Rocket Companies, Inc. (RKT) Earnings Call Transcript & Summary

Hello, and welcome to everybody, and thank you for joining us at this virtual version of the Morgan Stanley TMT Conference. I'm very excited today to have Jay Farner, the CEO of Rocket Mortgage, with us this morning. But before we get started talking to Jay, I do have an important disclosure to read. For important disclosures, please see morganstanley.com/researchdisclosures. So as I said, we're excited to have Jay with us today to talk about Rocket Mortgage. In a lot of ways, I think that to be fair. People associate Rocket Mortgage with Dan Gilbert and the founder and all of his activities. But Jay has been right there alongside him most of the way and has really driven and been a key part of Rocket's success. So really nobody better to talk about the business than Jay.

Maybe Jay, we'll start off with kind of the attention-grabbing headlines of the last few days, and obviously, the stocks' seen a lot of trading activity and substantial moves. Anything that you can talk about fundamentally or otherwise surrounding that stock activity and movement?

Well, thanks for having me, and thank you for the kind introduction. I've been able to work with Dan Gilbert for 25 years. And so it's -- he's an incredible guy. And his vision for how we can transform really mortgage, and now that's led into real estate and auto and personal loans and all the other things we're starting to work on, it's all rooted in that vision that Dan laid out back 20 years ago as we were leading into the Internet. And so I just want to make sure I tip my hat to Dan and all that he has done and continues to do. The stock yesterday and over the last few days, really interesting to see. For us, obviously, we had an incredible 2020, and we had our earnings call last week, where we talked about the results in 2020. We talked about the fourth quarter. And so a lot of this, for me, is really the recognition of the Rocket Companies' platform. We spent a lot of time, and you heard both from investors as well as even folks on the television set starting to really discuss Rocket as a tech platform, which is what we've been building for 35 years now, and in particular, the investments in the last 15 or 20 years. And I think 2020 demonstrated the ability for us to leverage that tech platform. We look at the growth we experienced in 2020. I think from our start to our finish, that growth was close to, equal to the entire amount our next closest competitor did in mortgage. And alongside that, we've set up our real estate platform to double this year. We've set up our auto platform to double in GMV this year. So people are starting to understand between the brand, the technology; our Rocket Cloud Force, which is our nearly 7,000 licensed individuals that allow us to operate in every state across the country; our Rocket Pro platform; our Rocket Insights (sic) [ Rocket Pro Insight ] platform, we've got over 30,000 real estate agents signed up to that now. People are really grasping the power of the platform. And so the question I've obviously received and you just asked it, what I think about the price. Well, everybody on this call is far smarter than I am when it comes to determining the appropriate price for stock. Someone reminded me this morning that even at the high point of our share price yesterday, if you look at the S&P 500 and the average multiple on forward earnings, many of the analysts probably watching would find that our multiple would be lower than the average even at that high price. So you know how we feel, which is 25 years in the business, all the investment we're making, we are very bullish on where Rocket Companies is headed, and we'll keep making all the right decisions to continue to grow the company. James, I think you're on mute.

Thanks for the help there, Jay. I was following the instructions, and I forgot one. One of the things I want to touch on that you just mentioned, and we can dive into the intricacies and the back and forth of mortgage itself. But you did mention on some of these other non-mortgage businesses, whether it be auto and real estate, et cetera, and obviously, you have big ambitions for their growth this year that you just highlighted. How should we think about those as contributors to the growth of mortgage, whether it be directly through incremental revenue and earnings contributions versus serving as a way to secure and further retain customers through their mortgage life cycles and economic life cycles. So what are the benefits? And how should we measure those?

