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

Great. Well, welcome to the Blend presentation at the Goldman Sachs Communacopia and Technology and Internet Conference. I have the privilege of introducing Amir Jafari, Head of Finance and Administration at Blend Labs. Amir joined Blend in March 2023. My name is Mike Ng, and I cover Blend and fintech here at Goldman Sachs. We have about 35 minutes for today's presentation inclusive of audience Q&A. So if you have any questions towards the end of the session, please raise your hand and we'll get a mic over to you.

So first, Amir, thank you so much for making the time to come out here today. We really appreciate it. So Blend is the leading mortgage point-of-sale product used by some of the largest bank lenders in the world. For those that may be a little bit newer to Blend, would you just give us an overview of Blend, its core Mortgage point-of-sale product as well as Blend Builder which is the foundational platform for a lot of these products? What's the 3- to 5-year growth strategy from here?

Well, just to unpack that and going into it, there's a few pieces. If you go back to just the origin, the vision of Blend, it was intention to make banking as simple as possible and accessible to as many as possible for what we do. So we do that today for our -- all of our customers, and we happen to begin in the mortgage space, as you had indicated. And for that, what it led us to was being able to be the leading front end and I think it's a POS solution for what we power when you think about the home lending and all those other components for what we do. We've taken it further. We've never lost track of that vision, and that's the intention that we've had. And so Builder is a culmination of that. Builder allows us to expand beyond more of what you would think of as an application to just an end-to-end platform and you're starting to see it come through in an essence in a lot of what we do. So Builder is the fruition of that platform. We're just -- it just happens to be where we're starting that platform in the world of consumer banking, which we'll talk about in essence what it does. But we will 100% be taking that to mortgage as well in terms of what we do. And then to the last part of your question, when you think about the next 3 to 5 years, it's going to be a continued focus for where we are today, which is protecting and conserving our mortgage customers, expanding with Builder into consumer banking and then from there in a world of mortgage as well. And then being able to do it with the lens that we do today, which is much more focused on profitability, but also just operational excellence on our processes. 3 to 5 years, it's a bit harder to answer when you think about just the ambiguity that exists out there when you think about macro per se, in terms of rate environment. And so putting that aside just a little bit, the 3- to 5-year view would be for us to be able to continue to expand from mortgage into all of the other vectors and all of the financial products that our customers serve. So that's deposits or auto or anything else so that it may be and all powered on Builder. What that allows us to do is, as you know, today, we're a U.S. centric company. it's going to allow us to unlock multiple vectors when you think about 3 to 5 years. There could be international. There could be GSIs, there could be ISVs. There could be our customers leveraging Builder themselves to build applications, which really, I guess, naturally kind of lends itself into or parlays itself into this whole world of ISV. So there's a lot of room for us.

Well, that's a great overview and a great way to kick things off. I was just wondering if you could expand a little bit and talk about how Blend Builder is used today by both your customers as well as your internal development teams. Looking forward, what's the outlook for getting the entirety of the product suite on to a Builder and what efficiencies would that allow.

Sure. The first piece is Builder for us was just launched in March of this year, and we've already shared a few external data points in this just to validate. It's substance in terms of what we said, for example, would maybe being 1 of the pieces that we share. There's a few pieces that kind of come to mind when you think about Builder. First and foremost, I think what it does for our customers, it allows them to think about Blend as an end-to-end capability rather than just anything that single point of sale or single application per se. It then unlocks a few other parameters. It could be where we, in essence, enter into the world of consumer banking, whether it's through we have certain customers that start on auto finance or deposits or whatever may be, but then power the array of financial solutions that they in essence uncover. That's the beginning of Builder. There's a few other things that happen behind the scenes. One, our ability to deploy, in essence, unlock the time to value for our customers. On a platform play, it's significantly faster. Nima spoke to this on the Q2 earnings, where we talked about our ability to drive feature functionality and just both sometimes we refer to it as customization, but just even configurability for our customers. We now do it faster, and we do it at a lower cost point. So it's just the beginning of what Builder unlocks. And as I mentioned, Builder, just think about it, it's what we used to describe our platform, starts in the world of consumer banking, it will really go to mortgage and power everything.

