Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rocket Companies Fourth Quarter and Full Year 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Sharon Ng, Head of Investor Relations, you may begin your conference.

Good afternoon, everyone, and thank you for joining us for Rocket Companies' earnings call covering the fourth quarter and full year 2023. With us this afternoon are Rocket Companies' CEO, Varun Krishna; and our CFO, Brian Brown. Earlier today, we issued our fourth quarter and full year earnings release, which is available on our website at rocketcompanies.com under Investor Info. Also available on our website is an investor presentation. Before I turn things over to Varun, let me quickly go over our disclaimers. On today's call, we provide you with information regarding our fourth quarter and full year 2023 performance as well as our financial outlook. This conference call includes forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mentioned today. We encourage you to consider the risk factors contained in our SEC filings for a detailed discussion of these risks and uncertainties. We undertake no obligation to update these statements as a result of new information or further events except as required by law. This call is being broadcast online and is accessible on our Investor Relations website. A recording of the call will be posted later today. Our commentary today will also include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings release issued earlier today as well as in our filings with the SEC. And with that, I'll turn things over to Varun Krishna to get us started. Varun?

Thanks, Sharon. Good afternoon, everyone, and thank you for joining the Rocket Companies earnings call for the fourth quarter and full year 2023. Reflecting back on the last year, today, I'll talk about how our consistent execution drove exceptional results for the quarter and the year, especially given the backdrop of the market. I am so eager to share with you how we are positioning Rocket to operate with greater clarity, focus and velocity and how we will achieve growth and profitability at scale through our AI-fueled homeownership strategy. I'd like to begin on more of a personal note. It's hard to believe it's been nearly six months since I joined Rocket Companies, and time certainly flies when you're on a rocket ship. I continue to be inspired by our team members whose talent, energy and grit are the lifeblood of our company. I am so confident about our future and the collective impact we will make as a team. And the best part is that our journey is just beginning. We delivered strong fourth quarter and full year results against the backdrop of extreme market challenges as the industry faced persistent constraints in affordability and inventory. In Q4, we reported adjusted revenue of $885 million, representing an increase of 30% when compared to Q4 of 2022 and the second consecutive quarter that we've accelerated top-line growth on a year-over-year basis. Now, adjusted revenue in the quarter was $85 million above the top end of our guidance range. We reported positive adjusted EBITDA for the third quarter in a row despite some of the most difficult industry conditions in three decades. Now in 2023, we delivered $3.8 billion in adjusted revenue, and I'm proud to share that we grew market share in both purchase and refinance annually. Purchase market share…

Thank you, Varun, and good afternoon, everyone. On today's call, I'll cover our strong financial results for the fourth quarter and the full year 2023. I'll share how our AI-fueled homeownership strategy positions us for success this year and into the future. I'll conclude by sharing our outlook for the first quarter of 2024. In 2023, Rocket again made significant strides in market share growth, gaining share on a year-over-year basis in both purchase and refinance. More specifically, we grew purchase market share by 14% and refinance market share by 10% from 2022 to 2023. I am incredibly proud of what we accomplished in the face of an extremely challenging mortgage market. It's a testament to our grit and tenacity. In my 10 years at Rocket, I have never been more excited about what's to come. Through the ups and downs of mortgage cycles, we have continued to invest in our data and technology foundation. And now with AI, Rocket will change this industry. As Varun shared, we are unlocking capacity at scale through higher team member productivity and delivering a better client experience. We have made material progress in increasing scale and capacity in 2023, and we expect those gains to accelerate into 2024. Said differently, we believe we can keep our fixed costs relatively flat while originating significantly higher volumes. Turning to the full year results. We delivered $79 billion in closed loan volume and $3.8 billion in adjusted revenue in 2023. After cutting roughly a quarter of our cost base in 2022, we further reduced expenses in 2023 by nearly 20%. We are operating with greater clarity, and we're laser-focused on prioritizing the most important work that will deliver the highest impact. In 2023, we took action to pivot or sunset projects that were not meeting our…

[Operator Instructions] Your first question comes from the line of Kevin Barker from Piper Sandler. Your line is open.

Great. Thanks for taking my questions. I just wanted to follow up on the outlook. It seems like you're implying that you're going to take market share in the first quarter. Do you assume that, that's going to continue throughout 2024 and accelerate revenue growth in '24 above the 30% growth that's implied from industry originations? And what I mean by that is, are you taking market share and then subsequently, the revenue growth will come with it? Thanks. Hello?

Please stand by. We are experiencing some technical difficulties. One moment.

Okay. Can you guys hear me okay?

Yeah, I hear you.

