Good afternoon, and welcome to Blend's Third Quarter 2022 Earnings Conference Call. My name is Crystal Sumner, Head of Legal Compliance and Risk for the company. With me today are Nima Ghamsari, Co-Founder and Head of Blend; Tim Mayopoulos, President; and Marc Greenberg, Head of Finance. After Nima and Marc deliver their prepared remarks, the team will take questions. You can find the supplemental slides on our Investor Relations webpage at investor.blend.com. During the call, we will refer to certain non-GAAP measures, which are reconciled to GAAP results in today's earnings release and in the appendix to our supplemental slides. Non-GAAP measures are not intended to be a substitute for GAAP results. Also, certain 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 and 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 most recent 10-K, 10-Q and other SEC filings. We are not undertaking any commitment to update these statements if conditions change, except as required by law. I'll now turn the call over to Nima.

Thank you, Crystal. We achieved revenue of $55.4 million this quarter in a market environment that has continued to get more challenging. We grew our Blend Platform segment revenue modestly by 3% year-over-year to $36.1 million despite a 63% decline in industry mortgage volumes for Q3 2021 to Q3 2022, according to the Mortgage Bankers Association. Three primary factors drove our performance. First, the migration of software-enabled title revenue to a Blend Platform as we fully integrated Mr. Cooper onto the platform; second, the strength of our performance in mortgage banking and related revenue relative to industry volumes; and third, roughly 50% growth in Consumer Banking & Marketplace revenue, excluding software-enabled title. Our Mortgage Banking, and Consumer Banking & Marketplace performance reflects continued execution of our strategy. We are driving increased share of industry lending volumes, achieving higher pricing per funded loan, doing a great job of retaining customers and leveraging product expansion to increase wallet share and utilization of our platform. Against the backdrop of the largest annual mortgage origination declines in 30 years, I'm really pleased to see our strategy working. And we believe we are setting up for long-term success as lending conditions improve. Despite this mortgage industry volume decline, today, we've narrowed our guidance range for 2022 revenue to $235 million to $240 million, within the range we laid out back in March. As our outlook demonstrates we've executed on our strategy through challenging headwinds. We're able to make progress because we remain focused on what's within our control, specifically our customers and its growth, product growth and our cost structure. Let's start with our customers. The headlines are that we continue to grow market share while maintaining strong retention levels and improving our pricing. Our gross revenue retention was 98% this quarter, roughly in line…

Thanks, Nima. Good afternoon, everyone. I'll walk through our financial results, and I'll provide context in the following order. First, I'll start with the recap, including how we are performing in this market cycle. Second, I'll expand on Nima’s comments surrounding our efforts to reduce our cost structure as part of our broader capital management strategy. And last, I'll provide context around our guidance update and how we expect to see trends unfolding for the rest of the year. Then we'll open it up for questions. Let's start with the highlights in Q3. Total revenues for the quarter were $55.4 million. Blend Platform segment revenue was $36.1 million, slightly up by 3% year-on-year. Title365 segment revenue was $19.3 million. Within Blend platform, our mortgage revenue declined by 27% year-over-year in Q3 to $19.9 million amidst the 63% mortgage market volume decline in the same period. Our Consumer Banking & Marketplace revenue totaled $15.3 million this quarter, up from $6.6 million or up 132% as compared to the prior year period. This includes $6.1 million of software-enabled Title revenue that is migrated to the Blend Platform. Year-on-year, total nonmortgage linked consumer banking transactions grew by approximately 145,000 to approximately $229,000 in Q3, driven by additional home equity and personal loans as well as credit cards and deposit account openings being processed on our platform. Closing up the revenue discussion, we recognized $865,000 in professional services revenue. Moving to gross profit, Q3 non-GAAP gross profit was approximately $21.6 million, down from $40.6 million in the prior year period. Current period non-GAAP gross profit includes $19.8 million attributable to Blend Platform and $1.8 million to Title365. Our change in gross profit is primarily the result of a lower contribution from our mortgage business as well as lower order volume and unfavorable product mix…

Thanks, Marc. The macroeconomic environment is out of our control, but something we are approaching prudently, and we are doing so by adapting the things that are within our control. And to recap, what we're focused on is, one, our execution within our customer base; two, our ability to deliver not just one but a suite of products on a platform to our customers; and three, our ability to decisively manage our cost structure. We are managing the business to weather this cycle and come out stronger on the other side. We're planning for mortgage industry unit volumes to remain at or near historic lows through 2025. And we're doing this all in a way that allows us to continue to innovate because one thing that we all know is true. The banking industry will continue to transform, and that transformation is driven by technology to deliver real-time experiences that will benefit consumers and financial institutions alike. With that, thank you again for joining. Crystal, we're now ready for questions.

