Thank you for standing by and welcome to the Rocket Companies Second Quarter 2024 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] I'd now like to turn the call over to Sharon Ng, Head of Investor Relations. You may begin.

Good afternoon, everyone and thank you for joining us for Rocket Companies' earnings call covering the second quarter of 2024. With us this afternoon are Rocket Companies' CEO, Varun Krishna; and our CFO, Brian Brown. Earlier today, we issued our second quarter 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 disclaimer. On today's call, we provide you with information regarding our second quarter 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 the 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 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 Brian Krishna to get us started. Varun?

Thanks, Sharon. Good afternoon, everyone and welcome to the Rocket Companies Q2 2024 earnings call. As I reflect, it is hard to believe that it's been almost a year since I joined Rocket and what an accelerating journey it has been. This Rocket is fueled by the passion of our team members who are the driving force behind everything that we do. They are led and inspired by an unrivaled leadership team, each bringing decades of experience and knowledge, ranging from fintech and mortgage capital markets and AI, the marketing, product, operations, sales and so much more. Together, we're blazing new trails pioneering experiences that will redefine how consumers experience the homeownership journey now and into the future. Our mission is to help everyone home. That means we are obsessed with making homeownership easier and more accessible for everyone. It's not just a business goal. It's our higher calling. We consider ourselves the most optimistic company in America because every day, we make 30-year bets on people who make 30-year bets on themselves. The need for hope and optimism has never been greater in our country. We're navigating through challenging times and unpredictability is the new normal. Despite some signs of gradual recovery in home listings and sales, affordability remains at historic lows due to persistently high mortgage rates and rising home prices. This past spring, the industry experienced a weak home buying activity with purchase applications dropping to their lowest levels in over 3 decades. Macro uncertainty and affordability issues are keeping potential buyers on the sidelines while consolidation continues with smaller players being acquired or exiting the market. Mortgage employment has decreased by 36% from its peak. Yet in the face of these challenges, optimism remains our mantra and higher calling. While others are faltering or retreating, we're…

Thank you, Varun and good afternoon, everyone. Today, I'll cover our financial performance and provide an update on our investments in growth, particularly in technology and servicing. I'll close with our outlook and guidance for the third quarter. You heard Varun share the passion behind executing our AI-powered homeownership strategy, all in service of our mission to help everyone home. Our mission is so important because we bring people the pride and joy that only homeownership can offer. In pursuit of this mission, we're breaking new ground. We're transforming the homeownership experience from one traditionally filled with stress and complexity into a radically easier and simpler process for everyone. Rocket has a unique opportunity to transform the fragmented $5 trillion homeownership market. We have all the ingredients for success, an unrivaled combination of talent, assets, capabilities and culture. We're just getting started and I couldn't be more excited for the opportunity ahead of us. We are not just imagining the future of homeownership we are building it. Now on to the second quarter results. We delivered a strong second quarter, growing purchase market share, revenue and profitability year-over-year. Our growth was particularly impressive against the backdrop of a contracting market. as industry purchase applications declined to their lowest second quarter in 30 years. Adjusted revenue came in at $1.228 billion, above the high end of our guidance range. This represents a 23% increase from the second quarter of 2023 and our fourth consecutive quarter of year-over-year revenue growth. Reflecting on our performance this past quarter, several wins come to mind, a double-digit lift in purchase conversions due to marketing optimization, record volume for home equity product and a 30% increase in our agent network attachment rates, driven by demand for buys. We generated $25.1 billion in net rate lock volume,…

[Operator Instructions] Your first question comes from the line of Mark DeVries from Deutsche Bank.

Yes. Thanks for the comments on your 3Q outlook. I was hoping you could give us a little bit of additional context for kind of your overall market view an outlook in the Q3 guidance? And how might that change if we start to get Fed easing and the long end of the curve moves down some?

Mark, thank you for the question. I appreciate it. I'll start by just sharing a couple of thoughts and ask Brian to jump in. I think the first thing is just I think the operative question is really not if the market will rebound. It's really when and how. And while we might not know exactly when we do know that '24 is better than '23 and we believe that '25 is going to be better than 24%. And if you look at the data, whether it's Fannie or the MBA, et cetera, we roughly believe that the mortgage market is going to be around $1.7 trillion. Now the good news is that's up 8% versus '23. So it's still well below the average but we're starting to see some signs of gradual improvement. But that said, we're not seeing exactly the same upswing that you would typically associate with the spring buying season. But with that said and when you look at homeownership overall, it's still a huge market. It's still a $5 trillion overall category and it's an industry that's existed with basically no modernization. So regardless, our philosophical view is that we're determined to take share and we have a track record of taking share in essentially any market. I do just want to share 3 things that give me confidence that Rocket will be accelerated uniquely within our outlook and what gives us optimism. And I think the first one is just quite simply our focus and our track record. I mean there's a reason why we're the number 2 player in purchase, excluding correspondent. And if you look at the results of our execution and hard work this quarter and consistency quarter-over-quarter, year-over-year and those are important proof points. The second is just there are…