Okay. Sorry about that, Kevin. Let me just repeat. Thank you for your question. We ended 2023 strong. We're entering '24 with momentum, and that's reflected in both our results and our guide. And we look at many factors when we think about the outlook for the year. We look at the forecast. We look at the CPI, we look at the 10-year treasury, we look at the Fed forward curve. We look at our own data and most of the industry, we predict a 33% larger market, $2 trillion versus $1.5 trillion. We expect rates to drop in the second half of the year. And these are all tailwinds for Rocket. And so we're investing in growth, and we're playing to win. At the same time, when you think about the market share itself, the second part of your question, there are still multiple tailwinds as well. You have a lot of market consolidation with M&As and exits and bankruptcies. You have banks that are seeing market share and leaning back. You have Basel III, which is on the horizon. You also have industry capacity coming out. So when you put all these things together, I mean, we do expect to accelerate growth. It's a bit of a survival of the fittest dynamic with winners taking most. We grew share double digits in both purchase and refi, and we feel very good about our position in terms of our assets and our endurance. So we're confident on building on those gains.

Okay. And then just to follow up on some of your comments around AI. Obviously, you're embracing this wave that's happening within fintech and AI in general. Could you just maybe give us a little bit more depth or a little more color around why the AI that you've developed or how far you've developed it, that is better than some of the biggest industry competitors, given we've seen several other companies also look to embrace AI. Maybe not at the scale, but maybe you can delve into why Rocket is different or at least well ahead of the rest of the industry? Thanks.

Yeah, absolutely. Look, I'd start by just saying that we believe that AI is going to be absolutely transformative to this industry and to fintech and tech in general. And we've made quite a bit of progress, but we're just still scratching the surface. And we're in the earliest of innings, but our progress is only going to accelerate with generative AI. It's a major area of investment across the board. The biggest thing that I would say is AI is something that you have to have a right to win and the right to win means you have to have the assets, you have to have capabilities, you have to have data. You have to have these ingredients to create the right recipe. So because of those ingredients that we have at scale, it's why we expect to be a benefactor. And I shared a couple of examples earlier on this call, three in particular, but you're going to expect -- you can expect to see us continue to show you more and more and more examples of how we're going to be differentiated, whether it's the 50 million call logs that we process every year, the thousands of attributes that we have on clients, how we use chat, how we use transcription, the 3.1 million clients that we engage with in servicing, document automation, appraisal review, hiring. So kind of across the board, we think we have a durable advantage because we have many of the ingredients that it takes to build one of the AI companies of the future. And so those are just some examples, and you can expect to see many more as we continue to make progress on this journey but it is a major strategic imperative, and we're investing across the board.

Thank you, Varun.

Your next question comes from the line of James Faucette from Morgan Stanley. Your line is open.

Yes, hi. This is Jeff Adelson on for James. I guess maybe I wanted to ask about some of the more recent focus from regulators on the nonbank oversight world on. Yellen's making some comments about that oversight of nonbank mortgage lenders in the future. And that sought put out this framework for monitoring risk for non-banks. I'm just curious if you could share your thoughts on how you're thinking about this. How have you been interacting with the regulators on this front yet? And maybe what could we be expecting to come here over the next year or two on this front?

Yeah, Jeff, I'll take that one. Thanks for the question. Listen, I'll start by saying, of course, we're aware of the comments, and we're staying close. But I'll also add, it's never a good idea to speculate too much on these matters. We have a really active presence in D.C., and we're watching it closely. But I guess if you think about it, from our perspective, we have an extremely strong balance sheet or a really strong capital profile and a ton of liquidity. I would say, one of the strongest in the industry, if not the strongest. The way we look at it, we actually stand up pretty well to even some of the banking capital requirements. So it's something we'll pay close attention to. But in a lot of cases, new regulation like this could actually increase our competitive advantage and sometimes even increase the moat around this business.

Understood. And just to maybe circle back on some of the comments around AI, generative AI. Lots of examples here. It sounds like in initiatives you're kind of rolling through here. But do you have any early views at this point to maybe what kind of uplift to financial metrics look like as a result of these initiatives, whether it be profitability, EBITDA margin, EPS growth?

Yeah. Thank you for sharing. I mean look, I think fundamentally, the simple answer is we expect this to be a transformative implication across the board, whether it's helping us be more efficient and productive, driving top line growth as well as bottom line growth. But it's a very natural technology to fit with every aspect of the home ownership journey, everything from home search to lead generation to underwriting, to servicing, appraisals. And so the great thing about this is we feel like the sky is the limit. And so we have made it a strategic imperative to apply this at the top level at every aspect of the company. And so you can expect to see those gains be transformatively impacting every aspect of how we do business.