Great. At the end of last year, Blend introduced a platform fee component for Blend Builder that should drive more of a recurring revenue model on top of the existing consumption-based model for products like Mortgage. So can you talk a little bit about the logic behind the revenue model expansion? How have your customers responded to date? And how do you think about the revenue model broadly and holistically?

Starting with the customers in terms of just how we start any of our conversations, it really came to fruition from the customers, because if you think about the history and you think about Mortgage, not everything that we do can be measured through an end point of consumption, which is the way that our unit economics are driven today. And so what happened with Builder is as we were getting customer feedback for them to want to be able to build on to the platform not being measured by an endpoint of consumption is what enabled us to, in essence, introduce the platform fee. It's not a sea-based license. It's really just the platform fee enables them to build their own application layers, their own have their -- again, Builder is going to power much more of the end-to-end flows for these customers. And so that means that it's no longer just the heads of the business units coming in, but it could be the technology leaders of the banks coming in, where they want to leverage Builder. That's the intention of the platform. To your point, it has more software-like components in terms of its recurrent and upfront just benefits from a free cash flow perspective.

Great. It was also encouraging to see Blend accelerate its outlook for profitability to 2024 from 2025. What momentum are you seeing in the business today that gives you comfort in pulling forward that guidance? Where are some of the factors that could potentially lead you to outperform and achieve that profitability sooner?

The -- what's allowed us to actually be able to pull it in is just pure focus and execution more than anything, making sure that we stay very focused in terms of what we're delivering for our customers and the value. In terms of the second part, which is what could help accelerate that, there's multiple. Obviously, the macroeconomics completely changes it, and you have visibility -- for a lot of the investors, you have the ability to see less than 2 years ago, what this looks like in terms of what happens. Because as we've been very focused on the execution layer, we've been driving higher market share. We've gotten higher per funded loans, as we call them, on a unit economics basis. Those with the strength that we've seen on the consumer banking side, again, 1 of the things that was mentioned on the Q2 earnings call was our ability to see a ramp in our pipeline per se, for consumer banking. It is these pieces that are giving us the confidence to your point as to why we pulled it in, but then also, in essence, what can create and accelerate the slightest uptick in terms of just the macro element will become an exponential driver in terms of outcomes.

Great. That's a great segue to talk about the macro. I do want to ask how you're thinking about the macro and what assumptions are embedded in your outlook for profitability in 2024. It seems like the latest MBA forecasts are calling for industry mortgage transactions to be down 27% year-over-year with purchase down 17% and refi down nearly 50%. That said, I think most industry forecasters are looking for recovery in 2024 and 2025. So how are you thinking about the macro impact as you think about your business?

We'll probably split it into maybe 3 or 4 different kind of flows. We're likely going to see that 2023 was the low point. And I think what we said is potentially that would have been around Q1. So I think that's 1 of the things that we'll see. We, too, we follow MBA just like, again, a lot of the numbers and facts that you shared. On a shorter-term horizon, we have a lot of application volume. And so when you ask about guidance per se, we're able to leverage that into our views and be able to give more just thoughtful guidance with regards to what we do. But to your point about 2024, and I would say thereafter, we've obviously -- we see those same numbers. I think the way and the intention in terms of how we're operating today is even if we were to hold at the lows that we are in 2023, we're going to be able to achieve all of the numbers that we've shared for 2024 with regards to just our path to being profitable, but also our ability to start generating free cash flow for what we do. So the bigger point of that is we're not expecting or in essence, calling for a massive return in the business in 2024 for us to be able to achieve some of what you asked just before with regards to path to profitability and even what we've shared publicly around some of the unit economics of the business.

