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

Afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Blend update call. [Operator Instructions]. Winnie Ling, Corporate Secretary, you may begin your conference.

Hi, everyone. Before we begin, please note that statements made during today's conference call regarding Blend and its operations may be considered forward-looking statements under federal securities laws. The company cautions you that forward-looking statements involve substantial risks and uncertainties in 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 SEC filings. We are not undertaking any commitment to update these statements if conditions change, except as required by law. Please also note that we will not be discussing our results for the fourth quarter and full year 2022 until our earnings release in, March and we will not be commenting on our 2022 performance or 2023 outlook during Q&A or other portions of this call. I'll now turn the call over to Nima, Co-Founder and Head of Blend.

Thank you for joining us. Today, we announced a series of big changes. The upshot is we're taking decisive action across the company to become even stronger. We're going to be materially leaner than we've ever been before, while not mortgaging our future. We'll continue investment in our builder platform and for our existing customers, we will be laser-focused on getting the benefits of the product enhancements we've made over the past few years. I'll walk through the outcomes of this in a moment. There are three big takeaways from our announcement today: One, we're providing an update and further details on our plans to reduce our cost structure as we prepare Blend to achieve profitability; two, we're making some key organizational changes that align with that objective and our shift to becoming a platform company; and three, as part of this, we're addressing not just cost, but also our product suite and corresponding revenue model in ways that enhance our margin profile and accelerate our path to profitability. Internally, Blend, we view these changes as both a response to market realities and also a natural evolution of our strategy. We spent 10 years building a product set and growing our market share, especially with quality financial institutions that are well positioned for market recovery. The steps we're taking today will strengthen Blend's long-term growth opportunities and our value creation journey. So let me recap what we're doing, add a little context, and then we want to give you a chance to ask questions given that our Q4 earnings call will not be until March. And one note on that front, one thing we are not discussing today is last year's performance or this year's revenue outlook. Given how early we are in the year, we'll look to address those topics in March. So to recap, three key pieces of our announcement. First is our cost structure. We've taken a difficult but very important action of reducing our onshore employee base by an additional 28%. This reduction cuts across every function in the company. We believe this action, combined with other efficiency measures will reduce our annualized operating expense and cost of revenue by more than $100 million from the third quarter of 2022 through the end of 2023. Last year, we told you we reduced our non-GAAP net operating losses by 50% by the end of 2023. We believe these actions will help us surpass that goal. Second, we're also realigning company leadership to support the objective we've been building towards for a few years. A transition from a company with several point solutions to a platform company. Blend Builder is the next-generation platform for banks to offer their products. But this transition from a product company to a platform company is not easy. Our first move year was recently adding Dean Klinger to run all of our go-to-market. He came from two companies that underwent this transition, Snowflake and ServiceNow. Today, we announced the appointment of a new Head of Finance and Administration. Amir Jafari, who spent a number of years at ServiceNow during their transition from a product to a platform. Amir will oversee all key internal operational functions, including finance, legal, security, HR, IT and others. This will effectively consolidate the roles of Tim Mayopoulos, Marc Greenberg and Crystal Sumner; all three will be departing the management team after transition periods, while Tim will remain on the Board. I'm so grateful for everything we've done in building Blend. They've all been here for more than 4 years, and they have helped us get to where we are today, and they have left us with a bright future ahead of us. Third, we're enhancing our go-to-market investment strategies to align our growth squarely with our best market opportunities and doing so in ways that will meaningfully benefit our margins and accelerate our profitability path. Key initiatives here include: first, Blend Builder. You've heard me talk about the configurable software platform that we've invested in over a number of years. It's a composable origination platform that gives us and our customers the power and flexibility to originate all their products seamlessly. Without writing much, if any code, we've already developed products off of the builder platform, including our instant home equity and deposit products. Opening it up for customers is the next step. Importantly, Builder will also help us to diversify our revenue model. On top of our traditional success-based transaction fees, our customers will pay an additional platform fee that comes with the power and flexibility of Blend Builder. This should help drive additional growth, predictability and incremental margin. When ready for our mortgage customers, Builder will give them additional power and flexibility they've been asking for and help them differentiate in a meaningful way. It's our platform of the future and key to our transition from a point solution company to a platform company. Next, we're also thoughtfully reallocating investment in both R&D and sales with a focus on Blend Builder while setting the foundation for our next-generation mortgage products. Obviously, mortgage today is our biggest business. So what are we doing there? Over the past few years, we've invested in and built a rich portfolio of products, most recently Loan Officer Toolkit, Blend Income and Blend Close. Because of the high volatility environment for the past couple of years, many of our customers haven't had the capacity to adopt new functionality at scale. But now they do and technology is the best way for them to drive efficiency capture market share and outgrow their competitors. So as customers invest in positioning for the next upturn, we can also harness the benefits of the backlog or features we built while efficiently reallocating dollars to Blend Builder. Given that we haven't provided the 2023 revenue outlook yet, we understand it's hard to put all of these initiatives into perspective. So I'll provide some. We now believe that our mortgage origination business should turn EBITDA positive in the second half of this year. This is a big step forward for us at a time when volumes are still low. Second, looking at overall Blend platform gross margin, we're improving our product margins and diversifying our revenue streams as we leverage Blend Builder, which has a platform revenue component and a unit revenue component. We have previously said our gross margins for our Platform segment in the medium term would be in the mid-60s. Now we see a path to overall platform gross margins exceeding 70% exiting this year and a few percentage point higher if you exclude software-enabled title. While it's too early to get specific, what we're sharing here implies a very healthy gross margin improvement exiting 2023 from where we'll exit 2022. Combined with our cost reductions, as we improve our product margin story and begin to generate additional revenue from Builder, we believe we will be in a much better position sooner to capitalize on a broader market recovery once the interest rate and macro picture is clear. To wrap up, we have a lot of work to do. We'll be in a tough operating environment for some time, but we're taking decisive action. We have a clear plan and a very strong management team. We have a great customer base that continues to grow and will continue to expand within those customers, and we have the best platform in the market. In short, we feel confident in our path and our ability to execute. With that, let's open it up to questions.

