Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Blend Update Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. Winnie Ling, Corporate Secretary, you may begin your conference.
Hi, everyone. Before we begin, please note that certain statements made during today's conference call regarding Blend and its operations may be considered forward-looking statements under federal securities laws. The company cautions you that forward-looking statements involve substantial risks and uncertainties, and a number of factors, many of which are beyond the company's control, could cause actual results, events, or circumstances to differ materially from those described in these statements. Please see the risk factors we've identified in our SEC filings. We are not undertaking any commitment to update these statements if conditions change, except as required by law. Please also note that we will not be discussing our results for the fourth quarter and full year twenty twenty-two until our earnings release in March, and we will not be commenting on our twenty twenty-two performance or twenty twenty-three outlook during Q&A or other portions of this call.
I'll now turn the call over to Nima, Co-founder and Head of Blend.
Thank you for joining us. Today, we announce a series of big changes. The upshot is, we're taking decisive action across the company to become even stronger. We're going to be materially leaner than we've ever been before, while not mortgaging our future. We'll continue investment in our Builder platform, and for our existing customers, we'll be laser-focused on getting the benefits of the product enhancements we've made over the past few years. I'll walk through the outcomes of this in a moment. There are three big takeaways from our announcement today. One, we're providing an update and further details on our plans to reduce our cost structure as we prepare Blend to achieve profitability. Two, we're making some key organizational changes that align with that objective and our shift to becoming a platform company.
And three, as part of this, we're addressing not just costs, but also our product suite and corresponding revenue model in ways that enhance our margin profile and accelerate our path to profitability. Internally at Blend, we view these changes as both a response to market realities and also a natural evolution of our strategy. We've spent ten years building a product set and growing our market share, especially with quality financial institutions that are well-positioned for market recovery. The steps we're taking today will strengthen Blend's long-term growth opportunities and our value creation journey. So let me recap what we're doing, add a little context, and then we want to give you a chance to ask questions, given that our Q4 earnings call will not be until March.
One note on that front, one thing we are not discussing today is last year's performance or this year's revenue outlook. Given how early we are in the year, we'll look to address those topics in March. To recap, three key pieces of our announcement. First is our cost structure. We've taken the difficult but very important action of reducing our onshore employee base by an additional 28%. This reduction cuts across every function in the company. We believe this action, combined with other efficiency measures, will reduce our annualized operating expenses and cost of revenue by more than $100 million from the third quarter of 2022 through the end of 2023. Last year, we told you we'd reduce our non-GAAP net operating losses by 50% by the end of 2023. We believe these actions will help us surpass that goal.
Second, we're also realigning company leadership to support the objective we've been building towards for a few years. A transition from a company with several point solutions to a platform company. Blend Builder is the next-generation platform for banks to offer their products. But this transition from a product company to a platform company is not easy. Our first move here was recently adding Dean Klinge r to run all of our go-to-market. He came from two companies that underwent this transition, Snowflake and ServiceNow. Today, we announced the appointment of a new head of finance and administration, Amir Jafari, who spent a number of years at ServiceNow during their transition from a product to a platform. Amir will oversee all key internal operational functions, including finance, legal, security, HR, IT, and others. This will effectively consolidate the roles of Tim Mayopoulos, Marc Greenberg, and Crystal Sumner.
All three will be departing the management team after transition periods, while Tim will remain on the board. I'm so grateful for everything they've done in building Blend. They've all been here for more than four years, and they have helped us get to where we are today, and they've left us with a bright future ahead of us. Third, we're enhancing our go-to-market investment strategies to align our growth squarely with our best market opportunities and doing so in ways that will meaningfully benefit our margins and accelerate our profitability path. Key initiatives here include, first, Blend Builder. You've heard me talk about the configurable software platform that we've invested in over a number of years. It's a composable origination platform that gives us and our customers the power and flexibility to originate all their products seamlessly without writing much, if any, code.
We've already developed products off of the Builder platform, including our Instant Home Equity and deposit products. Opening it up for customers is the next step. Importantly, Builder will also help us diversify our revenue model. On top of our traditional success-based transaction fees, our customers will pay an additional platform fee that comes with the power and flexibility of Blend Builder. This should help drive additional growth, predictability, and incremental margin. When ready for our mortgage customers, Builder will give them additional power and flexibility they've been asking for and help them differentiate in a meaningful way. It's our platform of the future and key to our transition from a point solution company to a platform company. Next, we're also thoughtfully reallocating investment in both R&D and sales with a focus on Blend Builder, while setting the foundation for our next generation mortgage products.
