Perfect. Thank you, everyone. Good morning. My name is Dylan Becker. I'm the research analyst here at William Blair that covers Blend Labs. For all the necessary disclosures, you can find those on williamblair.com. We're joined here today with Nima Ghamsari, the CEO and founder of Blend. Nima, thank you for joining us. There's probably varying levels of familiarity to the story, Nima. If you don't mind providing kind of some context, background, kind of the ideology of why you founded Blend, the problems you're trying to solve, and kind of where the industry shapes up today.
Yeah, sure. So yeah, basically, I was thrown into the mortgage industry right out of college because it was the financial crisis. And I was at Palantir, and we were signed by some of the big banks and Fannie Mae and Freddie Mac to go help people avoid foreclosures. And me coming into it as a 22-year-old, I was like, wow, $10 trillion of assets. There's got to be some really good tech in here. I remember walking into the Bank of America offices 15-plus years ago, and it was green screens and filing cabinets. I worked on that for a few years. It sort of inspired me. I was like, man, there's got to be better tech for this industry. Why isn't there better tech for this industry?
I thought the reality was that the mortgage industry, unfortunately, it just was not something that really great technologists cared about. It was not like you left Stanford or MIT and you wanted to go and build software for the mortgage industry. At the same time, it was a super critical, super impactful thing for consumers, as we saw in the Great Recession that we saw thereafter. I set out to start Blend in 2012. It has been 13 years since. We wanted to be the best origination platform, just starting with mortgages originally. Since then, we have expanded to all consumer banking. The premise of the company is very simple, which is we are going to have digital, data-driven origination experiences instead of the legacy technology experiences that people are used to. We have been at it 13 years.
I think the thing that I'm most proud of for the team is our customer base. You can see some of that on the slide. It's very, very difficult to penetrate financial institutions with software, especially the regulated, diversified financial institutions. We've done that. It's in the biggest ones. We didn't go small community banks and credit unions, which is what most people do. Our goal was to get in the door. We were talking about Viva and Guidewire this morning. Dylan and I were talking about it. What they told me early on was like, you get in the door, and then you expand with them over time. We've seen that. Getting in the door with some of these really big financial institutions is extremely difficult. We've done that, and we're still growing our customer base.
We have expanded to other product lines over time.
If we start solely on the mortgage side of the house, could you give us kind of some context on where you fit into that process, right? How you've evolved the platform to feature more components of that end-to-end journey? Then touching on the customer segment as well. Who are you catering to on the high end of that segment? What does it look like if we kind of were to delineate the mortgage market?
Yeah, so think of Blend as we're a front office. We're what the consumer uses to apply and upload their documents, sign their documents, do their closing. We're sort of their system from front to back. We're the loan officer, who's typically the salesperson on the mortgage side, their system that they can use throughout the process to help the customer, do work on behalf of the customer, help with just track what they're up to. We're a front office. There's typically a back-office system. ICE has a back-office system. There's a few others in the industry that we integrate with each other on that front. There's a servicing side, which is after the loan has originated. We stop when the loan has originated. That's where we've historically played.
That's how we play, actually, across all product lines: consumer, all consumer product lines, small business, et cetera.
If we were to think about the factors in the mortgage landscape right now too, right? Affordability, supply, rates, kind of how are you thinking about the trend line of where we sit relative to historical averages? How are financial institutions thinking about investing ahead of that impending recovery in more digitally native solutions?
Yeah, so you all are probably familiar with this. Rates went up a lot from 2022, throughout 2022, and then into 2023, mortgage rates. As part of that, two things happened for financial institutions in 2023. It was their worst year ever. Volumes went down 70%. Not only that, margins went down 60%. They had this high fixed cost. They were pretty much all losing money in 2023. No one was buying tech in 2023. They were all losing money. They were all just trying to get their house in order. They used 2023 and 2024, the first half of 2024, to get their house in order.