Yeah, Jeff. And I would just say completely agree with what Varun said. And to be clear, going back to some of our prepared remarks, we did about $79 billion of mortgage production last year. And right now today, we believe that we could put through the system a significantly higher amount of mortgage volume. And to Varun's point, we believe that will only accelerate in 2024 with some of our plans and future releases. But if you think about it, there's kind of a couple of key roles in the mortgage business. One is a licensed loan officer, another one is a licensed underwriter and the ultimate goal is to increase the productivity of those roles because if you increase the productivity, you increase the capacity, but you also increase the velocity. And if you increase the velocity, that means faster turn times and faster turn times mean better client experiences because if you're refinancing on interim refinance, you're saving money faster. If you're getting cash out, you're getting your cash faster. If you're making a purchase offer, having faster turn times means in a very competitive market, it makes your offer stronger because you can close faster. And by the way, to the extent that you can get loans off your balance sheet faster, it lowers your financing costs. So we completely believe that these will translate into financial metrics. And frankly speaking, they already have through some of the investments in 2023.

Great. Thank you for taking my questions.

Your next question comes from the line of Christian DeGrasse from Goldman Sachs. Your line is open.

Hey, thank you. Data sale margin has hovered around the 2.7% levels for the past couple of quarters it’s more off the lows, as you guys mentioned. So as you guys look at the competitive dynamics, the capacity coming out of mortgage, as you guys mentioned, and what could be a potential improving volume environment? How do you see margins trending from here over 2024?

Yeah, Christian, thanks for the question. So yeah, just to take a step back, I think it's important to look at what happened over 2023. To your point, there was sequential increase from Q1 to Q2 to Q3. And then as you saw here in the release, a slight dip in Q4, but that dip was completely planned because we see that in Q4. And it wasn't down as much as we typically see in Q4. And that's really important. And then as we look ahead into the guide in Q1, the big component of that is strong gain on sale margins. There's no doubt about it. And when I say strong, I mean building on even the high point of last year, the Q3 number of 276 basis points. So I think your question is what are we seeing and why is that happening? And one component of it is absolutely capacity coming out of the system and price competitiveness seeing a little bit of relief. There's other components that go into gain on sale margins, too, like primary secondary spreads but absolutely capacity is a big part of that. Varun mentioned in his prepared remarks, some of the more recent reports are 30% to 35% down. We're starting to see that come through the system now. So look, we're not going to comment on exactly where we think gain on sale margins will be all of 2024, but I can say this is a great way to start the first quarter, being two thirds of the way through, a great way to start the year with a lot of momentum around gain on sale margins.

Thank you. And I'd like to follow up on expenses. I understand the first quarter revenue guide this point to a nice uplift and looks to be pretty strong. It also looks like expenses are guided to be up a decent step higher quarter-over-quarter, down year-over-year. Can you maybe just help contextualize some of the moving pieces you guys mentioned a little bit further? How much of that's being driven by a pickup in volume, the seasonal marketing campaign you guys have talked about, some of these investments in AI. And then maybe beyond that, strategically how have you been thinking about expenses throughout the year beyond the first quarter?

Yeah. I'll start and maybe ask Brian to chime in as well. I think the biggest thing I would share is that our primary focus is growth. And the reason for that is you have a $5 trillion home buying TAM. You have an incredibly fragmented market. You have no player with more than double-digit market share, and that's a great place for us to be disruptive and drive growth, especially with AI. So we're always looking for efficiency. We think we're in a good place. We're actually well capitalized, as Brian shared, but we're trying to invest our dollars in innovation, and we're trying to figure out ways that we can actually attrite significantly more with the ingredients that we have. So part of that is where you see our increase in focus and prioritization. But we have a lot of share to take, and we want to invest our resources to win. And let me ask Brian if there's anything he would add.

Yeah. Thanks, Varun. I completely agree. And just even taking a step back on the expense front, 2023 was about doing the difficult but necessary work to rightsize the business, but it was also about narrowing our focus. We mentioned narrowing our priority list by roughly 80%. And if you think about what's left, it's really stuff about -- that's a part of our core business and home ownership. And then to Varun's point, we did something we don't believe others did. We still continue to invest through the down part of the cycle. And that's important because if you were going to start that now, it's much, much too late. And this is largely a big reason for some of this capacity gains that we've been talking about. To answer your question more specifically, I'll talk a little bit -- if you look at like Q1 of this year to Q1 of last year, there are a couple of things going on. Number one, Rocket Money had a really great first quarter of this year. That's their biggest customer acquisition month. They call it their Q5. They actually had a record quarter. So there was some performance marketing this year in Q1 that wasn't quite substantial last year. And then the other piece, and you mentioned it is a difference in performance marketing. You mentioned the growth in the client acquisition. That's simply a math equation. We're going to spend that money when we like the returns. And starting off the first quarter with momentum, we're seeing some nice returns.