Obviously, mortgage today is our biggest business, so what are we doing there? Well, over the past few years, we've invested in and built a rich portfolio of products, most recently, Loan Officer Toolkit, Blend Income, and Blend Close. Because of the high volatility environment for the past couple of years, many of our customers haven't had the capacity to adopt new functionality at scale. But now they do, and technology is the best way for them to drive efficiency, capture market share, and outgrow their competitors. So as customers invest in positioning for the next upturn, we can also harness the benefits of the backlog of features we built while efficiently reallocating dollars to Blend Builder. Given that we haven't provided a 2023 revenue outlook yet, we understand it's hard to put all of these initiatives into perspective, so let me provide some.
We now believe that our mortgage origination business should turn EBITDA positive in the second half of this year. This is a big step forward for us at a time when volumes are still low. Second, looking at overall Blend platform gross margin, we're improving our product margins and diversifying our revenue streams as we leverage Blend Builder, which has a platform revenue component and a unit revenue component. We had previously said our gross margins for our platform segment in the medium term would be in the mid-60s. Now, we see a path to overall platform gross margins exceeding 70% exiting this year, and a few percentage point higher if you exclude software-enabled title. While it's too early to get specific, what we're sharing here implies very healthy gross margin improvement exiting 2023 from where we'll exit 2022.
Combined with our cost reductions, as we improve our product margin story and begin to generate additional revenue from Builder, we believe we will be in a much better position sooner to capitalize on a broader market recovery once the interest rate and macro picture is clear. To wrap up, we have a lot of work to do. We'll be in a tough operating environment for some time, but we're taking decisive action. We have a clear plan and a very strong management team. We have a great customer base that continues to grow and will continue to expand within those customers, and we have the best platform on the market. In short, we feel confident in our path and our ability to execute. With that, let's open it up to questions.
Thank you. If you would like to ask a question, press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. We will pause for a moment to compile the Q&A roster. Again, as a reminder, if you would like to ask a question, press star, followed by the number one on your telephone keypad. Your first question comes from the line of Michael Ng from Goldman Sachs. Your line is now open.
Hi, good afternoon. Thank you very much for the question. I just had two. First, just on the cost initiatives and the cost savings, is that $100 million of annualized savings a net number, or is it a gross number that may be reinvested to scale the Blend Builder product? And then, second, I was just wondering if you could just provide a little bit more detail around, you know, how you're defining the mortgage origination business versus the Blend platform business, because it seems like a new segmentation, you know, relative to, you know, what we may have been used to hearing about in the past. Thank you very much.
I'll take the first one. This is Nima. Thanks for the question, and then I'll hand it over to Marc for the second question. The $100 million is net, meaning from Q3 2022 until end of 2023, when you look at our overall costs, operating expenses and cost of revenue, we are now expecting greater than $100 million in savings across those two things. And Marc, do you want to take the question about segmentation? And there's no change in segmentation, but Marc, maybe you can give some more detail around that.
Yeah, sure, Nima. Yeah, there's no change in segmentation. We just wanted to make sure it was clear that when we look at mortgage, we're looking at mortgage and mortgage-related add-ons, and that's a profitable business, and how we look at it internally.
Thanks, Nima.
Thanks, Marc.
Again, if you would like to ask a question today, press star, followed by the number one on your telephone keypad. Your next question comes from the line of Ryan Tomasello with KBW. Your line is now open.
Yeah. Hi, everyone. Thanks for taking the questions. Just starting on the cost actions, appreciate the commentary relative to the intermediate-term targets for 2023 that you previously gave. Just curious, you know, beyond that, do you think, do you view these cost actions as incremental, meaning accelerating your prior long-term targets of reaching cash flow break even by the end of 2025, or more of a step in that process to align with the current operating outlook that's affecting the top line?
These cost actions surpass our previously planned cost actions. We're not gonna give outlook on exactly just given that, or we haven't given revenue outlook for this year on exactly when that happens, but this surpasses our prior expectation of costs going forward.
