blend. When you go into a branch, it's on Blend. And so it's not necessarily that we're saying that, that shouldn't be a possibility. We're just saying it shouldn't be the only option. So yes, that was 1 thing is that there's been a huge demand from consumers for digital solutions, which our customers, the financial services firms feel. But then on top of that, there's been a rise of fintechs, many of whom are our customers and those rise of fintechs, because they've gotten a lot of customers during the pandemic, it's gotten the attention of the broader market that financial services needs to transform in order to just remain the levels that it is today.

Got it. Okay. That makes sense. One of the other exciting parts of the Blend story, I think investors appreciate, but maybe I could ask you to elaborate on is from your roots in automating that mortgage onboarding process, Blend is expanding, diversifying with your customers to automate a whole pile of other interactions that I might have with Wells Fargo or U.S. Bank or any other customers. So Nima, maybe you could talk about how far along you are in that diversification journey away from your core mortgage routes?

Well, we shared some numbers on this in the most recent earnings as well, where our percentage of revenue that came from core mortgage went from 89%-or-so last year to 81% in the same quarter this year. And so we're expanding our product lines. But I'll start with the problem statement first, which is if you're a financial services firm, the way you're probably set up today is you have 1 system for each product line, which doesn't seem like a terribly interesting thing, except when imagine you go and you apply for a loan and then the next day you apply for a different product at the same institution and it's a completely new process from scratch. I mean if someone who is on this call have probably felt that pain of feeling like the institution doesn't know you. And -- or just got you a bunch of information from you and can't even reuse it because it's in a different system now to get you approved for a different product because now that other product makes sense. So instead -- maybe instead of getting a mortgage, now I want to get a home equity loan. Those are on different systems, it's a different consumer profile, the consumer has very destroying experiences. And so that's not the future that everyone wants. I think the future that everyone wants is one where it's, from the consumer's perspective, it's 1 bank, it's 1 financial system, it's on fintech, it's 1 view of their own data and all the products that they're eligible for. So it's not -- it doesn't feel like every time they apply for something it's a brand-new experience. And from an infrastructure perspective, it's better for the banks and fintechs, too, because they're having fewer systems to manage all these products. At the end of the day, underwriting a consumer for any kind of loan involves some combination of income verification, identity verification, potentially some asset verification if there's some assets that are need to be down payments or securitization. And so those kinds of things are the same capabilities that are needed across all these product lines and a layer like Blend can do all that in the same way across every product line. That means my profile as a consumer becomes the same. So that was the reason for us getting into the space in the first place and the uptake from our customers has been amazing. They're focused on wanting to be more digital across their product and serving their consumer first has been really refreshing for me as somebody who's a very sort of consumer-oriented CEO.

Yes. And Nima, how does that upsell process work? So maybe to make it real, a couple of quarters ago, you announced KeyBanc as a new Blend customer. So maybe to use them as an example, are they starting by using Blend to onboard mortgage application processing and at some point in the future, they'll -- you'll be able to upsell them product 2, 3 and 4? Or did they start more big bang with a number of products? How does that upsell motion work?

It used to be that we only had 1 product line. So as everyone originally would start with just mortgage. Now we have -- we see more and more bundling. And I actually have some exact numbers on this, I actually don't have at the tip of my fingers right now, on how many customers get started with us with 2 or more products. And it's a startling number given that we only launched with these products 2 years ago, but take somebody like a KeyBanc or somebody like a UBS signed with us or whatever it may be, they would typically start with a few product lines, actually nowadays. And then we'd layer on over time. We just launched this Blend Income product, which is an income verification product, it's exactly what it sounds like, it's an income verification product that makes sure that if you get a loan, you could pay back the loan. And if -- and when we launched that, we had our customers say, "Yes, of course, you want to include that in our offering." So we're seeing a lot more sign up with that as part of their initial sign-up flow with us. And for the ones that haven't signed up with us, many of them decided once they saw that announcement to sign up for this add-on and it's gotten a lot of uptake from our customers. So that -- just to make it real, I think the typical process and we actually build our whole company around this is, we have a very customer-centric approach. We spend a lot of time on it with our customers. I spend most of my time with our customers. And when the time comes where it can add real value to their business, that's when we engage them around these products. And it could be right when they sign up initially, it could be a little later. And in that process, it's again, it's all similar consumption-based pricing model. So it's truly based on their success is our success.

Okay. Got it. And maybe the big splash that you guys made, obviously, around the time of the IPO is extending into the title space, where the Title365 deal was fairly significant. Could you spend a minute talking through the rationale for that acquisition and where you see the synergies upside Nima?