Thank you, Nima and Marc for your remarks. We'll now turn to Q&A. Our first question comes from David Unger from Wells Fargo. Please feel free to un-mute, and go ahead.

Can you hear me?

Yes, we can.

Sorry about that. [Indiscernible] ratio, it's improved by a lot meant 19%. I'd like to know how that compared to your expectations coming into the quarter baseline for that. What's reasonable to think going forward? Thank you.

I think part of the reason – this is Nina. Thanks for the question. Part of the reason for that was the way that that's calculated, which is described in the disclosure is the total revenue of customers this year compared to last year adjusted for volumes, and there's more detail in the disclosure on that. And so as we add more add-ons, they tend to be pretty chunky sometimes with customers where if they add a new big add-on, like software-enabled title, for example, that number will jump. And we always expect our net revenue retention growth – our market adjusted net revenue retention to be high as long as we're investing in adding new add-ons and growing within our current customer base and helping our customer base adopt new functionality. But sometimes it will be lumpy like this.

Our next question comes from Michael Ng from Goldman Sachs. Please feel free to un-mute and go ahead.

Hey good afternoon. Thank you very much for the question, I just have two. First, could you talk a little bit more about your expectations for OpEx and cost savings? Is the 4Q OpEx good run rate to think about as we go into 2023? Or do you think you could see further cost reductions? And then second, I was just wondering if you could talk a little bit more about some of the costs related to the platform migration. It was helpful to get the context about the mid- to upper 60s ex the platform migration. Are those really one-time in nature? And when should we see, I guess, platform migration costs come off? Are we through that now? Thanks.

So thanks, Michael. So in terms of OpEx, we continue to look across the business and make sure that we're investing our time and our energy in the right levers. You saw what we did again this quarter. Our headcount is down 25%, nearly over 500 positions since the beginning of the year. So we're continuing to rightsize the business. Some of those savings still are yet to be seen in the run rate. It does take time for that to play in. But if you look at Q1 to Q3, it's down $10 million in OpEx. I think Q2 to Q3 is down $7 million in OpEx. And then in terms of the Title and cost of revenue, obviously, some of that is variable to the volume that we're doing, but others, we continue to look at vendor spend and opportunities for us to optimize offshore and rightsize the business overall. And then your second question…

The gross margin.

The gross margin, from the Title perspective – sorry, the software-enabled Title, it's early days in that business. So we're making some upfront investments in the costs associated with software-enable Title. But overall, that's something – we're confident in the overall Blend Platform gross margin that will be in the low 60s as we've reiterated.

And just to add one thing on what Marc said there, the methodology that we're using to drive margins is add more value to our customers and that is what substantiates any additional price per unit they're willing to pay us and drive down our COGS. And we have certain parts of our cost of revenue that are – and that's what's driving some of the improvements that you saw from Q2 to Q3 that Marc remarked on.

Next question comes from Ryan Tomasello from KBW. Please feel free to unmute and go ahead.

Hi, is my coming through okay?

Yes, hi Ryan.

Hey, all. Thanks for taking the questions. Just based on some comments from other mortgage service vendors out there, it seems like the depressed volume environment is starting to trickle down into headwinds into the sales environment given the focus on profitability and I guess, the distraction of volumes. Have you seen any noticeable change there in appetite from clients or a minimum an elongation of sales cycles? And then regarding the customer low account, apologies if you have on this earlier in your prepared remarks, but it looks like that declined just a bit sequentially. Just any specific color you can provide around the drivers there? Thanks.

Yes. I'll hit the second one first. I did talk about it in my remarks, but just to reiterate, smaller independent mortgage banks, in particular, are the ones struggling. They're less well-capitalized. So we expect some of those to consolidate, whether it's through acquisition or if they go out of business or cut things that they can't afford anymore. And so that's typically where we're seeing our turn actually in all of our turn in that quarter is coming from that. Now one thing I would add there is that gross retention is how I look at our overall churn as a business, and we've maintained very high gross retention above 98%. So we aim to continue to do that. And some of that will just be continuing to focus on our existing customer base, making sure they're getting more value from our product and platform. And the fact that technology can help transform them and be successful in this new margin environment is not a small thing. They need this technology, and we want to be the ones to continue to provide it to them. So that's – I guess that's your second question.