Okay, got it. And then in terms of the go-to-market, and revenue model enhancements, maybe you can discuss how you envision the business mix evolving over the next several years. You mentioned the updated gross margin target for the mortgage business, you know, exceeding the 70% range over the, by the end of this year. But curious, you know, if we should take this commentary as the company, dialing back its exposure to the mortgage market, and if you have a target for your mortgage revenue mix over the next several years. Maybe I'll pause there, and let you guys address that question.
We don't have a target for our mortgage revenue mix, and we're not dialing back on the mortgage industry. The reality is, with Blend Builder, it can support a whole suite of products, every product that a lender or bank may offer, and I also mentioned that the Blend Builder, a lot of what our mortgage customers ask for is the flexibility and power of something like what Blend Builder offers, which is having the ability to differentiate and create custom workflows, drive additional efficiency. So we are not dialing back on the mortgage industry. It's just that we're opening up to new markets faster by focusing our investment around Blend Builder, which we think is a one-of-a-kind platform, and we think it's gonna be a big part of our future going forward.
And just one last one that I can squeeze in before hopping back in the queue. Regarding the Blend Builder platform fees and the recurring revenues that you called out as being higher in incremental margin, do you think that these changes will drive a meaningful near-term increase in the mix of recurring non-success fee-based revenues, or that's still likely to take time as you ramp, you know, the Blend Builder, you know, focus? Thanks.
Sure. And even the—just to be clear, even the Blend Builder platform, think of Blend Builder as a premium enterprise offering for people who want that level of flexibility, who want that, who wanna pay for that level of flexibility and power, an enterprise offering, if you will, and especially for companies who wanna use this across multiple business lines or across within mortgage to truly differentiate and have a custom, totally custom workflows and totally custom, internal and external design. That's the power it brings. So you'll still have a unit-based fee on top of that enterprise platform fee. It's not like we're foregoing the success-based fees. We believe in those. And for the platform fees to take on a material portion of revenue will take time, if that becomes the case.
It won't happen overnight, given that we're just launching this really this year or late last year in earnest.
Thanks. I'll hop back in the queue.
Your next question comes from the line of Joseph Vafi with Canaccord. Your line is now open.
Hey, guys. Good afternoon. Thanks for giving us an update. I know most of this call is focused here on the cost side and, you know, some changes, you know, to pricing and the business model. But any commentary on uptakes or deal activity that you care to provide right now would be great, especially around perhaps signing more larger banks. Thanks a lot, guys.
Yeah, I think the simple way to put it is the mortgage industry, while it's in this turmoil and figuring out where they can make investments and when they can make investments, most of our interest and focus on the new sales side is with banks around the non-mortgage offerings, and we're seeing good interest and traction there, and we'll keep you updated as those things evolve. We're nothing that we can share right now, and then on the mortgage side, making sure our customers make it through this current market environment, where purchase volumes are lower than people expected, refinance volumes are lower than people expected. It's tech platforms like ours that can help make them successful, and so that's what we're gonna do on the customer success side, which is, you know, of course, very, very important to us.
Great. Thanks a lot, Nima.
Your next question comes from the line of Matt Stotler with William Blair. Your line is now open.
Hey there. Thank you for taking the question. Just one from me. Obviously, something you guys have talked about in the past is the approach with the success-based pricing and how attractive that was for customers, you know, by tying your success to their success. What's your sense of the readiness or willingness within your customer base today to add on a platform fee on top of that? And any feedback that you've gotten from customers so far in terms of their acceptance of that additional pricing model would be helpful.
Yeah, sure. And again, the platform fee is a fee for the people who want that additional level of flexibility and power. And so we still believe in the success-based pricing model. And that being said, we have had customers who want that additional level of flexibility and power and want a drag-and-drop platform where they can essentially automate a large part of their business, that they're willing to pay that fee. This platform doesn't exist anywhere else, and so they want to be able to create a modern, digital-first, fairly automated business, so that they can survive and thrive in this environment. So those customers are the ones who are willing to do it, and we realize not everyone's going to want to do that.
So we have different tiers that are essentially focused on making sure that anybody can adopt our product. And then as we go upmarket, and there's more appetite to customize and get that level of flexibility, we have a product offering for them and a product suite for them.