Yes. So we're very fortunate that we've benefited from both of those things. And as I know you're aware, we're profitable on the first transaction with a client, but our retention rate, north of 90%, means that the lifetime value of that client really brings great profitability. And when you think about these other businesses, whether it's auto or real estate or personal loans or other things that we may explore, one of the barriers for a lot of folks is the cost to acquire a client. And for us, we're very fortunate, we're servicing nearly 2.2 million clients. We speak to a north of 1 million clients a month. Last year, we helped over 1 million Americans with a mortgage. And so that reach that we already have to grow these other businesses that we're adding to the platform is far different than someone else who might enter this space because we already have that relationship. The clients trust us. They've trusted their largest financial transaction of mortgage with us. Our brand and the client experience, it's been demonstrated by the J.D. Power Awards that I can talk about endlessly. I mean all of those things really allow us to lean in. So not only can we recognize the revenue that we're adding on from the sale of an automobile or the sale of a home, but we're also doing exactly what you said. We're creating additional engagement points to ensure that, that lifetime value continues to grow. Now I've touched on it, but I think it really -- it's important to understand that we're not just entering a space like real estate or auto with Rocket Homes or Rocket Auto or Rocket Loans. We're entering with the technology that we've developed, streamlining a process, mortgage, one of the most complicated ones and applying those same principles. We're entering with the client experience and sales force that we've built. We're entering with all the technology that drives those efficiencies there. We're entering with the billions of dollars and brand that we've invested for mortgage. And so we get to benefit from that. And that's why when I make a statement that we're at $6 billion in real estate transaction in 2020 and we're going north of $12 billion in '21, that's very achievable for us because of all these leverage points that we've established with mortgage. And every time we engage that client in auto, in real estate, in personal loan, to your point, it just is another touch point that allows us to have a higher degree of confidence they'll be coming back for another mortgage. And so in times like this, where we actually see interest rates tick up a bit, while others may be concerned, it's actually -- it creates an opportunity for us because as people back away from the market, we can lean in. But the other thing what we know is that we're adding more clients to our servicing book at a higher interest rate, which of course, creates an opportunity when rates drop, and we can refinance those clients and save money there as well. So it's really a virtuous cycle that we've built on the platform. And we're just starting to get that flywheel effect that we've been working on for years and years now.

So picking up on that, and I can -- I think it's easy for us to visualize kind of the flywheel effect that can carry you through different types of markets and different interest rate environments, et cetera. But you and Rocket have the benefit of having been around for a long time and operating in the space that you have. How much of an impact does -- do rising rates have on mortgage origination demand? Like how much does that actually move the needle? And is there an interest rate level where we start to crossover where maybe the impact in the initial move-up isn't that much, but when you get to an x level, then we start to see impact on demand. And how do you manage through that?

Yes. Well, I'm glad you put it out, and I have to remember each of the cycles that I've been through because as you enter them, you're faced with some new challenges, you're always faced with some of the familiar things that you're aware of. And as you know, we've never really anchored our company to having the lowest price or the lowest margin. We've always gone the opposite, investing in technology and client experience, so we can protect our margin in all different interest rate cycles and grow our company. And so if you look at the loans that we produce between purchase; cash-out refinances, which are at incredibly high levels right now as people invest in their homes; debt consolidation; life events as people marry and divorce and have children, all of those things, consistently more than 50% of our loan production is really driven off of life events outside of whether there's a savings by a 0.25%, 0.375% or 0.5% in a refinance. And so knowing that the market can expand or contract, even when it's contracting, the efficiency of our mortgage platform and our great reach in marketing allows us to spend more and drive more clients in. As, again, others typically pull away as people watch it becoming more challenging for mortgage, they'll stop investing, they'll stop advertising, and it creates an opening for us to go grab that market share. And we approach it, as we've already touched on, not as a single transaction. We approach it as a lifetime value for that client. And so that's been the kind of cadence over the years as how do we continue to find opportunity to grow that market share when people give us that opportunity and they pull away. The most recent example I can think about is the brand-new jumbo product that we just rolled out here 2 days ago that we think is going to be another way for us to reach a strong client base as we go into markets where home values are rising, and so the amount of people who need to borrow continues to rise. So that's the cycle we've been through and that I've been through now for 25 years. And then the nice thing that we're adding on, and we've already touched on this is the additional businesses. And they, of course, today, don't represent the same revenue opportunity, but they do represent a growth of the client base. And so we have the data. I think somewhere north of 52 -- 53, maybe up to 58 million records of households in the country that we've interacted with that really give us a strategic advantage to do some of the marketing that I've just touched on that isn't rate sensitive. We've got another 150 million records that we've gathered data on that's less proprietary, but that's over 200 million records. And with these different products and these different auto, loan, real estate, this is where our marketing machine goes to work. I was talking to the CMO the other day, and I told him to just increase the budget, not $5 million, $10 million but by hundreds of millions because this is where we can put the pedal down and grab market share and engage with clients. So that's the pattern we've been in over the last 35 years, and I think that's what you'll continue to see us to do.