Yes, Mark, I'll touch on the guidance piece. As usual, we include all the information, all the data leading right up to the call. I'm thinking about where to set the guide. But we're still only a month in so you got 2/3 to go. But I think there's a couple of points just worth noting. One is you may have seen the MBA purchase application data in the month of July. The MBA study was down 10% when you compare it to June. I mean I'll say that's a bit unexpected to Varun's point around what the traditional home buying season looks like July is usually a pretty robust month. And then secondly, it's just worth noting that September is traditionally the lowest month kids get back to school, usually want to have the home or be in the home by that period of time. So September is when you start to see it trailing off. So I think when you put all that together, there's a view you could get to where Q3 is probably going to be flat to Q2 or perhaps even a little bit down. Now of course, we saw some rate relief come through today which is always good. But nonetheless, I don't think there's a little bit of uncertainty. I'll just touch on the gain on sale margin piece. We've said a lot that we expected gain on sale margin expansion from 2022 levels. And the 299 basis points in Q2 was really healthy. And when we lumped into the third quarter, I feel good about those levels being relatively consistent. So I think if I had to summarize it, you look at the guide and it's, of course, a bit tempered because of some of the uncertainty with how the home buying season will shake out. But to be clear, it definitely includes the confidence in our belief to take share through the quarter and beyond.

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

Varun and Brian, nice job in the quarter. I wanted to dig in a little bit on the share gains you're seeing on the purchase side of things. I guess I'm curious if you're seeing any mix changes in the types of buyers that you're originating, whether it's first-time buyers, move-up and kind of weather the share gains you're seeing are being driven by a certain cohort or type of buyer? And secondarily, I guess a 2-part question on the purchase side. Are the share gains apparent in both DTC and partner or any differences in the purchase trends between those segments?

Thank you for the question, Ryan. I would just start by saying that profitable market share growth is our defining North Star metric. That is something that strategically across the company is a top line imperative. And I would just highlight a couple of control points that we've really focused on in a durable way to achieve this metric. The first thing I would just highlight is innovation. Across the board, we're innovating faster than ever. We're building deeper, better experiences and we've increased the velocity of high-impact innovation by releasing at a higher cadence. In fact, we're doing product and digital and experience releases almost weekly now. The second thing I would just say is we have increased our focus. We have restructured the way that we execute and we have operationalized against a new, what we call, a mission-based autonomous structure. That means that we have autonomous teams that are gold driven, that are working hard to execute against clearly defined metrics. And then the third thing I would highlight is that we've taken what we call a full funnel approach to every aspect of the business which means that we consider every single element of funnel, whether it's how we deliberately engaged with our massive servicing portfolio, improvements to performance marketing, whether that's better targeting, better creative, better channel mix optimization, tuning our front doors. And then all the way through the digital experience, making that more streamlined and then obviously, optimizing our sales and operations motion against specific workflows, whether it's purchase, refi servicing. And this is just to name a few of the things that we've done. Specific to purchase, one of the things I would just highlight is that we're really doubling down on our focus on purchase as a top line strategic imperative. And so you're going to start to see us innovate further and faster here. whether it's existing product innovation like buys or the new AI-based verified approval letter adjustments that we're starting to see major traction because we're meeting our clients where they are, through to the development of new purchase offerings that are more focused on our retained based better segmentation of our clients, understanding our clients, whether they are first-time homebuyers, female head of household, Latino, understanding demographics, segmentation and then leveraging our data to connect deeper with home search, optimizing the top of funnel for our purchase. So lots and lots of images across the board. But bit by bit, these interests start to stack up and that really reflects on some of the improvements that we started to see and we're still just scratching the surface of what is really possible. And then I'll ask Brian to maybe comment a little bit further.

Sure. Yes, Ryan. Good to hear from you. Just 2 things for me. One, on your channel question, where the share gains are coming from. The answer is it's definitely both. It's definitely the direct-to-consumer and TPO. And then just lastly, on sort of the demographic attributes in terms of where the share gains are coming to. One of the things we've talked a lot about in this market is the first-time homebuyers. While they're not immune to some of the affordability challenges and down payments can be tough. They're also not trading a 3% or low or no rate for a higher rate. So we've talked a lot about this but we skew very high in terms of share, in terms of first-time homebuyers, given our digital experience and the way we interact with clients through chat. So we think that's a big piece of share gains as well.