Sure. Well, similar to income, title insurance is one part of the process that needs to get done for every mortgage and -- or at least most mortgages and many home equity loans, which are 2 of our larger business lines. And the process of title, just like everything else that I mentioned, is very paper-based, is very manual. And the reality is it's only really done because it's required by the mortgage providers. Not to say that you would want to buy a home and have a lean on it that you could know about. But the reason that's done is because somebody is getting a mortgage on that. And so -- and a lot of the data is the same as what the mortgage company needs to do the loan in the first place. They have to get property information. And so we wanted to build title insurance into the mortgage flow which I think it sounds obvious to say like people should close their loan in a digital way, all the information should flow seamlessly. All that makes sense. But it's never embedded in the mortgage flow before because the way that these industries came to be was the title industry was over here, title insurance industry was over here and the mortgage industry is over here, and they kind of work together, but not in a truly seamless way. So we started building that out a couple of years ago actually and -- or just over a year ago, I should say, and we saw a lot of traction in our customers around the concept. But the reality of scaling up the concept and getting licenses in all 50 states and all the things that are necessary for us to serve our customers and the scale of our customer base today because 14.5% of the market, while it's not the whole market and there's still a lot of upside, it's still a lot of consumers in every geography. To being able to truly scale that up and make them an offering on our platform, fully embedded, software-first, was going to take some time, and we went and started looking at opportunities for acquisition, where we had a -- we're looking for something it was very customer-focused, very centralized. We didn't want to branches in brick-and-mortar locations all across the country, which is how many title companies operate. We only wanted to have one that was truly a centralized operation that could serve the consumer in a digital-first way. And so we set out to do that. We see a lot of synergy. We have some pilots that are going live with some of our mutual customers that we're very excited about. And then some of our biggest customers are in process of getting rolled out as well. So we're very excited about that. Just another layer. I think it was another layer of this broad digitization story. I mentioned income, title. There's a whole lot of work around identity verification similarly that's happening. It just happens to be another layer.

Got it. And obviously, a large organization, I think it had more employees than maybe Blend had, if I'm not mistaken. So you're 5 months in. What about the internal integration, Nima? How's that gone so far in the 5 months that you've been at it?

So we acquired pretty much the company as is in the sense that we acquired it and we kept it whole. We weren't trying to break anything up. The company that we acquired was doing great. We want to keep it functional and keep growing in its normal course of business, and it's done well. It's done really well as a company. And our team is focused on 2 things. One of the key integration points from a company perspective, and there's some obvious things, right? When we're thinking about this offering to the market, we want our customers to think of this as a layer in the mortgage process, not as a stand-alone title entity. And so layering and thinking how our go-to-market works together is an obvious example, not something that's gone really well with the mutual -- the joint companies. And then there's a technical integration effort. And so the other aspect is technical and building the software layer that can power the automation, the data, all the things that we talked about flowing from our system automatically fulfilling the title policy, having all the numbers flow back and forth between the lender system and our system. Those are all things that we have built -- been building out and have continued to build out and that's going really well. It's proceeded ahead of expectation. Actually, the title integration end-to-end, and it's something that we'll continue to invest in and keep sharing results out as we get pilots live and customers live and sharing success stories that will help build the momentum around getting the word out there about what this offering can even do for the market. I think that's the thing that a lot of people don't understand what it's going to mean, but it's going to be truly transformative when title is just another box in the mortgage process that's automatically done by a system like Blend.

Yes. That sounds exciting. And from a financial standpoint, Nima when you start migrating from the legacy Title365 to the core Blend platform, how is that going to work? Like will the core blend numbers see a boost from that migration effort and legacy Title365 will desell? Like how will it show up in the numbers? And how will we know how much of core Blend is core versus migrating from Title365?

Well, I wouldn't think of it is migrating from Title365 exactly. It's more like as we start to automate the software -- the title process and build it into the software platform, some of that -- as that gets migrated -- as that gets ordered and done through our software platform, it will create some additional revenue for us. And then as that -- the way we classify that is we classify as core Blend platform revenue. Now there's 2 things that are affecting the revenue of Title365. One is market conditions. We all know interest rates at some point are going to go up. We just don't know when. So that's 1 thing that we're paying attention to, and we're modeling that out. We think the Title365's volumes as a result of interest rates should go down over time. But then some of that is also those customers when they get on the blend software platform, they're no longer going to be ordering in that legacy way anymore. And so that will also affect the Title365 revenues. But you will see a boost in that -- we kind of think as the rollouts happen in Q2, Q3 of next year really around the full integration, we expect to see a boost in the Blend platform revenues, and we're tracking that as well and making sure that we're staying on target or ahead of target on those objectives.

Okay. That's good to know as we model the business. So 2Q -- 3Q should be when we should see some of that success on the core Blend side?