Great. Turning a little bit more towards mortgage. Blend has been able to build a very meaningful competitive moat by signing on major lending partners including the #2 and #3 largest lenders, Wells Fargo and PennyMac. How much white space is there to win new major customers? And then for these new potential customers, do they tend to be using competitors? Or are they using more in-house solutions? How does Blend Builder potentially open up these new opportunities for you?

Yes. And hopefully, I hit on all 3 of the points because I think they are critical. So the first and foremost, as you think about much more of just, in essence, our mortgage customers and who we serve some of the stats that were shared, we still serve 47 of the top 100. And as you think about this, our sole focus is that we're continuing to unlock value, and it's evidenced in terms of in essence that as we go into the renewals process and as we make the, in essence, cost per loan lower or, in essence, provide more configurability for what we provide for our customers, you're seeing that translate into unit economics for what we are able to achieve on a per funded loan basis. To expand to the white space that exists, I think that comment on the per-pound loan, it's our ability to actually expand into what we call our Blend Close solution, our verification of income solution. But I think, again, what I don't want is I don't want those to take away from just core mortgage because what we've done is we've continued to, in essence, invest in that area. So the white space is quite material. The way to think about the white space, though, is probably a little bit different to your point. It's not just about the ability to go after the logos. It's about the ability to be end-to-end for what we do with them or across the entire spectrum. And so with that, yes, in-house is still what we compete with more than anything for a lot of the banks that we serve and a lot of the customers that we serve across our entire customer portfolio. But our ability to, in essence, to really follow the journey of the customers, there are certain customers to your question, that start on day 1 and they go with Blend instantaneously 100%. One of the customers you mentioned is a great example of that. There are other customers that want to start in certain areas and expand over time. We'll follow that journey as well. But what we do see over time is, in essence, as long as our technology and our investment in technology, continues to just differentiate for what you can do because it's not just about building, it's about building and then maintaining what you need to do from a technology perspective, then that's where we see the ability to tap into that white space.

Right. Let's talk a little bit more about the future share gain opportunities among existing customers. Help us think about the dynamic of doing that land and expand across the same products, whether that's Mortgage or something else or across multiple products. What does the time line typically look like or the process typically look like for that existing customer share gain to play out?

Well, it depends because there's 3 opportunities for us today. Where we have mortgage customers and we're able to, in essence, drive expansion through our Blend Close and our Blend Income solutions, those are things that we're able to go after today. And the time line for those is somewhat shorter because we're, in essence, just enabling an attached solution, something that, in essence, is highly synergistic to the end-to-end flow of in essence, the origination. On the flip side, though, we're also seeing land and expand in the consumer banking suite, not just because we have some of the largest banks in terms of the mortgage side, there are also banks that would benefit from what we do in the consumer banking space. And so that's an expansion, but then consumer itself is actually going to be an acceleration of new logos for us. So those are the 3 kind of areas as you think about just in terms of the short-term horizon of being U.S. centric versus you asked a question with regards to Builder. I think Builder in the future, it really unlocks even more vectors of growth for us as we potentially think about other things for it, whether it's international or GSIs or ISVs, just this whole motion of what you asked about -- this whole notion of what you asked about earlier.

One adjacent opportunity that we didn't talk that much about yet is Title search and insurance similar to the legacy Mortgage application experience, title tends to be a highly manual, primarily off-line experience today. And it seems like Blend has an opportunity to innovate to drive a much improved experience for Title. So what do you hope for Title to look like in the next 3 to 5 years for Blend and important -- why is Title important in what you do?