Got it. It's helpful. Thank you.
Your next question again comes from the line of Michael Ng with Goldman Sachs. Your line is now open.
Great. Thank you for the follow-up. I was just wondering if you could talk a little bit more about the Blend gross margin exit rate coming out of 2023 in excess of 70%. You know, is that something that you know, we should think about as improving gradually throughout 2023? Or you know, is this something that is you know, more of a sharp inflection point following some of the cost cuts that you've announced today? Thank you. And is it mostly in the title business? Thank you.
Yeah. It's, it's gradual throughout 2023. It's not mostly in the title business. There are areas of opportunity for us to improve gross margin within our mortgage product, within our consumer banking products, but it is gradual throughout 2023, and it's a, it's a combination of all things.
Thank you.
Your next question comes from the line of Terry Tillman with Truist Securities. Your line is now open.
Hey, good afternoon, gentlemen. Thanks for taking our questions, Nima and Marc. And, Marc, one thing for you, you know, hopefully you get some well-deserved rest, and good luck with whatever you do next. I guess in terms of, I had a handful of questions. One question is, as it relates to the 28% reduction in onshore headcount, I'm assuming you all have opportunities with offshore, and then probably there's cost advantages. Can you talk about maybe offshore headcount increases? And given the takes, the puts and takes of onshore and offshore, you know, what is total headcount gonna look like, when you get done with some of these cost containment efforts? And then I have a couple follow-ups.
Thanks, Terry. I appreciate the comment as well. On the offshore, onshore, a lot of what the offshore was focused on was title. Now we're adding offshore resources across the business and other parts of the business, finance and support and other places, to, in order, yeah, as you said, to capture some of those cost savings. But net-net, it's a reduction in offshore headcount for the time being.
Okay. So total reduction as well when we account for-
Yeah, total reduction as well. Yeah.
Okay. Can you, can you maybe quantify how long?
Let me just add one thing there.
Yes, sir.
Let me just add one thing there. There are certain things we're not offshoring. So our sales reps, for example, our R&D, our engineers, our product managers, you know, those people are staying onshore. And so there, there's some parts of the business that Marc mentioned that we'll offshore for the efficiencies, and we have plans to offshore and some parts that we don't.
Understood. And maybe Nima, for you, I don't know if Dean's on this call, but would love to get a perspective. And it's not really trying to ask you about how fourth quarter is, but there is an ongoing evolution here of the business and the go-to-market from point solutions to platform selling, and that's a journey. Maybe what you've seen so far from Dean and his team in terms of kind of the progress there. And then the second part of that question is: with Blend Builder, do you think in terms of what's gonna be more actionable and monetizable, is, you know, getting new logos in the door, or this just really helps create volume and velocity with installed base selling? And then I actually have one more question after that.
Yeah, sure. Dean's been a great add for the exact reason you mentioned, because this transition from a product to a platform is not a simple one. If companies think of you as a product company, and then suddenly now the CTO and the chief digital officer and the CIO, all these people who historically haven't had as much exposure to you, get exposure, it opens up new possibilities. So a lot of what he's been doing is making sure we're getting in front of all of those constituents, so they can understand the power at their fingertips with something like Blend Builder. It's a really powerful thing, and they start to think about possibilities that we didn't even think about. I've been very impressed with the level and quality of conversations.
helps our customers think big, which is obviously good for them and good for us. And so it becomes something where if we can get that motion and continue to get that motion, something we can do across the market and, and even downmarket, it'll be something very powerful for our customer base. And what was your second question?
The second part of the... I'm terrible, I always have these multipart questions. It's got to be annoying for folks. So the second part of the question was just related to with Blend Builder, you know, and it's probably not a simple answer, but you know, do you think it ends up becoming more actionable in terms of installed base selling and just getting that next use case going? Or do you think it becomes an easier, quicker wedge into new logos with Blend Builder?
Yeah, I mean, there's been a number of customers who have basically said to us or prospects who have basically said to us in the past: We want the level of flexibility that we would have if we built this thing in-house. And we haven't been able to give that to them because there wasn't a platform like Blend Builder out there, where we could say, "Hey, go and customize the UI or the workflows or the internal tools," in the way that Blend Builder allows them to do with writing very little code. So now that we can give them that, it will help us get into logos, or we believe it'll help us get into logos that otherwise would have been very difficult to get.