Now pretty much all our customers that I talk to are profitable, which has opened the door to them investing because at some point, the historical averages for a number of mortgages in the country is about 8 million per year. We're currently 7-8 million a year. We're currently seeing around 4 million mortgages being done a year because rates are still so high. Who knows where the 10-year Treasury yields are when that'll come down. Our customer base believes it's going to come down. That's why in the back half of last year, we really started to see a pickup in sales. We announced a bunch. This is all in our earnings scripts if people want to listen to that.
Another top 10 bank signed with us at the end of last year, a top 5 credit union, two of the biggest servicers. It has been a really good run recently where people are starting to invest again. There was that lull period in between.
Into the things that are within your control, if we think about kind of the three core levers of the business, market share, and monetization, you talked about kind of getting a foot in the door and proliferating within an enterprise. Can you talk about the evolution and how you're tracking in those metrics that are more under your direct kind of purview despite kind of the macro sensitivity piece?
Yeah, I think 2019, the year before COVID, we had sub-10% market share. In that time, we've, I think, more than—I'd have to go get the exact numbers and look through the exact—I think we've more than doubled our market share in five years. We're still signing customers, which is great. On top of that, our price per unit, which we call economic value per funded loan, but essentially it's our price per unit, has gone up, I think, close to 60% since—I think it was in the 60s or low 60s, something like that. Now it's in the 90s. That's because we have add-ons like digital closings that they can do now with our platform. Our price has gone up slightly over the last few years as well, like 10%-15%, something like that, our base price, I should say.
The add-ons really help. And then we have a marketplace of offerings, which you've heard about, like the home insurance and the title insurance and things like that that people can do on our platform that adds additional value per unit.
As we're talking about kind of this potential impending recovery, you do have some newer solutions as well too that are hierarchical in nature. Can you talk about kind of what you're doing to help digitize the refinanced component, the home equity component? Maybe that ties into consumer, which we'll get into, but some of the newer offerings as well.
Yeah, so as part of getting our customers ready for where the world is right now and for when rates come down, where the world is right now, they have a lot of consumers who have built up a ton of equity in their homes. The equity in their homes is becoming necessary for them to tap into, unfortunately. Consumers are struggling a little bit right now. They are seeing a lot of home equity growth. That is resulting in our customers needing more automation because the volumes are growing, and they do not want to staff up a ton of people. They do not want to have long turn times for customers where the consumer comes in, and then seven weeks later, they get their home equity line. That is not a good experience.
They often will go to some other place if we can't serve them fast enough. We rolled out, first and foremost, a new product called Rapid Home Equity. Think of it as roughly 50%-60% higher price per unit than our base platform. Essentially what Rapid Home Equity does is it does the full home equity approval where we run a valuation on the home. It's an automated valuation on the home. We run credit. We run an income analysis. We do credit decisioning in the flow and give the customer a line amount and an answer and let them consolidate their debts, if that's what they're trying to do, in our flow, which it's showing that it's cutting cycle times for our customers, which is great, even our best customers, our fastest customers. Most importantly, it's increasing conversion.
Our typical flagship home equity flow, which is sort of a baseline flow that does not do the decisioning upfront, which is what I think the goal is with all of these new flows that we are rolling out. I will get to that in a second. The flagship flow does not do decisioning upfront. We see the conversion was about when somebody touches our product to when they eventually get a line of credit was 30%. With the new platform, or the new flow, I should say, we increased that to 45% in our first pilot customer, which is a big-scale home equity lender. Material improvement in conversion for our customers, which I think that is the name of the game because their costs are too high. They cannot be leaving business at the door. That is one thing to help them with today.
To help them with the future, when rates come down, we have a similar solution called Rapid Refi, which what happened last time during COVID, when rates came down, there was an influx, a massive amount of volume that came in. Those customers were put in the waiting queue and waited up to 90 days to get their payments lowered. I just finished saying how much consumers need to help financially right now to lower their payments. The people with 7%, 7.25% mortgages, when rates go down to 6%, they're going to need the help financially. They're going to want the help as quickly as possible. I expect a big rush of refinances, and so do our customers, when rates come down, if rates come down. We have this Rapid Refi product, same concept of what I just said.