[Operator Instructions] Your first question comes from the line of Michael Ng from Goldman Sachs.

I just had two. First, just on the cost initiatives and the cost savings, is that $100 million of annualized savings a net number? Or is it a gross number that may be reinvested to scale the Blend Builder product? And then second, I was just wondering if you could just provide a little bit more detail around how you're defining the mortgage origination business versus the Blend Platform business because it seems like a new segmentation relative to what we may have been used to hearing about in the past?

I'll take the first one. This is Nima. Thanks for the question. I'll now hand it over to Marc for the second question. The $100 million is net, meaning from Q3 2022 until end of 2023, when you look at our overall costs, operating expenses and cost of revenue, we are now expecting greater than $100 million in savings across those two things. And Marc, do you want to take the question about segmentation and there's no change in segmentation, Marc, maybe you can give some more detail around that.

Yes. Sure, Nima. Yes, there's no segmentation. We just wanted to make sure it was clear that when we look at mortgage, we're looking at mortgage and mortgage-related add-ons, and that's a profitable business and how we look at it internally.

[Operator Instructions] Your next question comes from the line of Ryan Tomasello with KBW.

Just starting on the cost actions, I appreciate the commentary relative to the intermediate-term targets for 2023 that you previously gave. Just curious, beyond that, do you think -- do you view these cost actions as incremental, meaning accelerating your prior long-term targets of reaching cash flow breakeven by the end of 2025 or more of a step in that process to align with the current operating outlook that's affecting the top line?

These cost actions surpassed our previously planned cost actions. We're not going to give outlook on exactly just given that we haven't given revenue outlook for this year on exactly when that happens, but this surpasses our prior expectation of costs going forward.

And then in terms of the go-to-market and revenue model enhancements, maybe you can discuss how you envision the business mix evolving over the next several years. You mentioned the updated gross margin target for the mortgage business exceeding the 70% range by the end of this year. But curious if we should take this commentary as the company dialing back its exposure to the mortgage market and if you have a target for your mortgage revenue mix over the next several years, maybe I'll pause there and let you guys address that question.