Great, thank you.

Your next question comes from the line of Kyle Joseph from Jefferies. Your line is open.

Hey, good afternoon. Thanks for taking my questions. Just wanted to dig into expenses and profitability a little bit more. I just want to get a sense for how big Rocket Money has become as a percentage of marketing. Obviously, there's some seasonality to that business. And then just as we think about, obviously, there's some variability in your expenses tied to your originations. But how much does the AI initiative really impact the fixed versus kind of floating nature of your expense as originations hopefully ramp up?

Yeah. Thank you for the question, Kyle. I want to -- I'll just start with Rocket Money. And Rocket Money, obviously, is a part of our Personal Finance division, and the team has done a fantastic job. I believe they've grown almost twice the volume since the acquisition. This is an area on a personal note that I'm very passionate about, given my background. The business has over 5 million members. They've saved our clients over $1 billion in savings. And quite frankly, it's the best personal finance app there is. We've seen impressive top line growth. I believe in December, they were the number one app in the App Store in the finance category, and they're on track, as Brian said, for the best quarter ever. And as we think about AI, the thing I would say before handing it over to Brian is this is really about supercharging everything we do around homeownership. It's about making sure that our team members can be orders of magnitude, more productive which is what we need when we're trying to go after a massive market and go after share. And so this is really about allowing us to do more with the same and to allow us to basically take share and grow in a market that's incredibly fragmented and there are multiple places in which we're investing in AI across the board at every level of the organization. And so a huge strategic imperative for us. And I'll ask Brian to comment on some of the more specifics.

Yeah, Kyle. Just to jump in a little bit on your fixed versus variable. I want to be clear because we think we're in a really good spot on expense reductions after the past two years in those tough efforts. We focused, of course, mostly on the fixed expenses and we feel really good about that. I mean this business is a beautiful thing, is volume and revenue is growing and operating leverage continues to expand. Again, not -- we don't know exactly what will happen in 2024. But to Varun's earlier comments, most of the industry forecasters are predicting about a 30% to 35% increase. So if you slap something like that on the same fixed cost base, you'll really like the outcome. The beauty of this business is once you cover those fixed costs, that next loan, a huge chunk of that drops to the bottom line. We still focus on, of course, the variable side and lowering that aspect of the business. But from a fixed cost side, we feel good about where we're at. We'll continue to monitor and watch the market and respond to conditions as any good business leader would but as we sit today with a strong Q1 guide and a decent forecast from the market of what '24 could look like, we feel good.

Great. Thanks for taking my questions.

Your next question comes from the line of Don Fandetti from Wells Fargo. Your line is open.

Yeah. I guess on the capacity coming down in the industry, are you -- is the trend strong enough in your view that you can sort of get back to like the 300-plus basis point gain on sale margin ultimately? And is Q1, I guess, will we see progression through the year? Is that kind of your sense where it's not just like a kind of peak in Q1 on the margin?

Yeah. It's hard to say exactly what will happen in terms of the rest of '24 because obviously, there's a lot of factors like interest rates and things that go into that. But what I can say is we're sitting here two thirds of the way through the first quarter. And we're building on the high point of last year, those Q3 gain on sale margins. So it feels good. Like we had mentioned earlier, we do believe the primary reason for that is capacity coming out of the system. We saw that through 2023, really elevated in the second half of 2023. And now we're starting to actually see it flow through in terms of pricing competitiveness. So it's hard to say exactly what will happen. But I'll tell you what, as we sit here in the first quarter, guiding up and we sit here looking at the overall mortgage forecast and it's both coming from volume increases and gain on sale margin increases, it feels pretty good to us.

Okay. Thank you.

Your next question comes from the line of Ryan McKeveny from Zelman & Associates. Your line is open.

Hey, thank you. Exciting times even with this macro. So I want to ask on Rocket Homes. Always a lot of buzz around the online search portals. There's some new competitors. There's always a lot of innovation. Can you maybe talk to us about how you feel Rocket Homes is positioned within that online ecosystem? What's your view around the differentiation of your platform and ultimately, maybe tie it to some of the long-term vision, either specific to the Rocket Homes business or even the interplay with purchase market share over time? Thanks.