It's very personalized to that specific consumer and their specific mortgage they already have and the specific home they already have. It just walks them through and says, within a couple of screens, here's your old payment. Here's your new payment. Would you like it? If so, give us intent to proceed. We'll lock your rate. We'll collect your credit card to go order the appraisal, which is needed in a lot of refinance cases. That's another one that's great. We have it live with a couple of the largest servicers in the country where Refi is especially important to them. It's getting interest across our entire customer base. We have a number of signed deals there already.
Can you talk to, if we point on or press on the Refi piece in particular as well too, the importance of positioning around and recapture rates, what that can mean from a market share perspective? Maybe is that an incentive for some of this incremental investment as well?
Yeah, so I think part of the reason for the incremental investment is that there's new technology from when we built our flagship platform seven, eight years ago to now that we can make the flow materially better. For example, there's better income verification. You can prefill high friction fields like Social Security number from the mobile carriers. You don't need to collect Social Security number from consumers anymore. Those kinds of things make it higher conversion and make it a better experience for the consumers. Part of it is because you can do better. Our job is to keep improving. Part of it is because our customers care so much about conversion and recapture rate. When they get a customer coming in the door, they need to make sure they convert that customer. They're willing to pay us for it.
If you're a mortgage servicer, recapture rate is for every 100 customers that you have that refinance a loan, what percentage come back to you? It's a simple metric that they use, but it's sort of their true north in almost every case. They want to maximize. The best ones, I think Rocket is something like 75%-80%, maybe even a little more. Mr. Cooper, I think, which just got announced that it was getting acquired by Rocket, is like in the 60s last I looked. Most of the industry is in the teens. Unless you really dial it, we're going to help them with that, with this flow. I think that they can do a lot better. Part of it is marketing, but part of it is the flow itself.
Perfect. If we were to kind of summarize at least what we're seeing on the mortgage side, and we'll get into consumer as well too, but maybe if we step back, how should we think about the financial profile of the business? To your point, there were some structural headwinds. How much of the revenue model is usage-based versus subscription? How should we think about kind of the building blocks and levers that you see from a financial perspective?
I mean, I guess the things that I think, let's talk about what's sort of built-in and base upside and then additional upside that I see in the business. The built-in upside is we're about half the size of a typical mortgage market. All of our contracts have a usage-based component, every single one, maybe minus one or two small ones. There are not large ones that are not usage-based. When mortgage volumes come back, I expect us to do a lot more volume on our platform and get paid for it. At this new higher rate where we have more products attached and we have more features turned on, and in some cases the rapid flows, which are a much higher price point.
In those cases, I feel like we have a lot of built-in upside in the business from that, which I'm excited about both for our customer's sake and for our sake. I'd say the things to be excited about for the future are the rapid flows are getting a lot of attached. We talked about this in our Q1 earnings a few weeks ago where that has sold a lot better and a lot faster than I thought. Typically, it's a big. It's so obvious. If you start putting all the decisioning upfront, you're going to convert more customers. They're willing to pay extra for it. We've made it easy. We kind of gave them a short try before you buy period. We're like, hey, you're going to see the ROI.
If you do not like it, turn it off because we believe in our products. That has actually worked really, really well with our customers. We can afford to do that because it is all in the same platform. It uses the same integrations. We do not have to do a huge new implementation to get them live. That is one thing to get excited about. I think the long-term upside is much bigger than even that, which is they are still about putting Blend aside and putting their existing systems aside, putting the software spend aside. There is about $10,000-$12,000 of spend for humans and other systems in the process, of which the vast majority of it is people shuffling papers back and forth and reading a document, comparing it to another document. Hey, was the appraiser's license on the appraisal?
Does that license number match the system we have in our system? Is it expired? There are humans who look at these things all day, every day. What we have been building now, or we have sort of hinted at now, is those are things that AI is very good at and with extremely high accuracy and very cheap. What I do not view the world of mortgage as shifting to is, hey, we are going to just keep getting incremental software spend. I view it as some combination of their people spend comes down as their software spend goes up. Not to make it so that it is more like we want to give them a 5 to 1 or 10 to 1 ROI. If we can save them $1,000, we want to command another $100, so it is a win-win, or $200, so it is a win-win.