Exactly. That's when we think the integration will have some scale to it and some success. And these are -- again, these are very complicated financial products with a lot of money-changing hands. We do not take the integration lightly. We're very methodical about it. We're starting with small pilots, but when we do it, it's going to truly -- it's going to be a fundamentally new way of this part of the process, just like our income product is a fundamentally new way of doing income verification. It's not a bunch of people calling employers.

Yes, got it. And then Nima, on the core mortgage side, you just said it vis-à-vis Title365, but rates up volumes down. So obviously, everybody involved in your stock needs to be prepped for that, needs to model it carefully. So I'm just curious, as you and the team forecast your own revenues, what assumptions are you using that are embedded in that?

Well, we look at this market using really the best third-party forecasts. So Fannie Mae and the Mortgage Bankers Association are 2 leading industry groups around this or leading economists around this. And so we really use their numbers and we kind of put together their numbers in a way that allows us to see what do we think volumes are going to look like next year? Now those things are not going to be perfect either because nobody has a crystal ball, but we use that as a best-in-class estimates of volume. And then because we know the volumes of our customer base, we're able to then model out how that -- the volume changes in the industry will impact our customer base at a customer-by-customer level. We have customer-by-customer forecast of what we think our volume on the -- their volume on our system is going to be this year, next year, even further out in some cases based on the current forecast, and we use that to continue to refine and learn what we think our revenue is going to look like. A new forecast come out every month, which is helpful for us to see every month, but we take that approach to it.

And when you look back over the last several months and last several quarters, how have the volumes that you've actually processed on the platform track relative to those third-party estimates. Has it been a little bit better than the forecasters had predicted? Or has it come roughly in line such that looking forward, we should really embed those third-party forecasts in our model without really making any kind of adjustments?

Well, it's been a little better than expected for us. I think part of it is our own performance and just us rolling out things faster in some cases than we wanted to. That being said, again, it's a lumpy industry, things are methodical, so it could also sometimes things can take longer than we want sometimes. And so we want to be thoughtful about that. But I think just -- I would just use their forecast there, I don't want to say that they're always right, but they're the most right that we think we can find right now, so I would use their forecasts, and if we end up being a little better or a little worse because of the natural fluctuations in the industry, that's sort of out of our control and what we're focused on and the things that are in our control, which is digitization is happening, customers who want better software. And so making sure we keep delivering the software at scale to our customer base, that's the thing that's in our control, that's the thing they want, that's the thing we want, that's the thing you all want something that I think it's just a natural focus of our business.

Got it. Okay. Cool. Let's switch maybe topics to the competitive environment, so we can understand that. When you are up against other third-party firms with these big banks, like perhaps, I'm sure KeyBanc was a competitive bid. Nima, who tends to be those rivals? Is it smaller niche vendors? Is it the large firms like Ellie Mae, Heist or Rocket or Fiserv or who are the ones you bump into most frequently?

Well, a lot of it's point solutions in these individual areas. And as we go to these financial services firms, nowadays, we go in as a platform across all their products and we talk to them even if they're not going to sign up for everything on day 1, we've talked to them about the possibility and what it's going to look like for their firm if they have all their products in 1 platform. As far as I know, we're the only platform that really does that, that does a mortgage and a personal loan. And it's like it just seems simple to do, but actually it's super complicated and no one else offers that. So that's a competitive differentiator with us -- for us and those, and we're the only ones to sort of do that. And we're the only ones who have taken a really modern approach. I mean this idea of creating an orchestration layer like ours, that's infrastructure layer, that's drag and drop, I mean, that doesn't exist in the market. And that just gives them a lot of -- gives our customers a lot of confidence that these things are future proof for them. And as the market changes, which it will, as the consumer financial services market changes that we'll be able to be -- we'll be able to serve them for decades to come. So that's something that's, I think, really special. But then we do see point solutions in individual cases where somebody will say, "Well, I'm looking at this product for income, I'm looking at this product for a mortgage or I'm looking at this product for a title, I'm looking at this product for closings or whatever it may be," and we run at this point solutions a lot. We work with many of them in a lot of cases because we're more of this platform layer. We don't think of ourselves as having to be the monopoly of every product and every service for everything. As long as we're the platform layer that works with these banks and becomes a software layer for these banks, fintechs, they want to use across all their major product lines, I think that's where we're well positioned. So we definitely run into competitors. And I think we have some unique things going for us to make sure we win a lot of those.

And when you are in those competitive bid situations, Nima, how does the pricing discussion go? Do you find that you tend to land roughly in the same spot and win on feature functionality and the breadth of the platform is Blend known out there as being a premium pricer because of that future advantage?