So speaking of market share, market share gains, spending on engagement and branding, et cetera, obviously, you guys did a very good job on things like Super Bowl ads and that kind of thing that came here in the -- at the beginning of the year. But in the fourth quarter, and we haven't gotten total statistics yet on the mortgage market size, but it did seem like compared to the June and September quarters that December, you probably took a pretty big step-up in share -- market share, most likely. And you highlighted some of the growth versus competitors early on in your comments. But was there a change in -- or what was happening kind of under this -- behind the scenes or under the covers back in June and September quarters that allowed for that step-up? Or was it just market dynamics that there was so much demand and you guys really have the ability to service it? Like what do you think contributed to that? What seems to have been a notable step-up in share in the December quarter?

Yes. I'm going to start with tech, the scale that the technology brings us because we're -- I'm going to remind you that in addition to all the things you've just stated, everyone's working from home. So we have 22,000-plus individuals that are at home in their home offices, in their bedrooms, in their kitchens, on their computers working. And so it's really -- that, again, is, I think, another checkmark of what can this technology platform do. It's one thing to be able to close $5 billion a month or $10 billion a month. But if you're in this business on the mortgage side, as you add volume from $20 billion to $40 billion, things become more and more complicated. There's a lot of moving parts there. And so that was our technology and our nearly 3,000 technology team members and their ability to lean in and give us that scale, our operations group that's highly efficient, our Rocket Cloud Force that's highly efficient. So we really were able to flex that muscle of operational efficiency and technology. And then alongside of that, you referenced, we've got great brand building, but there's also this performance marketing engine under the hood that's spending hundreds of millions of dollars a year to drive those clients and who need their full approval letter, who are interested in saving money or figuring out how they're going to send their children to college. And that machine is always working. And as you touched on, in the fourth quarter, I think that's where it really excels. As we get into Thanksgiving, and again, sometimes our competition tends to pull back from a marketing spend because there's other retailers out there, our performance marketing engine kicks in. And that data that we've got in that servicing book really kicks in. And so that allows us to grow even if others may not be having the same experience.

Yes. And that's really interesting commentary on the operational aspect of it. And one of the things that's been striking to me in our conversations, Jay, is that as much as we talk about market share, and that is certainly the way I teed up the last question, you don't really seem to focus on market share per se. It's more -- that's the outcome of your operations and the operational focus in driving the vision that starts with Dan Gilbert, all the way down. So with that kind of in mind, where are the areas that you're focusing on right now for operational improvement? Are there some specific things that we should -- as investors should be trying to pay attention to where you would expect to see improvements? And whether that would be on the core mortgage businesses or on some of these other incremental opportunities you're starting to chase?