Our next question comes from the line of James Faucette from Morgan Stanley.

This is Jeff Adelson. I was curious if you could maybe just dive in a little bit on the gain on sale dynamic this quarter? And it seems like it held up a little bit better. I'm just wondering if you're seeing some more excess capacity come out, just kind of feeding into the broader dynamic of you taking share, maybe a little bit less competition there? And why you feel that should be stable from here?

Yes. Thanks, Jeff. I can comment on that. Yes, we've been really happy with the progress and gain on sale margins. If you were to chart it over the past 2 years, you've seen some pretty decent growth. We've always said and I believe at that the number 1 thing, there's a number of things that can impact gain on sale margins but is capacity in the price competitive nature of this business. So it's absolutely contributing to that. We talked a lot about the consolidation and the capacity coming out of the system but it's probably worth noting, too, that we traditionally had higher gain on sale margins and it's also just because of great execution. We have a best-in-class capital markets team. And when you operate in all 50 states and 3,000 counties, you can create very diversified pools of loans and bond holders are willing to pay a premium for that diversification and scale. So that always helps as well.

Okay. Could you just maybe -- as my follow-up, could you maybe just comment a little bit on the outlook for profitability from here? You've got 2 consecutive quarters of double-digit EBITDA margin. I don't think you've been there since late 2021, early '22. Your contribution margins are holding up nicely in the different segments. Just curious if you think that can continue to expand from here or if you're a little bit more reliant on the volumes continuing to increase for that to happen?

I'll just add a couple of quick thoughts towards profitability. At the end of the day, philosophically, profitability is going to be driven by a couple of key things: how well you execute, how efficient you are and then the big swings that you choose to intentionally take. And so in service to that, at the end of the day, market share, top line growth is our number 1 priority. Now of course, we're going to run an efficient business. And that's a strategic imperative as well. And there's always room to go. And we definitely think we can scale up significantly while keeping our fixed costs roughly the same. And philosophically, the reason we believe in that is because that's how you build a durable growth business for the long run. Now I think as you know, we made $225 million of adjusted EBITDA in Q2. That's an 18% margin and we believe we can grow that further. And we are leaning seriously into AI because we believe that will increase our operating leverage significantly. And so that capacity will come from AI investments and allow us to be more productive. And so in summary, investing in operational efficiency, driving major innovation that's in AI. Making our organization orders of magnitude more productive is how we believe we will accelerate our normalized profitability.

Your next question comes from the line of Derek Sommers from Jefferies.

Now that we've had volume bounce off trough levels from seasonality and the 30-year mortgage rate seems to be cooperating a bit. Can you talk about -- a little bit about Rocket's incremental capacity for originations? Will recent investments in and Rocket Logic alleviate any of the typical operational bottlenecks?

Sure. Let me comment on AR and then I'll ask Brian to just jump into some of what we're seeing in terms of capacity. And I'll just start by saying that from a resource perspective, AI is our most strategic imperative and we are resourcing this to win. And there are real reasons that we're so vested in this because we see tangible concrete metric-driven benefits of efficiency, velocity and, most importantly, a better experience. And so Rocket Logic continues to advance. It's not built into every part of our experience whether it's the data workflow to document management to the tools that are actually powering our team members end to end in terms of how they drive the client experience. As we shared earlier, we're now generating 300,000 transcripts every week. That is a massive data set and that data is actually automating 113 fields on a mortgage application that would have to be entered manually. As we talked about already, we've seen a multitude of benefits from the earliest days of our generative AI-powered chat experience and we're just starting to lean in much more heavily there. And then we're using all this data to actually refine and train our models and our workflows further. So more volume results in a better AI system that we'll continue to learn and improve and make us better. So I would just say for us, this AI thing is not hype, right? Like we see concrete tangible benefits. We see our safe, we see faster call resolution. We see faster turn times. We see 100% accuracy on verification. And these are the earliest stages. And then the other thing I would add before I pass it over to Brian is we're also investing deeply in talent, like we're not standing still. We've recently hired a CTO. We're making significant investments in data leadership and infrastructure. We brought AI talent to our Board. And we're also being very deliberate in terms of being strategic and what we build where we have strength which is how we partner with the best in the industry, whether that's OpenAI, AWS and Entropic, just name a few. So it's early days but we're very encouraged by some of the key improvements in metrics and so we're continuing to lean in there. Let me ask Brian to just talk a little more on capacity.

