Good afternoon, and welcome to Blend's Second Quarter 2023 Earnings Conference Call. My name is Winnie Ling, and I'm Head of Legal for the company. Leading today's call are Nima Ghamsari, Co-Founder and Head of Blend; and Amir Jafari, our Head of Finance and Administration. After the prepared remarks, our team will questions moderated by our Investor Relations lead, Bryan Michaleski. You can find the supplemental slides on our Investor Relations web page 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, in particular, its guidance for 2023 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-Qs 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.

Thanks, Winnie, and good afternoon, everyone. Our second quarter results exceeded expectations for the second quarter in a row, demonstrating continued progress on our strategic priorities. Even if it's a tough market, we are deepening wallet share with our mortgage customers and our Blend Builder platform, a key driver of our growth strategy is gaining traction, unlocking efficiencies and speeding time to revenue for both us and our customers. And with that, we're accelerating on our path to profitability. We outperformed the top end of our total company revenue guidance owing to strong performance in our mortgage suite of services as well as our growing revenue diversification as we begin to deploy our Builder enabled Consumer Banking product lines to more customers. I'm also encouraged to see this translate into a pipeline of nearly 40 opportunities between our Mortgage and Consumer Banking products even as market conditions remain dynamic. In Q2, we saw this increase as our customers begin to crystallize their budgets for the upcoming year, keeping our sales efforts in full swing. So far in 2023, we've deployed 18 Consumer Banking products. This translated into strong results from our Blend Platform segment, which also exceeded the high end of our prior guidance, and we improved our software margin meaningfully quarter-over-quarter on top of that. We have also taken significant steps to streamline and improve how we operate as a company, and we are seeing these savings show up in our results in a meaningful way. As a result, in Q2, we surpassed the 50% operating loss reduction target we set last year, and we did it 2 quarters ahead of our original goal. This is a testament to our focus on execution regardless of the operating environment. On top of that, there is more work being done on…

Thank you, Nima, and good afternoon, everyone. I'm pleased to be joining you today to discuss our financial results for the second quarter. As Nima highlighted, we delivered another great quarter, executing ahead of our targets, both for revenue and non-GAAP operating loss. We are also continuing to take the necessary steps that allow us to both control our own future and ensure we achieve our long-term goals, including our path to profitability. As I jump into the results, let me just remind you that unless otherwise stated, all results are non-GAAP. Total company revenues in the second quarter were $42.8 million, outperforming the top end of our outlook by 4%. We reported platform revenue of $30.3 million, which was 8% ahead of guidance. We credit this outperformance to 2 dimensions. First, our customer base is demonstrating resilience in a tougher origination environment by gaining share in a market where volumes were a little better than we expected. Second, our customers are demonstrating faster adoption and go-live of Blend's add-on products. Similar trends are benefiting our Consumer Banking suite revenue as our backlog converts to new deployments reaching go-live at a time when the industry is seeing stronger-than-expected personal loan volumes. Our Mortgage Banking suite revenue declined by 17% year-over-year to $22.3 million despite the origination environment declining 37% over the same period as measured by the Mortgage Bankers Association. As we gain traction with the customers through continued adoption of add-on products, coupled with the customer renewals and new logos, we are generating improved mortgage suite revenue per transaction. Our fee per funded loan rose to $93 from $77 in the same period last year. Our Consumer Banking suite revenue totaled $5.8 million in Q2, an increase of 27% as compared to the prior year period. This growth reflects…

Thanks, Amir. We are exiting this quarter feeling energized about our position and our opportunity. I'm proud of the accelerated progress we've made on our 2023 priorities and our path to profitability. We still have more work to do. And while we cannot control the market, we can control how we deliver for customers to help them optimize performance and build for the future. If we continue to focus on this objective we will strengthen Blend's business and performance as well. With that, thank you again for joining. Bryan, we are now ready for questions.

Thank you, Nima and Amir, for your remarks. We'll now turn to the Q&A portion of the call. Our first question comes from Michael Ng with Goldman Sachs.

I just have two, both on gross margins. You saw a lot of gross margin trend in the quarter, 81% in software, and you talked about the higher-margin Consumer Banking suite and vendor optimization and mortgage. I was just wondering if you could expand on both those points. Is there something inherent in Consumer Banking that gives it a higher margin than mortgage? And then within the vendor optimizations, are you just using different or less expensive, like API tools? What exactly is that vendor optimization? And then I have a second question, which is just about the trajectory of gross margins for the rest of the year. Amir you talked about 80% software gross margins for next year. But is this 81% gross margin for the rest of the year, a good way to think about the back half?