I'm glad you circled back to kind of Dan's vision because you're right, the outcome is that you hopefully may acquire more clients because you're doing a great job. But the input there really is taking a complex process that people want to avoid, don't enjoy in streamlining it and simplifying it while increasing the quality. And so that's where you've noticed that we'll lean into. On a real estate side, Rocket Homes, it's one thing to go out and, of course, look at the MLS and getting excited about purchasing new home. It's another thing to find the right agent to get the full approval, to navigate the title on our For Sale By Owner side, get the services to figure out how to get a home closed, and you don't have an agent evolved. So that's an example of leaning in and trying to streamline these complicated processes. Same thing at Rocket Auto. What we noticed, there's a lot of people out there looking for cars. And there's a lot of folks out there that have cars they want to sell. But there's a disconnect between that online experience and actually purchasing a car. And as you do your market research, people will tell you they don't want to go into a car dealership. They're concerned about it. They feel vulnerable. And so we stepped in and said, let us take care of that for you, let us find the right vehicle, let us partner to have it delivered right at your doorstep. So that's our mission. Let's simplify these complicated transactions in life, and you can probably think about the additional things that homeownership brings to the table that are complicated that we could lean into. That's why we announced Rocket Labs, which is really our incubator kind of formalizing the incubator process that we have, taking 10, 15 people, putting them in a room, finding them and say, hey, go solve this problem, make the client experience better. And so that's how we view the way we're going to grow. And their outcome will be market share. But that's not really the focus that we have. It's just make the experience better for our clients. And as our business grows, our client sometimes is the end retail consumer. Sometimes, our client is the mortgage broker or the real estate agent. And that's great, too, because what we want to do is empower that person, not only with our technology but with our brand. So if a consumer out there is thinking I'd like to buy a home and I've heard of Rocket, then that local mortgage broker in that community can say, I partner with Rocket. I'm using Rocket technology, and we give them a leg up to win that business by leveraging the technology and the brand that we've spent so many years establishing. So I know I probably got deviated a little bit from your question, but I get excited when I think about all the -- what's driving our decision-making, which is really changing the client experience.

No, that makes sense. Look, I think brand building is obviously central to a lot of the focus for Rocket, at least what's visible to the outside. But I have to go back, and once again, building on a point you made earlier, your retention as people go through their life cycles and refinancing and that kind of thing. But grabbing those consumers at that original home purchase is obviously a focus. I remember, as we were first getting to know Rocket, we were working with our bank's analyst, and she audibly gasped when she heard your retention rates, you still -- versus what she was used to hearing from her bank that she covers. So the sooner you can get them into that funnel through -- in that initial home purchase obviously, the more lifetime value potential there is for the customer. So what are the things beyond brand that you're focused on in terms of being able to secure customers and help them buy that first home and do that first mortgage, et cetera, so that you can keep and take advantage of your retention over the long run?

Yes. You're 100% right. And that -- when we started focusing on Rocket Mortgage 4 or 5 years ago, that was the driving factor. All the market research at that time said, first-time homebuyers are slow, slower than they have been in generations past to purchase a home. So -- well, why? The thought process that I should have to go into a branch or physically drive to go a location doesn't -- didn't make sense to them. So many other things that they were doing in life and their general banking was being done on the phone, on their mobile device. And so that was the feedback we received. I want to do the mortgage when I want to do it on my phone, I want transparency into what the rates and fees are, and I want to be approved right now. And so we started on that journey to build those things. And you'd asked that question about operational efficiency, digitally accepting the information, whether it's asset statements or W-2 information, verification of employment, those are all the things that we are working on to bring that information into someone who can get an instant approval or as close to an instant approval as we're able to achieve. So then let's take that a step further. Once they have that, now the question becomes, okay, but that's just a piece of the process. And there's a lot of moving parts and a lot of individuals involved, and I don't quite understand it, I don't buy a home every day or week, and so help me understand it. And that's why behind the scenes, we've been investing so much in Rocket Homes. We've got technology, an entire new tech stack that we launched here in January. Congratulations to the Rocket Homes tech team, which will -- you'll watch over the course of the next few weeks, we're just loading more and more MLS data on, but giving our clients more filters, more options to search that property data. We're thinking about other ways people should be able to buy a home or list a home, sell their home. For Sale By Owner was an investment that we made. And then tying all of that data and that experience together, realtor.com is another example. We launched that partnership. And we're working hand-in-hand with them to determine what's the proper way, depending on where you are in the funnel, 9 months out, 10 months out, 1 month out for us to bring value to the transaction. So it's a smooth process for you. And oh, by the way, that goes into servicing. Now you understand your mortgage, you bought your home, how can we assist with homeownership? And as you probably know, if people are going to purchase a new car, it typically comes within 6 months of the purchase of a new home, which is very logical for us to then have Rocket Auto there. So we're taking all of these experiences and packaging them up in a friendly way where people can have confidence and make great decisions. And so that, to me, is the key here. I think we've experienced that on Amazon. I don't have to think anymore when I wake up in the morning and realize that I need something. And it could be a speaker, it could be a tube of toothpaste, it could be a case of water. It doesn't really matter what it is. I press the app, I get that thing. And that's really the mission we're on for Rocket Companies. When it comes to that more complex transaction that kind of gives you that feeling in your stomach, like you might be a bit nervous? No, you press the Rocket app, you go there, and we guide you through that process. That's the ultimate mission that we're on.

