Figure Technology Solutions, Inc. (FIGR) Earnings Call Transcript & Summary

All right. In the interest of time, let's get started here. Good afternoon. My name is James Yaro. I cover brokers, crypto and investment banks and Goldman's Equity Research division. With us, we have Michael Tannenbaum. CEO of Figure, a position he took over in 2024. He [indiscernible] the company through its IPO last year and have seen tremendous growth since and it's driven by an innovative approach to HELOCs and increasingly other asset classes. So thanks for being here, Michael.

Thanks for having me.

All right. So look, the business has evolved pretty quickly from a direct HELOC originator into a much broader capital markets platform, update us on what Figures building today and some of the long-term goals.

First of all, as I said, thank you for having me. It's been a great conference so far. Figure is a company really focused, as you mentioned, on the capital markets, and particularly, we're a first mover to the future of the capital markets on blockchain. We're the market leader in what's known as a real-world asset tokenization. And what we mean specifically by that is especially in home equity, where we do about $1.7 billion of volume through our marketplace, a month, our 500 partners are using our technology to originate mortgage assets those assets are on a blockchain that reduces the cost to originate, reduces the cost to trade and are traded in a very liquid capital market that offers whole loan and securitization sales to those 500 partners. And in the process of that loan manufacturing process, we save about $11,000 out of a $12,000 cost to originate and we save a ton of time as well. So it's about a 5 -- as fast as 5-day process versus industry 45. So it's a really fast-moving process that has created a very standardized capital market, and as you mentioned, James, it's a capital market that is now increasingly being used to standardize other asset classes, particularly in consumer finance and asset-based finance more broadly.

Perfect. So maybe you could just talk about the top 2 or 3 key strategic initiatives over the next, let's say, 12 to 24 months for the business? .

Sure. So we see a tremendous amount of growth in our core mortgage opportunity. There's $2 trillion of mortgage outstanding and we do about $20 billion a month. And then we also see about an opportunity in other asset classes as we mentioned. So we started in both auto and in small business. And just to be clear, those are -- we're not originating auto loans, we're not originating small business loans but we're taking third-party assets and standardizing the rails and offering capital markets as a service to those asset classes. So you have, as I mentioned, growth in the core mortgage where we see about 100x opportunity as well as bringing other asset classes onto the platform, both of those are fueling that over 100% revenue growth that you're seeing in Figure over the past couple of quarters.

All right. So maybe let's turn quickly before we get into some of the business details the competitive landscape, how it's evolved since the IPO, which is almost exactly a year ago. And I guess, as you add new TAMs and potentially new competitors. And then maybe just on your competitive mode as well.

Sure. So increasingly, Figure is moving more towards an exchange-like business model. And you should think about our differentiation in our moat from that context -- or in that context. And so specifically, we're the first mover in the home equity space. There's $35 trillion of home equity outstanding, we're the move in the market leader there. And increasingly in this rate environment, everybody wants to have a conversation about home equity. And that -- and we're making hey, while the sun is shining. You also have a dynamic that creates a lower cost of capital as more and more volume goes through our platform, investors like buying assets in bulk, and as we grow and as we do more and more AAA securitizations and become more of a repeat loan platform for investors the cost of financing comes down and spreads come down. And so what that means is every margin alone that we do is done more cheaply and provides this flywheel effect, and that increases our first-mover advantage. We see more broadly, capital markets are moving more towards tokenization. There's every bank conversation, every boardroom every capital markets company, that's your focus area, is talking about the future of the capital markets moving on chain even as people are regardless of enthusiasm for Bitcoin or Ethereum, there is absolutely a movement towards tokenization and we are the market leader there. And as more banks start to form consortia for tokenized deposits as an example, we're there to provide the assets against those tokenized liabilities as an example. So all of these things, these first-mover marketplace style advantages, these flywheels create a competitive moat for us more broadly, right? But then specifically, where I kind of look to when I look at Figure's, competitive advantages, is, one, the Fannie Mae ecosystem where Figure is very competitive. And Fannie Mae has done a lot on the first lien space of standardization and tools and technology and capital markets liquidity, we have done that in the second lien space, right? So if you were in home equity today, you look at FIGR as that standardized capital market you look to us for liquidity, and it's actually driving conversations even with depositories, for example, who may not necessarily want to adopt our origination technology, but they see the opportunity to use our capital market as a way to offload exposure to mortgage. Mortgages are 30 years, and that's a long time even for a bank. And so people are looking at Figure as the standardized way to access liquidity and for mortgage assets and increasingly other assets.

So I think you alluded to it a little bit, but this is really the third straight year where you're seeing an acceleration in origination partner growth. I guess, what are the catalysts for that? Is it brand recognition? Is it volumes being bigger, other factors? And I guess has the time to ramp up a new partner changed at all?