Longer sales cycles.

Yes. And I think on the mortgage side, we're definitely watching the market and the sales cycle. I don't think my particular focus is serving our existing customers, first and foremost in mortgage. We do have some new customers in the pipeline and some customers we announced even this quarter. SchoolsFirst is a very large credit union, OCCU, it's a very large credit union, those are marquee names in the credit union space. And then adding to that, the diversification of our revenue. We do have nonmortgage products that are very in demand, in particular, credit card and deposits or something that we're hearing a lot from our customers, and we have great products for that and builder is a good foundation for those things. And so we're making sure to serve our existing customers first and foremost and continue to drive additional products to our customer base as they need it.

Next question comes from Matt Stotler from William Blair. Please feel free to unmute and go ahead.

Hi, thank you for taking the question. Maybe just kind of a two-parter for me on the consumer banking side of the business. So you noted I think $8.7 million increase year-over-year, just over $6 million of that was from Mr. Cooper. Would love to just get some color on what you're seeing in terms of adoption outside of that customer and thus on the pace of further adoption there? And the second part of that question would be, obviously, we're going through the cycle on the mortgage side. Are you seeing the current macro uncertainty having any impact on volumes on the consumer banking side as well? Thank you.

So on the other aspects of why the Consumer Banking & Marketplace grew, some of it was add-ons like income verification, Blend Close, the digital closing solution, home equity lending is not an add-on, but it's an additional product that's grown and personal loans have also grown for us. In all those product lines, we're working off with a pretty small base, and we've grown, as you can see year-over-year. But the volume impact to that if we're seeing it in the market, it's much smaller than the opportunity ahead of us. We're very lightly penetrated in that Consumer Banking & Marketplace space. You've seen how much it's grown year-over-year, and we're investing heavily there to continue to grow that business.

Next question comes from Robert Dee from Truist. Please feel free to unmute and go ahead.

Great thanks so much for taking the questions. This is Robert Dee on for Terrell Tilman. Just starting off here, can you provide us with an operational update on offshore operations supporting the Title business in India? How is that transition going? And then I have one follow-up. Thanks.

Sure. So Title365 came with offshore operations that were already happening in EMEA. So we've been investing in those offshore operations, and we think it's a critical part of our strategy going forward.

Great. And then just as a quick follow-up. Can you provide a little more detail around the pipeline of customers who have signed but have not yet deployed? And how does that pipeline look versus 2Q? Thank you.

I don't have the exact numbers compared to 2Q, but we still have material regional banks and smaller banks that have signed and have not yet rolled out or in the process of rolling out. That number is in our disclosure in the percent that's not tapped. Part of it is that and part of it is usage within our customer base. And so we still have a material opportunity there. You can see in the disclosure that some of the untapped volume has come down since the last I guess, the last disclosure on that, and that's just a function of we're rolling out our customers that have signed and typically, the last quarter or last half of the year is when we sign new customers like SchoolsFirst and get them rolled out in the back half of the year.

Next question comes from Maddie Schrage from KeyBanc. Please feel free to unmute and go ahead.

Hey guys, yes this is Madi on for Josh Beck. I was just wondering if you guys could talk about the demand appetite that you are seeing, specifically with any differentiations between your size of customer and how you're thinking about IT budgets going into next year? Thanks.

I would say across the board, especially in the mortgage space, a lot of the demand is around how do we drive more productivity and more automation. And so some of the add-ons that we have can drive that. And that's all sizes of customers, but in particular, the larger ones and the banks that are taking a multiyear view at this. And then on the other products in the Consumer Banking & Marketplace, who are the biggest demand we're seeing in terms of IT budgets are home equity lending, deposits, and credit cards. And I would say, all sizes are investing and figuring out how to digitize those areas. There's not just one size, but we are, in particular, I spend a lot of time on the road with some of the larger customers, making sure that they – I'm hearing what they're saying and they're hearing what I'm saying, what we're building. And we see a lot of appetite to continue to digitally transform the organization. It is top of mind. I had a call today about that with one of them. And so it's top of mind for them, and they know they have to do it, and they want to have the best software platform to do it with, and that's blended particularly Blend Builder as a key centerpiece of that.

I think that was our last question. The conference has now concluded. Thank you all for your participation, and you may now disconnect your lines.