I think there's real upside there and something that I'm very passionate about and our customers are extremely excited about and navigating with us.
On that particular topic around AI as well too, how do you think about the positioning of being a vertical vendor that can help facilitate that specialized data with highly curated workflows in what is a very highly regulated industry as well?
Yeah, I mean, look, I think the horizontal vendors will do great because if you're a large bank or you're a large insurance company or you're a large healthcare company or it doesn't matter, large consumer company, you need some sort of horizontal AI strategy across your enterprise that works across all functions. I think where vertical software companies are especially successfully positioned is that we are actually driving the core workflows that their business spends money doing today and in this case spends $10,000 doing today. If you're a large bank or a small bank, that money is money that's essentially either coming out of your pocket or it's coming out of your consumers' pockets. This is a no-brainer. We're pitching them a win-win with AI. We're not pitching them, you just pay us extra and it's the science project.
We're saying, you do this pre-fund QC with us, and you cannot spend $100 alone on pre-fund QC or $200 alone on pre-fund QC anymore.
Sure, sure. If we're now switching over to the consumer side, can you walk us through kind of the ideation of Blend Builder, what that kind of helps establish in your ability to kind of penetrate more of the consumer segment?
Yeah, so just so people understand, the consumer segment, when we talk about that, it's personal loans, credit cards, deposit account opening/new membership if it's a credit union, and home equity lines and loans and auto loans. Now we've added recently small business as well. The origin of that for us was our customers being a vertical software company, our customers came to us and said, hey, we do our mortgage with you. Can you create a home equity product? You do home equity and mortgage with us. We want to offer a checking account to our new when we bring on a mortgage customer, can you make it so that we can open a checking account with them? It was like, well, you do the checking account. The most common product that people get with a checking account is a credit card.
Can you offer a credit card in your checking account flow? And then it was like, well, now you do most of our products. Can we do personal and auto lending? Because there are legacy systems in place there. We do not want to have to get some separate system that does not integrate with all these things within the flow. That was the origin of it. As we started going down these piece by piece from 2018 till now, as we added those line by line to our product suite, which now I am happy to say we have all the major products that a consumer bank may offer.
As we've added those, between 2018 and 2021 or 2022, I can't remember the exact year, we came to the realization that these products are all basically, they're like different animals with 98% of the same DNA, but they're essentially the same DNA. You're doing some form of credit verification, in some cases an income verification, an identity verification, in some cases asset verification or valuation. You're doing a credit decision in the flow. Maybe you have some things that they have to do as a follow-up, what we call stipulations or follow-ups after the fact of getting the approval, hey, I need an additional tax year of tax returns. These were all the same thing, even though these are completely run in silos at these financial institutions. What we didn't want to do, two things.
What we didn't want to do, one was create more silos and create separate platforms for all these things. That was one thing. The second thing was we wanted to make it really easy for us to build out and manage, more importantly, five or six product lines. We created this thing called Blend Builder, where we took all those building blocks: income verification, identity verification, credit scoring, credit decisioning, asset verification, document follow-ups, e-signing. We took all those building blocks. We made them drag and drop. We put them on a new platform. It's not only what powers our consumer side, it also powers all the rapid flows. It integrates with our flagship platform. All the new flows that we're building out are on this new Blend Builder platform. It allows us to build things.
I mean, for you all who are the financially savvy ones, it allows us to build things an order of magnitude cheaper and faster because the same DNA, it's drag and drop. It's the same DNA. We will be launching products cheaper and faster than we have before and than any of our competitors could if they wanted to. There is one additional upside, but maybe not as relevant because it's a little early on this. Our customers who see that platform get excited about it and say, hey, could I use that in an area that you won't productize? One customer was asking us about a certain kind of unsecured loan related to a home. Think of like a home improvement type loan. We don't want to productize that because it's not a big enough market.