The thesis in terms of just if you think about the loan process and Title being the required transaction in there, to the point you made with regards to the technology potentially being able to help drive efficiency, both for our customers, but also the customer's customers, us, the end consumers as an example, feels quite right in the world of Title. Now those things don't always come to fruition instantaneously. They take time to unlock. And so the perspective that we've looked at is we will manage Title. As you stated, I think, quite well, title is a very operational business, which means you have to have an extreme level of focus. We've already taken margins from the negative 1% that we reported in Q1 to 11% in Q2. And I think what we stated is very specifically, it will be a profitable component of our business. The ability for us to have -- continue that level of synergy for our customers similar to Blend Close, but also now with Title, I think will enable us to, in 3 to 5 years, take parts of the Title process that are ready to be more digital in their nature and continuing to go that path. So Title will remain a core strategy.

Great. We spent a lot of this conversation touching on all the opportunities within consumer banking, which is clearly an area of growth for Blend. So could you talk a little bit about some of the key products that are driving growth in consumer banking, how you plan to accelerate the adoption of these products? And how the go-to-market motion for consumer banking might be similar or different than mortgage?

Absolutely. Well, I'll start with the latter piece. I think the things to think about in terms of why Consumer Banking has certain differences in its flow is unlike, as I mentioned, from an application perspective, in the platform sale that we're able to achieve with consumer banking, you have more of the mind share, more of the wallet share that comes to the table because it's not just a decision for the singular aspect of consumer banking that they're making a decision on. But it's really around whether or not Builder can power their entire technology layer for the bank. And so that could be specific to the short-term decision that they're making or on a singular application. So customers can start in auto finance or deposits, obviously, and they can expand from there. And the perspective in terms of how we've done, we've made sure to just match our investment to the speed and the path in essence that the customers want to go down for, in essence, what they think about their time to value in their deployment. So that's -- that's how we're matching it. We're seeing, as we shared in Q2, a lot of positivity in terms of the short-term signs, and that's how we are in essence going to go after that space. We think it will be a larger space for us because if you think about consumer banking, what it allows you to do is to go after the end-to-end flow. And so as often raised with regards to Mortgage. Mortgage, we were more of a point of sale at the front end. And so with consumer banking, it should be thought about where over time, especially it will be much more of the end to end, which has a different value outcome, value for the customer and for us.

Right. Could you talk a little bit about how consumer banking might be different margin-wise relative to Mortgage? I think last quarter, you mentioned that consumer banking margins were actually a little bit better or were better. What about the Consumer Banking product suite results in a structurally higher margin? Is it sustainable? How do you think about that?

The comment around this structure, I think, is where we start. So the way that Builder was built in essence and in terms of its structure and the extensibility of the platform is what enables us to just be far more efficient in what we do. The level of investment that we've been making out for 2 years to go into this space is what you're starting to see come through and translate into numbers. And so to be specific to your point, Michael, I think when we report 81% software margins, and what we had stated around in essence, Builder being a contributor of that to your point, was the ability for us to be able to just start on what we had also said, which was when you're more end-to-end, there's more value for our customers, in essence, more value that we then capture. It's the beginning as to why we see this being a critical component. You asked as well whether it's sustainable? Is this going to -- is this something that holds or is it much more of a short-term phenomena. It's actually, I think, just the beginning for us because, as I mentioned, we only launched the Builder solution in March of this year, and we're still going to invest in it in terms of not just what we do for Consumer Banking and for Mortgage. So as you think about the simplicity for how you drive integrations, customized or configurable workflows and intake structures, all these pieces translate to better experiences that delight the end customers, make it lower cost for our customers, in essence, just drive higher margins when we're end to end.

And you talked a lot about moving more end to end, how that drives more value for customers. Naturally, you also will bump into a different set of competitors. So could you talk a little bit about the competitive playing field? There's obviously been companies like CoreLogic acquiring Roostify, nCino acquired SimpleNexus in the past. And these newer end-to-end implementations, who are you coming up against competition wise?