We are the most -- I think we're the most expensive priced product in the market. But we also create multiples more value in my opinion than our competitors, and that's why we can charge multiples. We've even had some competitors offer things for free to compete with us. And the reality is if I can create $10 of value and I collect $2, it's better than creating $2 of value and collecting $1 for the customer. And so it's -- I view it as a -- our goal is to create as much value as possible. This is not a fixed pie. Most of the financial services industry, most banking is still paper-based, it's still manual, it's still very human-driven. The size of the pie is so much bigger. Once we take that friction out, so many more consumers are going to get so many more products that can be offered at such cheaper prices with less operational expense for the bank or lender that the size of the market, it's not even far than what we're at. There's so much work to be done. And so we are a premium product. We intend to be this premium product that creates way more value than we charge.

Yes. Makes sense. And Nima, given the size of that opportunity, I'm sure there's a huge impetus to invest aggressively now to go after it, so that lends itself to a question about how you and the Board and the team are thinking about the emphasis on growth versus the emphasis on getting to profitability a little bit faster. Where are you on that equation right now?

Well, I think that there are certain things, I think, tend to think of the business in horizons, and we have certain business lines that I think should be and are more on that range of we're shooting to be profitable in those business lines. And they're very mature. They're at scale. We don't exactly track the business in this way today, but we treat it that way. We don't make overwhelming investments in things that are sort of once they reach a certain scale, it's hard for us to continue to spend above that scale in those areas. It's just like there's scale economics for us. We're a software company. But for the newer business lines, we do invest in those things in the future. And we're talking about title insurance. I believe that, that industry is going to look fundamentally different in 5 years than it does today. And we're going to play a big part of that, I'm sure others will as well. And so we need to make sure we invest in those areas to make sure that they actually do transform. Now with all that being said, we look at investment in these areas on a month-by-month, quarter-by-quarter basis, it's not we don't think of these things like static. The markets can shift. The talent market can shift, which is a huge thing. The industry volumes can shift, like I said. The appetite for software in these areas can shift. And so all those things are things that we look at on a week-to-week, month-to-month, year-to-year basis, and we pay close attention to, and we are very dynamic in our decision-making around those.

Yes. Okay. Let me finish by asking you a couple of broader questions so to get your perspective on as a CEO of a software company. One of the debate points out there is around labor shortages, where perhaps some of your financial services customers are experiencing it. But my line of questioning is more on how especially Bay Area software companies are dealing with this? And so maybe you could talk a little bit about whether that's been a constraint for you on hiring or not? And how that tight talent war has affected Blend?

Well, a lot of the talent war is around technical talent. Getting the best engineers in the world, getting the best product managers in the world, getting the best designers in the world. And the reason that, that's the area that is the most battle is because the reality is software products are mostly built by people who can write software -- write code. And so they're in incredibly high demand. And the problem that most companies face is that they weren't tech-first, engineering-first companies to begin with. And so they started with maybe a lower bar for engineering or technology. And then later, as they become they're trying to shift that and say, well, now we want to hire the best engineers because now we have scale. But the engineering, the technology culture of a company, I'm a software engineering by background, that is set on day 1 of the company's life. And if you are a software-first company, if you're an engineering-first company, you have that in your DNA, and if you're not, you just don't. And so one of the reasons that we have not struggled as much with technical talent hiring is because we do put the technology at the center of our company. We believe as a product and engineering-focused company, we believe the future of this industry is going to be transformed by software, by code. And so we put that in the center from day 1. We compensate very competitively, and we also make sure that people have a great experience here, stranded by some of the smartest people around them. So they're not working with people they view as B players or C players, everyone a Blend is an A player, and they want to work with A player since that creates a great culture for us to hire because we haven't struggled as much with hiring in that front. But it is a battle out there. It's a battle out there for sure.

Yes. Good news. Is the -- one of the manifestations of a tight labor market can sometimes be rising cash comp. How tough is it on the cash comp side, Nima? Have you had to factor that into your margin outlook for next year?

We factor in all sorts of things, including where we think salaries are going to go and compensations going to go. The beauty of software is that 5 software engineers that are A-plus players are better than 500 who are C players. And so it's because software, you're building a product that can scale. Like some of the most used products in the world, WhatsApp, had 16 employees, and I think when they had 1 billion -- some crazy number of users. It's not about number of software engineers. It's about the quality of them. And so yes, we do bake that in, but I don't think number and count, it's not like these are interchangeable bodies that it's -- like you find people who are great and you rally around them and you give them big projects with a lot of potential outcome for them, for the company and then they make you successful. And so while we have baked that in, of course, in our models, and we have a lot of software engineers, great ones to work a Blend. We don't think of it as a numbers game in that world.

Got it. Okay. Great. I think we're coming up against time, but I just wanted to leave you with the thought that we I am and the team, UBS is cheering for you to keep up that automation success, to make our lives a little bit easier as individuals. And congratulations again, Nima, on the successful IPO and wishing you a happy holidays and a fantastic 2022.

Yes. Thank you. Great to chat with you.

Okay. Thanks a lot.