They can use our platform to configure that and then use that within their home lending platform. Yeah, Blend Builder is something I'm super excited about. It's a few years old now that we've been building it, and it's still a work in progress. It's the thing that powers all of our consumer and even all our new mortgage flows.
Within that, how do you think about configurability as an enabler of kind of more of this ecosystem, opening up the aperture for partners to get more involved into the process and really kind of help compound that value delivery for customers?
Yeah, and that's a good point. One of the things that I think we're uniquely positioned to do because we have this amazing customer base that was nearly impossible to penetrate, going back 13 years, I don't even know how we landed some of these logos. I mean, I was involved in it, but it's just sort of a lot of things. I think we had a good product, and a lot of things worked in our favor. It took a long time. It was a lot of energy. Now others look at that and say, wow, I'd like to work with those customers, other vendors of theirs or other potential vendors of theirs, and say, I'd like to do more work with those customers. I probably get 10 vendors a week calling me about something or wanting to partner with these financial institutions.
The way we're setting that up is this platform, Blend Builder, is going to be an open platform, but there's going to be some, call it platform revenue exchange for us helping them with distribution and integration into these customers because it was a lot of work. It was very expensive, and there has to be a fair exchange of value. They understand that, and they're willing to pay. I was talking to one of the income vendors, and they would love to have some of these customers, their early income verification vendors. They're willing to pay us a good fee to do that. That allows us to, I mean, the thing about that is I always tell the team, you know you've made it in life when you're making money while you sleep.
When we have to do all the work to make the money, it's one thing. When we have leverage built into our platform that we're making money because other partners are building more things into it and then paying us for the privilege to do so, it's another thing. I think that's the target state in some cases. In some areas, we'll still build things. Ideally, we're going to partner where things exist in the market unless it's massively economically beneficial to do something else.
Sure. Going back to that kind of parability between mortgage and consumer, how do you think about kind of the unit economics between the two? Does anything from a go-to-market perspective have to change or how you can really lean into the reference ability of kind of the value you have created in one ecosystem given the interoperability of really kind of those two systems?
I think at the existing customers, definitely we can lean on the relationship with a lot of who introduces us to, at a large customer, to their peer who runs credit cards. It comes from, like I was at our customer advisory board at the New York Stock Exchange a few weeks ago. One of our customers, head of their home lending division, was like, hey, I think you have an end now finally with the deposit, and it's a huge bank, the deposit team and the credit card team. He's like, I might need you to talk to their CEO, who I also know, and help convince him that this is the right way to go because he wants to do it, but the business owner historically hasn't wanted to, but now the CEO wants to do it. A lot of that comes internally.
Yeah, I think there's just a lot of that that comes with, but I think with net new customers, I would say, with smaller ones that we haven't gotten as we're trying to expand our footprint to $1 billion-$5 billion institutions, it's a little different. They want the full suite. They want to work with us across all the product lines out of the gate. Finding ways to make it really easy for them to commit to that and get live quickly across product lines is something that we're thinking about for these smaller institutions, which is a little bit of a different selling motion.
Sure. How, if we were to kind of summarize all of that as well too, how are we supposed to think about kind of the competitive landscape, right? Is there differences between mortgage and consumer? Obviously, you fit in kind of different parts of the puzzle, at least at this point in time. How should we think about kind of the competitive landscape here?
Yeah, there's definitely difference. I'd say that on the consumer side, it's probably different by segment. The really big banks, the way you're competing with is custom build in-house. At the smaller ones, you're competing with one or two sort of point solutions for those specific products. In mortgage, at the big banks, it's mostly us or I'd say we're probably the only one who has a top 10 bank at this point signed on the platform. We have other, as we go down market, we go to the independent mortgage banks, which are great customers of ours as well. The middle column there, those are, there's other competitors in that space. It gets very nuanced. I'd say what makes Blend special for these guys is, one, I think we have the best standalone product in mortgage or the standalone product in consumer banking.