On the end-to-end piece, when we talk about Builder and what we're seeing in the world of Builder, it's very much in-house. It's a technology that they're trying to build because these are long-term deployments and strategies that are powering it. some of the logos that you or some of the other competitors or companies that you mentioned, they are competitors in the point of sales space. They're specific to something that we were going after, and they serve slightly different vectors or slightly different segments of the customer base that we go after. And respectfully so, I think, again, there's a lot of value in terms of what we do. In those areas, what we stay focused on is that I think what we've proven through market share and through some of these other pieces for our customers, the technology for, again, what our customers themselves have said the technology is it continues to deliver value to them by lowering costs, being centered in terms of automation. We'll talk about AI in the future as an example in terms of just as a platform play, we have a very natural capability to deliver this. I think that's where that comes in. However, an end-to-end to be clear, in-house is, I think, the biggest competitor and where we stay very focused in terms of just being able to articulate our vision to our customers given how new this is and what we can power for them.

Great. Why don't I get 1 more in before I see if there are any questions from the audience? And this question is just about the partnership ecosystem. Blend has prebuilt integrations with hundreds of third-party data providers to automate data collection, verification, decisioning. Could you talk little -- can you talk about the process of maintaining and expanding these partnerships while also expanding the scope of your offering? As you focus on cost discipline, have you had to rationalize any of these vendor expenses and partner expenses?

Yes. Well, there's a few pieces. But maybe if we can start with much more the innovation and then the focus on integrations that will remain for us. If I go back to the very beginning of our conversation, when we said that we want to keep banking simple and accessible, there's a requirement for integration, especially when you want to be end-to-end because there are certain things that you have to bring in to just be able to make it simple for that customer base as an example. So integration is a core component. It's a core tenet of our strategy. And I think we further actually doubled down on it because in the world of Builder, what you'd see and what you'll hear us talk about is our ability to build integrations is far faster and far easier in the sense in terms of -- it's not just the upfront cost, but the maintenance expenses that, in essence, go with it. The integration is a core component. As you talk about, what do we do from the rationalization. There are certain vendor expenses that we, in essence, have become very focused on to be able to deliver just what we've done in terms of the margin improvements from just Q1 to Q2 of this year. Those are not integration-based in terms of our technology innovation base. There are more, in essence, other parties that play in the space for what we deliver. And I think, look, we're always going to stay very balanced to make sure that we have a -- we're hitting kind of what we've shared in terms of our margin targets and kind of our view of our software margins being in the 80% range. So we will achieve both. But I think to be clear, our integration strategy with the ecosystem of providers that can actually make banking simpler and give more value, we will double down.

Okay. Great. Any questions from the audience? We have 1 up here. We're just going to get a mic to you.

Can you just take a step back and just talk about the investment case, why invest in Blend right now?

In Blend in general or in Builder? Blend in general? Yes. I think if it's okay, let's start with macro and then maybe break it down into just where we are today. So macro, as you look at it, hopefully, you have access, obviously, to the last 30 years of data. If you believe that the macroeconomics are going to further deteriorate and not 1 of our kids is ever going to buy a home, then that's, I think, part 1 of the decision tree. We don't sit here to profess what it looks like. I'd say the last 30 years, if you just normalize that slope of the line, it's up and to the right. And it's not 1 of these policies of up into the right. It's just the populations get larger, you need more space, loans are going to happen. Now what happens is you take in a short-term view, you take all of the ups and downs that happens and you normalize for those. As I stated a second ago, we believe that from a macro perspective, 2023 is likely a bottom. So I think that is point 1 in terms of the anchor as to why invest in Blend now or why that, in essence, happens. So that's piece one. I think the second is, there are, again, as the macro wins, in essence, create different levels of people making assumptions about the business, just taking focus on the core KPIs of the business, and we've shared those. We've talked about our market share gains or what has happened on a per funded loan basis. And so if people understand the story of Blend from 2 years ago, where our per funded loans were significantly lower than they are today. What it means when we keep talking about per funded loans, it means that in the future, as you start to see the units, the quantities return, we're going to be multiplying by a higher number in terms of just the value that we deliver for our customers. Then if you then bring it much more internal, there's a diversification, which, again, historically, we were mortgage centric, a lot to Michael's questions and points. So then to your point around like why invest, when you have the ability to diversify out of what you already were in essence the leader at in the mortgage space and be able to carry that in consumer banking and an investment that we made over the last 2 years and we'll continue to make to be able to drive the only platform that will deliver truly. The only platform that we own in essence there any of the competitors own themselves to be able to go after consumer banking, that's the beginning of a vector where if you believe that there should be more digitization, there should be more of a simpler process flow that I would say is level 2 of why invest in Blend now. And then really, it just comes down to we're going to continue to deliver on what I said, which is our -- the level of focus and the level of execution that we've been doing. I think as companies, in essence, to that, you'll see things kind of normalize versus where we are today.