There's a bunch of different go-to-market motions that we have that are fueling the growth for Figure. Some of those were set forth years ago, some are new, and in general, I came to the company 3 years ago, as you mentioned, and I brought a lot of kind of B2B sales rigor to our process. And the sales cycles that we have range from a couple of months to many years. And so you're seeing the fruits of some of that -- those efforts start to develop now and in past months, and we see a very robust pipeline. We break out our partner opportunity set across a couple of different dynamics. One is what you would call mortgage banks, independent mortgage banks to is servicers, so people that service loans and can offer home equity on top of those existing loans. Three is depositories where we started to have a lot of growth we announced in our -- in May, our partnership with Flagstar Bank, which is a publicly traded bank, and that's unlocked a lot more depository conversations. We're also having conversations with small business lenders who we've now built a $500 million run rate volume business in that space. And we're also seeing in fintech and home improvement really big opportunities for us to grow as well. So there's a bunch of different verticals each within their own respective levels of maturity that are starting to come to fruition and fuel that origination partner growth, which is then fueling volume growth. But I'll also add that within those 500 partners that we have, there is significant opportunity for upsell. We don't have nearly 100% penetration. In fact, for those partners, we're under 10% penetrated in their business. and especially as we're now having more of a moment in home equity, given the rate environment, we are earning our way into the CEO and executive level conversations to talk about expanding our business with our partners. And I think we shared in our most recent earnings, it's like a 60-40 dynamic new growth versus existing, especially as people adopt Figure Connect that capital-light marketplace that's now 65% of what we do as of Q2.

So you brought Figure Connect, I thought it was really interesting what you said on our last earnings call about how new partners are onboarding directly into Figure Connect, and that's obviously a new phenomenon. why is this occurring? What does it mean to go directly to Connect? And maybe you could talk about that in the context of the speed to ramp up volumes or in terms of the volumes themselves.

Yes. And for the audience, Connect is the dominant way in which partners interact with Figure today. It's 65% of our volume. We've guided to near term to 70%, and that number continues to grow. Figure Connect means that a partner for Figure uses our technology, originates loans on their license with their balance sheet and capital and then sells the loan into the capital marketplace and we just collect a rate or take a big on that. It's capital light, and it's increasingly where we've gone. Again, as we build towards that exchange for tokenized assets and the related trading. And when we launched our business, we always anticipated a trajectory, which would start with Figure as an intermediary, meaning we would buy the loans and then quickly sell them -- but what we're starting to see, as James mentioned, and particularly in recent months, is large partners going direct to connect and moving that percentage of connect volume as a percentage of total to higher amounts than we anticipated at our IPO, which was only a year ago, we guided to 60%, and we've already gone through that. And the reason is, Connect from a value proposition standpoint is very attractive for partners. They're earning more of the economics, and it's much more of the business we want to do, given it's capital light and given its high margin. You've also seen the company's margins post IPO scale well into the 50s on an EBITDA basis. And we're continuing to focus on connect and bring people into Connect, but I like to clarify, our #1 North Star's volume. And so we want to be a partner regardless of how the partner wants to work with us. So if someone wants to start and they're not ready to go to Connect for a variety of reasons. They don't have the licensing, not comfortable, don't have the capital, then we're happy to serve them. And increasingly, I was meeting yesterday with 1 of the largest warehouse lenders on our platform. And they -- that's an example where an ecosystem is building a round Figure. And so today, if you want to go to connect, we actually have warehouse partners, including our own proprietary product, democratize PRIME. But we also have third-party warehouse lenders like Texas Capital, like Western Alliance that lend against the Figure ecosystem and offer warehousing. So we're starting -- which is something that really only Fannie Mae has today, right? And we're starting to have financial partners that lend against Figure assets and make the onboarding to connect more easy because these partners don't have to use their own capital, they can use the warehouse lending.

Right. So I'm going to turn back to the 65% of consumer loan volumes that are on Figure Connect and you increased the target to 70%. But obviously, that's not that far away. So maybe you could just talk a little bit about the aspirations for what that proportion could be? And I guess, are there any constraints on what it could eventually be over time?

Well, I think as we move more to -- like I think the growth, especially '27, '28 for Figure, we don't see anything slowing down in the core mortgage market, right? We've continued to outperform analyst expectations, investor expectations. If you look back at our IPO because we just actually were back at NASDAQ, celebrating our 1 year, and we were looking kind of at the numbers that we put out a year ago, and we've blown through those. And nothing is slowing down from that perspective. But as a mix, we're seeing increasing momentum in third-party assets trading on Figure Connect. That is going to be the way if we think about the entire capital markets as the price we're -- we don't want to wait for 6 to 2-year sales cycles to get there. We're going to have to support the trading and the standardization of third-party assets as well. And that is going to take the ultimate percentage of -- that's all Figure Connect. And so you're going to see Figure Connect continue to grow as that part of the business grows. And for those students of our P&L in the audience, that will mean that the ecosystem fees that we capture as a percentage of total revenue will continue to go up. And that's really the growth. And I think in our most recent quarter, ecosystem fees became the single largest P&L line item for the first time ever.