Thanks, Michael. I think a few follow-ups that we'll just help give you a little bit of clarity to the questions. The best way to think about what we did on gross margins and the execution that we're able to deliver, it's more so from just a structural shift that we're able to execute against with Builder, first and foremost. So that ties it to your question with regards to what we see in the Consumer Banking space and the margin upside that we're seeing from a mix perspective. For the follow-up aspect with regards to just vendors, it's not so much that we're changing the APIs. It's just we're continuing to optimize how the -- we are shift in essence, this whole notion that we talk about from Phase 1 to Phase 2 in the platform, it enables us to actually allow us to be lower cost in certain aspects of the business, which also then enable us to drive higher margins. The last part of your question, I think, again, to the prepared remarks, what we stated is we feel very comfortable that in 2024, we'll be able to execute at these levels on a consistent basis.

Yes. And just one note from a product perspective, Michael. On the Consumer Banking side, there are fewer the products that are offered in terms of how banks offer these products are simpler. And so, there's fewer vendors that we bundle in together. So yes, it's structurally higher margin. But our mortgage product has additional margin opportunity as well as we optimize the vendors under the hood.

Our next question comes from Matt Stotler with William Blair.

Just two for me. One, good to see the revenue per transaction and mortgage suite increase year-over-year. It was down a little bit sequentially. So I'd love to just get some color on the dynamics that can influence that on a quarterly basis. How you're thinking about that in the second half of the year? The second question would be just an update on attach rate with new products like land income. An update there would be helpful as well.

Let me start with the PF just to help. I think what you're seeing is really just movements from a timing and a mix perspective quarter-over-quarter. What we said last quarter is that we expect it to be in the mid- to high 80s, where again, we're executing ahead of that. We're seeing strong adoption of the value add-on solutions -- the add-on solutions that we provide just given the value that they add. So that's what's driving the upside on the $93. And then on the -- for the second part of the question, if you can just repeat that one more time, and I'll answer it.

Sure. Just looking for an update on the attach rate that you're seeing with newer products like Blend Income, what that's looking like in the installed base at this point and where that can go?

Yes, absolutely. Well, I think, again, we haven't shared the attach a very specific to Blend Income. But what you're able to see is the follow-through of Blend Income and also what we do, for example, to Close and some of our other solutions, the ability to actually allow this to attach to what we do in terms of renewals with our existing mortgage customers. It's those 2 outcomes together that are actually driving an increase in our funded loan rates into the first part of your question. So we're seeing stronger just adoption in general. We're seeing it come through in terms of the results and what you saw this quarter in terms of the $93.

Our next question comes from Joe Meares from Truist.

I appreciate it. Earlier in the quarter, you announced the availability of soft credit functionality, noting that it saves lenders $50 per file. I'm just curious how this is trending so far, if you have any early customer feedback and if there's any pricing uplift from this future?

It's a feature that's built into our platform today, and it's just -- we always try to add new functionality for our customers, and that's what creates more value for them. And ultimately, when it comes to renewal time, if we're creating more value, they're often willing to renew with us at higher rates. So you're kind of seeing that in our customer base today. So we don't charge extra for that feature. And it's very important. Basically, the thing it solves is not only cost but additionally, it's also a conversion because there's a concept called trigger leads in the industry. It's a hot topic in the Mortgage Bankers Association, where when you get your credit polls for a mortgage somewhere, you're probably get 25 other calls from other lenders trying to sell you something. And by using soft credit during that prequalification pre-approval shopping phase, we're able to help the customer get what they want the consumer get what they want, which is an approval without bombarding them with hundreds of calls and maybe tearing them away from the lender that applied they applied with. And so it's been a really important feature for our customer base. We're going to continue to investing in our products and our customer base to make sure they're getting the value they need to get through this really tough cycle.

That's great. And I bet the consumer will appreciate not getting bombarded as well. Just as a follow-up, how are you thinking about the product portfolio in the higher for longer interest rate environment? I appreciate the consumer portion grew very strongly. But if you're cutting R&D with this new cost savings, are you going to be able to continue to develop new products on the consumer side? How are you guys thinking about that?