Yes. Sure, Varun. Thanks. And good to hear from you, Derek. The question we get asked a lot is like how do you think about the fixed cost structure. And we talked a lot about really keeping it flat. And I think there's 2 things that are worth noting there. One is like when you think about these AI investments, this is where we're deploying capital and resources. So that means we have to be really diligent and tough on the other side and looking for efficiencies and taking any slack out of the system so that we can continue to allocate capital to these very strategic initiatives. And then to your point on capacity, I mean, that's everything right now. We're happy with the fixed cost structure, 18% EBITDA margins in a quarter where I think we're going to look back and still say, yes, things may be getting better but this is still going to be a very low quarter in terms of the history of mortgages produced. So everything we're focused on right now is adding capacity to the system and doing it through efficient means in keeping the cost structure relatively similar.

Got it. And then just to kind of follow up on the fixed cost structure there. I'm seeing an increase of $2.7 billion of net rate lock volume and only $23 million of incremental expense that ratio is going to hold up over time? Or any other color there would be helpful.

Yes. I mean, like we kind of look at it in 2 buckets, the fix and variable side. And the beauty about this business is once you clear those fixed costs, a really healthy chunk of that top line revenue drops to the bottom line and you have a nice compounding effect. And if you think about 18% EBITDA margins in this quarter, that means we, at some point, didn't clear that fixed cost hurdle. So the cost to produce, as we've talked about, has some -- you pay a commission to your loan officers, you incur some costs along the way. But in the big scheme of things, it's pretty small. So you got great leverage on your fixed cost base on the way up.

Your next question comes from the line of Brad Capuzzi from Piper Sandler.

Varun, Brian, you've been asking acquirers of higher coupon servicing portfolios which strategically does make sense to Rocket. Can you just give us color on these transactions and conversations? I know you mentioned a lot of demand and a little bit of supply last quarter. Have these dynamics changed over the recent months? And then what are the retention rates you assume on your MSR purchases? And how does this affect the prices paid on those purchases?

Yes. Great. Thank you so much for the question. I wanted to start by talking a little bit about our strategy when it comes to servicing. And I'd start by saying that our servicing portfolio is an incredibly strategic asset because it allows us to play both offense and defense at the same time. So our approach to servicing and origination is very unique to Rocket in the sense that servicing is actually a source of future origination. And so the 2 things actually work as a flywheel where you create a cycle where you can attract a new client, you can organically create a new MSR and then you can actually support and build a relationship with that client as their lender for life. So computationally, our MSR includes not just the servicing cash flow but it also includes the future gain on sale from additional services and products that we can deliver to that client in an awesome way. And so when you add to that, we have very strong in-market recapture capability that's 3x higher than the industry. And so for that reason, we are investing strategically. We're going to keep growing our servicing portfolio, we're going to try our tranches strategically and we can provide new experiences to those clients, whether it's refinancing on falling rates, second lien loans for those who are looking to utilize equity and then, of course, originating new purchase loans as well. And underlying that, obviously, is our technology infrastructure and our client experience that allows us to do all of this with speed, with the light and ultimately value for our clients which is what we care about at the end of the day. And it's just very exciting to me that as of June 30, we had around $535 billion of unpaid balance in servicing. I have to just give a shout out again to our servicing team who is the best in the business, who recently won just last week, the tenth J.D. Power recognition for servicing. Let me ask Bryan to comment a little bit more on your question.

Brad, I think the key part of your question which is far the recapture and we talked a lot about to Varun's point, the 3x industry recapture rate. But I think honestly, the more exciting piece is that we're starting to learn through these acquisitions that we have a really nice recaptured on the acquired books. And if you think about what that does for us in terms of the market opportunity, it allows us to pay a premium in the sense of acquiring these because we're going to realize value that others in the space likely aren't going to realize. And it opens up a really exciting acquisition channel because we have our regular direct-to-consumer business, you have your TPO business and then now you have this acquisition channel via servicing from an inorganic perspective. So part of the hypothesis that need to be proven out was, hey, we know we do good on the clients that we originate and go through our J.D. Power winning origination experience and we know they love our service and to Varun's point, with our J.D. Power winning servicing experience. But when you're acquiring clients and you start to become their service or they haven't gone through your origination business and they haven't gotten to know you the same way. So there was a hypothesis that we would outperform the market there. And for a while, that's exactly what it was. But now that we've been acquiring and we have some actual historical data, it's only building our confidence in that space.