We don't have a target for our mortgage revenue mix, and we're not dialing back on the mortgage industry. The reality is with Blend Builder, it can support a whole suite of products, every product that a lender or a bank may offer. And I also mentioned that the Blend Builder, a lot of what our mortgage customers ask for is the flexibility and power of something like what Blend Builder offers, which is having the ability to differentiate and create customer workflows to drive additional efficiency. So we are not dialing back on the mortgage industry. It's just that we're being opened up to new markets faster by focusing our investment around the Blend Builder, which we think is a one-of-a-kind platform, and we think it's going to be a big part of our future going forward.

And just one last one if I can squeeze in before hopping back in the queue. Regarding the Blend Builder platform fees and the recurring revenues that you called out as being higher incremental margin. Do you think that these changes will drive a meaningful near-term increase in the mix of recurring non-success fee-based revenues? Or is that still likely to take time as you ramp the Blend Builder focus?

Sure. And even -- just to be clear, even the Blend Builder platform, think of Blend Builder as a premium enterprise offering for people who want that level of flexibility, the ones who want to pay for that level of flexibility and power of an enterprise offering, if you will. And especially for companies who want to use this across multiple business lines or across within mortgage to truly differentiate and have a custom -- totally custom workflows and totally custom internal and external design. That's the power it brings. So you'll still have a unit-based fee on top of that enterprise platform fee. It's not like we're foregoing the success-based fees. We believe in those. And for the platform fees to take on a material portion of revenue will take time if that becomes the case. It won't happen overnight, given that we're just launching really this year or late last year in earnest.

Your next question comes from the line of Joseph Vafi with Canaccord.

I know most of this call is focused here on the cost side and some changes to pricing in the business model. But any commentary on uptakes or deal activity that you care to provide right now would be great, especially around perhaps signing more larger banks.

Yes. I think the simple way to put it is the mortgage industry, while it's in this turmoil and figuring out where they can make investments and when they can make investments, most of our interest and focus on the new sales side is with banks around the non-mortgage offerings, and we're seeing good interest and traction there, and we'll keep you updated as those things evolve. Nothing that we can share right now. And then on the mortgage side, making sure our customers make it through this current market environment where purchase volumes are lower than people expected, refinance volumes are lower than people expected. It's tech platforms like ours that can help make them successful. And so that's what we're going to do on the customer success side, which is, of course, very, very important to us.

Your next question comes from the line of Matt Stotler with William Blair.

Just one for me. Obviously, something you guys talked about in the past is the approach for the success-based pricing and how attractive that was for customers by tying your success to their success. What's your sense of the readiness or willingness within your customer base today to add on a platform to be on top of that? And any feedback that you've gotten from customers so far in terms of their acceptance of that additional pricing model would be helpful.

Yes, sure. And again, the platform is a fee for the people who want that additional level of flexibility and power. And so we still believe in the success-based pricing model. And that being said, where we have had customers who want that additional flexibility in power and want a drag-and-drop platform where they can essentially automate a large part of their business that they're willing to pay that fee. This platform doesn't exist anywhere else. And so they want to be able to create a modern digital first, fairly automated business so that they can survive and thrive in this environment. So those are the -- those customers are the ones who are willing to do it, and I realize not everyone is going to want to do that. So we have different tiers that are essentially focused on making sure that anybody can adopt our product. And then as we go upmarket, and there's more appetite to customize and get that level of flexibility. So we have a product offering for them and a product suite for them.

Your next question again comes from the line of Michael Ng with Goldman Sachs.

I was just wondering if you could talk a little bit more about the Blend gross margin exit rate coming out of 2023 in excess of 70%. Is that something that we should think about as improving gradually throughout 2023? Or is this something that is more of a sharp inflection point following some of the cost cuts that you've announced today -- and it's mostly in the title business?

Yes, it's gradual throughout 2023. It's not mostly entitled business. There are areas of opportunity for us to improve gross margin within our mortgage product, within our consumer banking products, but it is gradual throughout 2023. And it's a combination of all things.

Your next question comes from the line of Terry Tillman with Truist Securities.

Marc, one thing for you. Hopefully, you can get some well-deserved rest and good luck with whatever you do next. I guess in terms of -- I had a handful of questions. One question is, as it relates to the 28% reduction in onshore headcount, I'm assuming you all have opportunities with offshore and then probably those cost advantages. Can you talk about maybe offshore headcount increases? And given the take -- the puts and takes of onshore and offshore what does total head count going to look like when you get done with some of these cost containment efforts? And then I have a couple of follow-ups.