I'm biased, of course. I'm like their father. But putting it together, we're definitely the only one, and this is objectively true, that has small business, consumer, mortgage truly on one platform. It's not even really a debate there, I think. I truly feel that way. I think that's a differentiator for a small institution and something we're leaning into.
Sure. If we were to talk about kind of the financial profile, right, there has been a lot of kind of rightsizing internally, but now you're at a point of scaling profitability. Can you talk about how that's kind of giving you flexibility to double down on some of these opportunities that you're seeing ahead of you and kind of how you think about that balance going forward on a growth and profitability perspective?
Yeah, I think much like our customers, we were hit pretty hard when mortgage volumes collapsed 70% because they were not just normal historical levels in 2022 and 2021. First half of 2022 and 2021, they were double the normal historical levels. We thought it was going to go down. We just did not think it was going to go down 70% one year and then another 40% down the year after that, which is a particularly hard thing to do when you set your cost of operations at being a certain amount of units that you expect, and it ends up being half that. We have used the last couple of years, just like our customers, to get our house in order. I feel really good about where we are today. We did $15.5 million in free cash flow in Q1.
We've had operating non-GAAP operating profitability three quarters in a row. We guided to positive non-GAAP operating profitability in Q2. The really nice thing about being free cash flow, I mean, I should have known this, but the really nice thing about being free cash flow positive and having non-GAAP operating profitability and having a great customer base that wants to do more with you is you can afford to invest in those things that allow them to do more with you. I am very proud of what the team did to get to that point. That is still in the mortgage market that is half as big. You can do the math on what happens when the mortgage market rebounds.
If it just rebounds to historical levels, let alone to what will actually happen, which I think will be materially beyond that for a two- to three-year period, given how many mortgages have been done at 7% now the last three years.
Sure. Maybe the last piece here as well too, right? Going more recently, we talked about kind of divesting the title business, simplifying kind of the operating structure of Blend. Could you maybe talk to kind of that evolution into the pure kind of vertical SaaS player and how we got there?
I blame SoftBank for how I got myself into this mess. They actually did not have anything to do with us actually doing it other than they inspired lots of companies in Silicon Valley at the time, 2018, when we did our first add-on where we built our home insurance agency in-house because it was an important add-on. It is an important part of the mortgage. Everybody who gets a mortgage has to have home insurance per Fannie and Freddie guidelines. They were telling everyone, you should build all these operations yourself. It is like, why give up that value? It turns out when you do that now across home insurance and income verification and title insurance, it just creates a lot of complexity. That is what happened with us. It became very complex, not necessarily on each individual business.
Yeah, each individual business was complex, but it's more in aggregate across the institution. Now you're across our company, across our institution. We're trading off between so many different business lines, which requires more investment. It requires more overhead. It had a lot of things that were really good about it, but it also had things that we had to think about internally. It's one of those, would I do it differently in retrospect? Yeah, but at the time, maybe given what the cost of capital was and growth trajectory of these companies where maybe it was the right thing to do.
Now, the last two years, we've been on the simplified Blend trajectory, really the last year where we announced a partnership and transition of our home insurance agency to a partner where we get, it goes back to what I said earlier, we get money while we sleep. They're doing the work to improve the home insurance agency, the home insurance flow, grow the home insurance customer base on our platform, and we just get the benefits. We can be the lean team that's focused on software. We just announced that the biggest, I think the biggest leg of that was title insurance. We just announced that a couple of weeks ago during our earnings that we're in an exclusive process to finalize that transition out at similar to a partnership model where they're going to be working to make us money while we sleep.
We still get the upside of volumes return, and we still get unit economics, and we get to be a software company. I want to build, and especially now in this AI wave, it is critically important because the vertical software companies that can figure that out are going to be massive. The ones that do not will still be good companies, but not the same scale.
Yeah, certainly bigger, better, faster, more profitable. Makes sense. I think we are about at time. Thank you, Nima. We will carry on the conversation for those of you that want to join us in the Burnham A room upstairs. Thank you all very much.
Yeah, thanks. Thanks to them.