And then just on expenses. Can you just give us an update on your expense management, both near term and long term and into 2025? I know you mentioned relatively flat quarter-over-quarter in 3Q but kind of how you're prioritizing investing for growth and driving operational efficiencies, both near and long term?

Yes. I think probably the only thing more I can say on that is it's operational efficiency and expense management is really part of our DNA and it's just part of running efficient and diligent business and we'll continue to do it. We've been really tough on the stuff that isn't key. In prior calls, I talked a lot about our relentless prioritization. So if things don't have the ROI that we expect in demand, we won't do them. We'll leave room for experimentation and the things that are working, we're going to put more capital to them as anyone would expect us to do. But on one hand, we're being really tough and looking for all the operational efficiencies we can. And then as we're freeing up some space, we're putting capital towards things like tech and AI and data, all the things that we believe will change the game here.

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

I was hoping you could talk about the -- how you're seeing the durability of demand for home equity and kind of what you see as the limiting factors for continuing to grow that, whether that be consumer demand or investor appetite to purchase the loans?

Thank you for the question, Doug. I'll just start by saying that this is a great example of product market set. It's the perfect product for the current market. And we've seen strong demand. The product volume has more than doubled year-over-year. That's because it's an offering that's incredibly valuable to our clients, right? They're using that money to fund a remodel, they're using it to consolidate debt. They're using it to pay for the inevitable life events that we may experience. And they're able to do that without affecting their favorable rates. And that's because they have $32 trillion of equity to tap into. And I'm incredibly proud that Rocket is now amongst the top players in the entire market. We've essentially created a market here. And by adding in the second lien, we're able to increase the weighted average coupon which then leads to potential refinance as well. And what I love about this is that this is just the beginning. I think we can go significantly further here because, as Brian said, it underscores the strength of our capital markets team and infrastructure which is second to none in the business. And we're continuing to improve it. We launched in what's called an AVM or automated valuation model in Q2 which means clients can actually get cash in as little as 7 days and they can actually close 7 days faster than a traditional rate in term refi. We can consolidate their first and second lien mortgages. So when interest rates inevitably decline, they're able to unlock additional value. And then I think perhaps best of all, in my opinion, is that the vast majority of clients who come to us are actually new to rocket. So it's a great business. It's a healthy business and we're just continuing to improve continuously.

And we have time for one more question. That question comes from the line of Rick Shane from JPMorgan.

The commentary on technology is fascinating. And one of the things that's always been the big opportunity for Rocket is the push into purchase and realistically, I think there's going to be a generational shift in terms of how consumers interact with financial institutions. Are you finding that the penetration or market share for first-time homebuyers who represent that emerging generation of buyers is actually higher than purchase penetration for existing homebuyers or second-time homebuyers, I should say?

Thank you for the question, Rick. I'll just start by saying that purchase is a strategically elevated priority for us compared to the past. And there's a lot that you have to do to really make sure that you understand how to build a profitable, successful growing purchase funnel. The starting point of purchase is really understanding your client and meeting them where they are. And for that reason, we're investing significantly in segmenting our clients and really understanding that the dynamics of a first-time homebuyer are different from a second-time home buyer. The way that we engage with our service base to understand how to help them find a new purchase loan is different. The way that we engage with home search and really nurture and build intent with our clients, the way that we create an optimized funnel end to end and introduce new products and services and be able to bet on AI-based experiences and leverage things like chat and generative AI are all a big part of our purchase strategy. One of the things that I think is really important is how we think about servicing as a source of purchase origination. Another area of investment is really doubling down on our broker platform end to end. And that's a big part of our purchase strategy as well and that's a very important client that we want to continue to serve. So I would say that across the board, we're really resurrecting an end-to-end view of how to build a profitable, successful growing purchase business. That includes segmenting our clients, building experiences that meet them where they are, investing big in technology and automation, understanding how to nurture them and their intent throughout the home buying journey which can often be complex and long. And by sort of achieving all of these things is how we think we're going to grow and purchase and then obviously, resourcing this as a strategic priority from the top down is something that we're really, really excited about.

Got it. It makes sense. Look, I think you guys will benefit from a generational shift. I just think about how my kids interact with financial institutions versus how I do and I think that will be transformative in terms of the purchase market.

We agree.

That concludes our question-and-answer session. I will now turn the call back over to Varun Krishna for some closing remarks.

Well, thank you, everyone, for joining us today. We're really excited about Investor Day on September 10. We hope to see all of you there. And we look forward to connecting with you next quarter. Thank you again for listening to the call.

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