Yeah. Thank you for the question, Ryan. I'll start by just saying that it's critical. And one of the reasons we have this amazing aspect of our company structure and organization is that home search is the first part of the journey. And it's no secret that hundreds of millions of consumers use home search apps multiple times daily because it's the starting point of the journey. And so that part of the experience is critical to drive a disruptive experience in purchase, which is why this is such an important part of our strategy. And I'm very proud of the Rocket Homes team because they continue to innovate past the bleeding edge. Two examples I will give you is the recent release that they launched with CarPlay, which allows you to have a local driving experience as you're driving around looking for homes. It's a very natural experience that is cultivated around home search. It's a way to build intent. It's the way to use location services, AI and data to really create a personalized experience that meets clients where they are. The second thing I would share is the team isn't stopping there. We just talked about a beta that we released with the new Apple Vision Pro that changes the game when it comes to things like spatial computing and being able to tour homes, publish listings and really using the next generation of virtual and augmented reality. And so home search is a big, big part of our strategy because it's kind of the beginning point of the journey of the purchase experience and if we can build intent with clients and we can build readiness with a combination of assets like Rocket Homes, Rocket Money, leveraging technology, we can bring them into the home purchase journey in a way that's more personalized, that's more streamlined and ultimately drives speed, certainty and value. So it's a big part of our strategy. It's a big part of the top of the funnel and the team has done a good job, and we're continuing to invest.

Thanks, Varun. That's helpful. Second question, on the marketing side of things. I guess, big picture, you guys have always innovated there. You've been very prominent as a brand in this industry. I guess, anything you can share with us on how things evolve with Jonathan as CMO, what changes in terms of the focus, what remains the same? Any thoughts there?

Yeah. I mean I would start by just saying that the best is yet to come. We've hired a pretty kickass new CMO, and we have big, big plans for our brand. The great thing about Rocket is it already is a household brand but we're scratching the surface on what's possible. And so we're continuing to invest. I think we have big plans for the near future and buckle up and stay tuned is what I would say.

Sounds, great. Thank you.

Our next question comes from the line of Doug Harter from UBS. Your line is open.

Thanks. In prior quarters or I think last quarter, you purchased MSR. Can you talk about how your appetite -- what your appetite is today for using that as a potential customer acquisition channel?

Hey, Doug, it's Brian. Yeah. Thanks. I'll take a shot at that. Servicing continues to be an important asset. It's a strategic asset for us. We really like the returns, of course. You're looking at double-digit returns just when you look at the cash flows alone. But as you know, when you add in the recapture rates, that's where the returns get really exciting. And just for the record, we think about the servicing asset a bit differently than some others in the space. We think we're pretty good at collecting the cash flows efficiently and a lot of that drops to the bottom line. But more importantly, is building that lifetime relationship with the client and capturing that next mortgage transaction because we know that next mortgage transaction is worth more than almost all the actual cash flows that you're collecting combined. So we have been active in the market. We have been actively bidding. In terms of supply, there is supply out there. I wouldn't call it great supply right now. The bids are fairly aggressive. You have players out there that have publicly stated that they need to grow the servicing portfolio. So of course, you see a lot of those players show up. In terms of us, the stuff that's interesting for us is a couple fold. One, we like the higher note rates out there, the on-the-run production because rates or when rates were to drop, those clients getting the money pretty fast and we'd love to take care of them and save them some money on their monthly payment. But it's also just about onboarding new clients to our servicing experience, which is J.D. Power award-winning and letting them experience Rocket experience in taking care of them. It's a lifetime value lens. It's not just a servicing lens.

Great. And just to follow up on that last point. I mean, I guess, what are the steps that you can do to kind of increase your ability to kind of retain that customer versus if they might have more loyalties elsewhere versus the customer that kind of chose to come in with Rocket on the initial mortgage?

Yeah. Well, it starts with a great onboarding experience. Switching services can be a difficult and painful experience, if you've ever had that happen to you. So it starts with a great onboarding experience and it starts with a great servicing platform and a great product and making sure that you're building a relationship with the client and getting in front of them at the right time without getting in front of them too often. So that -- if you think about our wheelhouse in terms of performance marketing, sharing a great experience in our brand with clients, there's no better way of doing it than when we have an excuse, at least on a monthly basis to interact with them and show off some of the products and features that we have built into the experience.

Thank you.

And we have reached the end of our question-and-answer period. I will now turn the call back over to CEO, Varun Krishna, for some final closing remarks.

Well, thank you, everyone, for joining our call, and we look forward to seeing you next quarter and just a special invite to come to our Investor Day. Stay tuned for details.

This concludes today's conference call. Thank you for your participation. You may now disconnect.