I want to turn in a second to some of the new products that you're adding, but 1 more on the core home equity business. First lien HELOCs, now comprise roughly 20% of volume, that's what are the key components of first lien HELOC today? And I guess where are you seeing the most traction in that bucket?

Yes. So we grew first lien business 3x year-over-year in Q2. So despite so much attention now [indiscernible] being paid on second lien because of the rate environment, first lien is firing on all cylinders for us. And the first lien story for Figure is a cost story. So our partners that do $100,000, $200,000, $300,000 loans, first lien loans, traditional mortgages, they're paying, on average, industry average, $12,000 cost to produce. So $12,000 on a $200,000 loan is 6 points, which is from a regulatory basis, you're only allowed to charge 5 points of fees. So you basically have to make up for all of that on gain on sale, which is challenging because then that means the rates need to be higher. So our low-cost production engine, which does a mortgage in under $1,000 is a very natural place for traditional mortgage origination to turn when they're looking at $100,000, $200,000, $300,000 loan balances. And that is the pitch we use home equity as a wedge and we earn the right to that smaller balance origination. And that business is booming for Figure despite the rate environment because of the low-cost nature of what we do, we're taking market share there from the Fannie Mae ecosystem and all in the first lien production that we do, and that continues to be a big part of our business. As a reminder, right? There's $35 trillion of home equity that I've mentioned. And we are -- people are using our product not only to take out money for home improvement or to refinance existing mortgage, but they're also paying off high rate credit card debt, high rate student debt, high rate auto loans. And as rates go up, all of the rates are going up. And so the value of being able to borrow against home equity over 30 years, which is going to be the lowest payment and against the most attractive collateral, which is the home is actually going to be more manifest in a higher rate environment. So we're seeing some of those dynamics in the first lien space as well.

Okay. So let's turn beyond the core HELOC product. So you've expanded into SMB, auto, DSCR, RTL loans. Just at a high level, how are you thinking about further product diversification? What are the key metrics that you think about when you're determining whether a product is a good fit for the platform? And then just how do you decide between an organic build, a partnership or an acquisition?

Sure. Fair amount of questions there, so I'll take them 1 by one. Let's start with the diversify. I just want to make sure clarify the diversification in other asset classes is a little different than what we're doing in the mortgage space. So in auto and in small business, we are working -- when we're standardizing those asset classes, we're working with people that are doing their own origination, their own underwriting, and we're taking those loans, we're tokenizing them and standardizing the way that they trade and are securitized. So it's sort of capital markets as a service, we're not getting into auto origination. We're not getting into small business origination. In the small business space, small business brokers do use our home equity product as an alternative to their business mix, but that's just our home equity business. So I just want to clarify that. In terms of -- you mentioned residential transition loans also known as fix and flip as well as DSCR we bought a company called [indiscernible] , we closed last week. That is our bet in that space now. So while we were experimenting with different models, they're the market leader in that industry, 25% of housing stock in the United States is owned by investors. So this is a huge market. [indiscernible] the market leader. As I mentioned, transaction closed last week. They have 10% market share, the next best competitor has 2%. And what they -- their secret sauce is being able to lend above 100% loan to value. So what [indiscernible] has done since 2013 when they were started and they've done it with about 50 basis points of losses as originated loans that are either home improvement, fixer upper adding an ADU, which is really popular here in the West Coast, these type of loans where you're going to increase the value of the property, they're an expert in doing that. They have the capital market support and the data and the technology to do all that. We bought that. We can put that on top of a HELOC. It's a very differentiating because 40% home equity loans are done for home improvement purposes. And 1 of our biggest decline reasons is loan to value. People that bought a home 1, 2, 3 years ago, don't necessarily have the equity, so they may be turning to a personal loan or to a home improvement loan. And now we can offer that through the Figure ecosystem through all our partners, and Kiabi unlocks that. So big opportunity there. And that's where we see a lot of the diversification efforts from our products, both first party and third party.

I want to turn to Kiavi and since the deal just closed, but I just wanted to ask firstly about the synergies that you're seeing from these new asset classes, but really in terms of the originating partners what's the dialogue with those in terms of what they might originate on Figure and I guess, cross-sell opportunities to buyers as well?