So we have about 5, 6 minutes left. So I want to hit on a couple of other points. And the first is just the various channels. You talked about kind of your partner channel as direct. There's different types of direct, whether they're engaging with Rocket or they're doing everything electronically just with a phone and kind of what you're imagining and envisioning ultimately getting to. Can you talk a little bit about what portion each of those types of channels or processes are of the overall volume and business today? What their relative growth rates are? And how -- what you think that looks like in the very long run?

Yes. Well, I'm glad you brought that up because there are these channels. And then even inside of them, there are multiple variations. And so I think people -- Jimmy, it'd be confusing to try to understand all of the different ways that we're engaging with clients. And so I'll go back to -- remember, at the end of the day, with the brand, the technology platform, the data that we've got and this Rocket Cloud Force of licensed professionals, for us, whatever is the best entry point for a prospective homebuyer in America or homeowner in America that we're fine with that, that -- it should be whatever is most comfortable to them. In some cases, they're on their Morgan Stanley or soon to be E*TRADE website, and they determine that right now is a great time to refinance; or they were doing their taxes with TurboTax and they were on Mint; or they were talking to their Charles Schwab adviser or on the Charles Schwab site. And that's the entry point. And so we love that channel because we think our brand, and we think the quality experience that we bring to the table really positions us to be the #1 choice for other large brands when they think of bringing a mortgage experience to their client base. So I think about how American Express is viewing it. So that channel is growing. It operates very much like retail. It's just the clients are coming to us through that trusted partner that they already know, which, of course, helps the conversion rate and the pull-through rate of that client base. The real estate Insight channel is a newer channel. And as I touched on, we're up north of 30,000 real estate agents who have signed up for our Insight platform. They can get all the information that they need to know where their client is in the process of purchasing the home, which gives them great confidence, which then, of course, means that they would like to refer their clients to Rocket because they want their clients to have a great experience. They want to know where the loan is in the process. And so we're seeing that accelerate quickly. So although a smaller channel today, one that we think has great growth opportunity. We've got our Pro network, which is financial planners, real estate agents. And that channel has really been growing by leaps and bounds in the last 12 months. This is a little bit more complicated, but it's also a great barrier to entry. As a State Farm agent or a Farmers agent or others join the network, they go through the licensing process. We have our proprietary licensing process that we've built. It's incredibly complicated to get licensed in all 50 states or your particular state for a mortgage. So those State Farm agents come on. They're licensed professionals. Now they're Rocket Mortgage originators as well as State Farm agents. And so that -- think about that as a long term -- it's building, and it's building. And so although it takes a little longer because you're going through the licensing process, once you have that force of agents out there, understanding mortgage, thinking about how that benefits their book of business and being licensed, that to me, that's like you get a 100-pound bowling ball rolling. It's going to -- even though it might take a little effort to get it rolling, boy, it's going to roll, roll, roll continuing into the future. We've got our broker network, our Rocket Pro TPO, which has been an incredible business for us. I think, and you touched on this, as we got into the summer and the fall months and brokers were concerned about, hey, where do I go? Where do I go where the trusted company, trusted technology or I know my mortgage will close? They really recognize that Rocket was that place. And then I'll finish, of course, with retail. And retail has is so many aspects, I could talk all day about how we grow the retail platform for the linear advertising, the performance advertising, the digital that we do. But that has been our core for 35 years. And all the sales technique and the skill that we developed and the marketing that we developed there, and we learned very quickly what works and what does not work on print, on digital, we're able to then take that learning and now transform it or move it to the other channels I just talked about. So we can learn with retail and then bring that forward to empower these other originators that we brought on to our platform. So I know we don't break down the percentages, and I'm probably not going to go any further than what we've already laid out in our earnings call, but as you can probably sense from my passion, they're all growing. And with what about less than 10% market share, wherever we are, it's hard to say today. If you think about all those different channels that can grow and give us reach, that's why we get excited about what this company looks like in the years to come.