Yes. I want to go back to something I said in the prepared remarks, which is that Blend Builder is a fundamental structural shift in how we can build things. And it's really only this year that we're starting to see those benefits or maybe late last year we started. But because we're able to make changes, and I gave that example of a customer that had 40 new feature requests. I mean any company taking on 40 new feature requests, it would be a bear and you couldn't do all of them. You'd have to get on your road map and the speed at which we're able to iterate on Blend Builder because we've made the DNA of any lending product or account opening drag and drop. Because we've been able to do that or at least many pieces of it, almost all the pieces of it. It just allows us to innovate more with less. And I think the real show of strength for our company is a how much you can get done per dollar per unit of energy spend, and that's something that we're really gearing towards going forward. So no, actually, I think our innovation will speed up. And I gave it a plug during the prepared remarks, please come to the Investor Day, if you can -- it's going to be following our customer forum, which is late September, and we're going to be announcing some really great new product features and new products for our customer base who they need to see this kind of innovation from us to continue to bet on us, and so we're going to keep innovating.

Our next question comes from David Unger with Wells Fargo.

Just one for me. Just wondering how AI CoPilot is going with the customers any initial observations you can share with us in terms of productivity gains with the banks?

We haven't launched anything formally there I do think lending and banking where a lot of the recent innovation in AI has been around how you can understand using natural language. You can understand the natural language that a person puts in and really understand the intent of that question, that natural language and then use that to eventually formulate a response. I think because most people interact with their bank, a lot of times, in person or on the phone and especially the mortgage on person or on the phone quite a bit, and that's using natural language. AI is sort of uniquely positioned to help here. And so we're excited -- we're not ready to share anything broadly yet, but we're excited about the space, and we think it can be used in our customer base and drive a material benefit in how they can serve their customers, the end consumer who wants to build to interact, however they want to interact with their bank, and we can help enable that over time.

Our final question comes from Ryan Tomasello with KBW.

Just unpacking the cost reductions a bit more. I mean, how long should we expect these to take to phase in? And any updated timing on cash flow breakeven beyond operating income breakeven? And I guess just thinking about the uncertain volume environment next year, do you feel like you've cut as much as you can hear or are still other levers that you'd be willing to pull in order to hit these targets?

Thanks, Ryan. I'll try to get through each of them. Let me know if there's something I missed. First, in terms of just the phasing, it's immediate. So there is no phasing. You'll see the, in essence, the outcomes flow through instantaneously. Second, with regards to the cash flow breakeven, we shared, obviously, in the last call that we were accelerating our path to profitability by a full year from 2025 to 2024. You can -- again, our targets are to allow our operating profit to match what we target from a free cash flow perspective. And so I think our intention is to have a very similar time line. Third, with regard to just the other components that you asked, I think for us, I mean, if you can remind me your last question, right, really quick because I want to ask for both of them.

Well, just to clarify, I mean the cash flow breakeven target, I think would be inclusive of the $30-or-so million of financing costs. So just wanted to clarify that what the timing looks like there from a breakthrough perspective? And then just the last question was if there's any other levers you're willing to pull depending on how the mortgage volume environment shakes out next year, just feel like you could cut any further?

Yes, absolutely. It was the levers one that I missed. Thank you. First, I think, again, the actions that we've taken, that allow us to achieve our path to profitability, which we spoke to at an even accelerated rate. And that implies that even if the mortgage volumes were to remain at these levels, we feel very confident with our future and the targets that we've set just period for us. And that's how we -- that's how we've kind of in rolled this out. The second part of that with regards to levers. What we said in Q1 and really we're reemphasizing that is we will continue to look for different ways to become more efficient the level of focus that we have internally today from the lens of operational excellence are not going to stop. We're going to continue down this path. And so we'll continue to look at those. And Ryan, let me know if I missed anything.

No. I just had another follow-up. If I could squeeze one in, would be just around the capital structure. I believe you alluded to it in the past, but just any thoughts around being opportunistic with potential restructuring or negotiation around the term loan or the put option with the Title business. Anything that you could explore there to alleviate some of those overhangs? Or do you feel like now you're on a path just in terms of organic execution to have those be manageable from here?

The answer to both, Ryan. I think we feel very strong about where we are as a company and where we've positioned ourselves. We'll always be strategic in terms of not just how we listen and explore options, but also the actions that we take. We recognize the difference right now from a from what we guided to from a net operating loss perspective to an essence of your question about free cash flow, the biggest driver there is obviously our interest expense. And so that's top of mind for us. We have a great partner in that Ryan. And so look, we are going to stay very strategic. We'll explore options, but it's -- we're again, I think what's more important to the question you're asking is, we feel very good about where we are today to be able to sustain with or without this type of optionality in front of us.

Seeing no further questions, this does conclude today's earnings call. Thank you for joining. Have a nice day.