Great. Thanks for the question. Just as a follow-up to that one, I was just wondering if you could expand a little bit on the per funded loan growth. Is that driven more by like-for-like pricing on Mortgage? Is it driven by platform fees that may not be sold on a consumption basis? Like what's the key driver for per funded loan growth?

It really just starts with a very simple perspective of what we tied to our 3 goals. We're going to continue to invest in Mortgage. And what that means is that in the mortgage solution itself, we continue to invest. As we continue to invest in the area, we're unlocking value for our customers. And so for the first part of your question, as you go back to the customers, especially time on renewals and other components, you're starting to see the mortgage PFL itself be higher. But we have attached solutions. These are solutions that are highly synergistic to the Mortgage flow per se. So Blend Close is obviously, a closed solution, verification of income we can talk about in great length, and there's homeowner insurance as an example and things like that. So as those have deeper and deeper penetrations to our customers because these are things that we are, in essence -- are helping our customers ramp and utilize now. That's what you're seeing, in essence, contribute to the per funded loan rates for what we reported in Q1 and Q2.

Great. Why don't I ask a closing question? Could you talk a little bit about where you, Nima and the rest of the executive team are spending the majority of your time and where you see the biggest areas of growth? Obviously, we've covered a lot of them today. And then maybe you can give us a little teaser on what we should expect to hear from the Blend Investor Day later this month on September 26?

Absolutely. Well, I think, again, we have a strong team that is focused on making sure we deliver on these 3 goals. I think every aspect of the organization is quite clear in terms of what it needs to do to be able to deliver on the level of execution that we want to do. So that's just -- that's front and center in terms of how we operate on a day-to-day basis. The second is we're really evolving from Phase 1 of Blend to Phase 2. The Phase 1 was obviously an application. We were, in essence, highly successful in the world of Mortgage. Phase 2 is a platform company, which means that we need to evolve how we think about things. And so you'll see that all of our processes, they're measured and they're tightly monitored just through the lens of operational excellence. That is in essence how we're all coming together in Phase 2, which is really where we are from a management team perspective today. Further from that, I think the lens that we are also operating on is always customer-centric. So as an example, we have our user conference next week for our majority of our customers. But then to the point you made, we have our inaugural Investor Day coming up. Our intention at our Investor Day is to take the story from what we've shared in the public world around our short-term views on our guidance per se from a quarter-over-quarter perspective, but actually be able to articulate the question that was asked with regards to why is there an investment thesis to give more clarity around what happens to this business in 2 or 3 years from now. And what happens with different work consumption-based business. But what happens at different points of both origination volume and then penetration in the world of Consumer Banking. I think us being able to deliver that messaging simplified and then being able to speak to not just operating income, the question you asked and what we've pulled in, but also just free cash flow and how we view ourselves being able to generate free cash flow in the business just as it is today. So our Investor Day, by the way, is in 3 weeks, it's the week of September 26 -- or I think September 26, if I'm not mistaken. Please join. Hopefully, we'll delight with them some new insights.

I'm looking forward to it, and that's a great way to wrap up the session. Thank you so much for your time here and insights. We really appreciate it.

Appreciate it, Michael. Thank you, Michael.

Thank you.