Last question, Jay, and then we're really out of time. But capital, capital allocation, et cetera, you just announced a special dividend that was quite good. You're making a lot of money right now. On the other hand, you do have a buyback authorization, which I don't think you've done much on. On the flip side of it, the float is pretty small. And so there -- sometimes, we have investors asking about, hey, is there a way to get more liquidity on the stock? What is your view right now on capital allocation and capital returns versus other things that you could do?

Yes. We've been very fortunate over our 35 years to be a profitable company each and every year, which is pretty rare in this business. And you saw the power of our platform last year with $11 billion in EBITDA. That gives us the flexibility to invest in our business, which we are doing all the time and grow it organically, and then also have that eye out there for bolt-on, add-on investments we could make to accelerate mortgage, accelerate real estate, accelerate auto, accelerate other things that tie into home. So we're very active in looking there. But even after we went through that process, we said, "Wow, we still have capital." And we believe that thinking through all the investments we've made or can make, we still have excess capital. And that's what led to the special dividend, $1.11. We were pretty proud to be able to offer that to our shareholders. And we think more of dividends as special dividends because we want that flexibility to make the right investment for the long-term growth of the organization. And I'm going to go back to watch a lot of clips from Jeff Bezos from years back, talking about the Amazon platform and really explaining to folks. I think one time he talked about, well, I'll set up a hot dog stand. That means I can then set up a lemonade stand and a hamburger stand. And I think he was underselling what the Amazon platform could do. But it's the same thing that we're thinking about. We have this client base. We have this incredible brand. We have clients who love the experience. We're transforming the experience. We're always going to focus first on what can we do to grow that base? And then if we come to the conclusion that we have excess capital, we'll do a special dividend, the Board did approve that stock buyback, I think, giving us the flexibility to invest in our company, if we think that's appropriate as well. So we're very fortunate. And our capital allocation strategy really hasn't changed, I think, from the first day that we mentioned it, always company first. It's growth first. And so I don't think you'll see us deviate from that. And as I've mentioned before, between myself and Dan and the other leaders in the organization, we own roughly 94%, 95% of the company. We believe in its future. And we have not sold shares -- or our key shares since we went public because we believe strongly in the future of what we're building. And this is our life's work. I've been here 25 years; Dan, 35 years; most of our leaders close to 20 years. So we're on a great mission, and we're going to continue on that mission.

Well, Jay, we could have a Joe Rogan podcast length conversation of 3 to 4 hours. I've got enough prepared questions to do that, but we're out of time that they've given us. So really appreciate you joining us. And I'm sure there are a lots of people around the country that have been appreciative of the work you've done as you've gotten mortgages done in, particularly, a very high demand environment. So thank you very much for joining us, and hope you all have a good day. See you all.

In fact, James, thank you for having me, and thanks to all the team members of Rocket Companies, we couldn't do it without you.

Have a good day, everybody.