But also within our internal customer base, that even if we're in one or two lines of business, there are other lines of business who historically they've wanted that level of control and flexibility and the power, candidly, that comes with something like Blend Builder, that we haven't been able to give them for those other lines of business. So it'll, I think it'll help us in both... and I, you know, it's gonna be a progression. You know, it's always harder to get in new logos, and then once they see the success, they want to expand with you, but in this case, we're getting in front of new audiences, even within existing customers, so it feels almost like we're talking to a new logo in some ways when we do that.
Okay. And I promise this is the last question, and thanks for being patient with all my questions. In terms of, if I'm not mistaken, well, and you've got a big focus on your, you know, your largest customers, caring and feeding for them, making sure they get through the downturn. But if I'm not mistaken, a lot of your largest customers, they're not on Blend Builder, for their mortgage origination workflow, if I'm not mistaken. And assuming I'm right with that, when's potentially the timeframe on trying to get or maybe their interest to move to the Blend Builder kind of rails or architecture, and could that be another uplift in margins at some point? Thank you.
We're, you know, candidly, we're not fully ready for that from a product perspective and from a tech perspective yet. There's the mortgage is the most complex product, but it is something that we have in our plans, something we're thinking about. We don't have a timeline set specifically for that yet, but we're getting a lot of interest, and we get people pulling us in that direction from a customer base. They want that level of power and flexibility. And mortgage, you know, being able to differentiate in the new world is going to be very important, and we have a premium way for them to do that without having to build everything from scratch. And so they kind of get best of both worlds once Builder is ready for them.
We're starting sort of exploratory conversations with customers, and when we're ready and we start doing another few, we'll make sure to share those case studies out with you all and with the market, so you all can see that.
Okay, thank you.
Your next question comes from the line of Karl Keirstead with UBS. Your line is now open.
Okay, great. I wanted to ask a question actually unrelated to the press release, but concurrent with your release going out, there was another CNBC article about Wells Fargo shuttering its mortgage business. And just in case we all on the line get questions about that issue tomorrow, Nima, could you just discuss that? How much is that in the rearview mirror versus maybe a degradation in that relationship still to come?
Thanks for that question, Karl. I just pulled up the article from CNBC, and it says, "As part of its retrenchment, Wells Fargo is also shuttering its correspondent business that sells mortgages through third-party companies." And so, you know, the company, again, I'm only reading what I see publicly, but their public strategy around mortgage has been to focus on their existing customers for a while.
Okay.
And they've shared publicly their mortgage numbers, so you can read into that. And a lot of those numbers are, you know, what you might expect when they focus on a certain subsegment of their population. But the correspondent business is not one that we... You know, we're in the sort of retail direct business, which is the business that would support them offering loans to their existing customers.
Okay. So just to be clear, Wells Fargo is still a significant customer of Blend. Obviously, that was a big one at the time of the IPO, but where does that relationship and revenue stream stand now to the extent that you can disclose?
Nothing we can disclose there. We still work with them, but nothing we can disclose in terms of the magnitude of the relationship.
Okay, got it. Thank you. Sorry for taking it slightly off topic.
Your next question again comes from the line of Ryan Tomasello with KBW. Your line is now open.
Yeah, thanks for taking the follow-ups. You know, just thinking about the levers you have to pull from here, need be, should the operating environment worsen, depending on the macro outlook, that's obviously remains very uncertain. Do you think that these cost actions you've announced here are more of like a complete ripping of the Band-Aid, so to speak, or do you think there are still additional levers to potentially pull on the cost side, if necessary, to achieve the profitability, cash flow, breakeven targets you've laid out?
I don't want to say the job's done, in the sense that there's probably always areas where we can continue to be efficient, just like any enterprise. But this is a fairly large material effort because we wanted to get as much of this in place at the same time as we could, and that was the idea. I don't think we're perfectly efficient. We know we have more work to do, and so we'll keep an eye on those things as we go and find more opportunities as we can. But this was meant to be a fairly large change for the exact purpose of trying to minimize future disruptions that might come from that.
Got it. And last one for me. Obviously, these actions are, you know, going to benefit the company's cash flow profile and liquidity profile. But curious how you are thinking, you and the board are thinking about strategic actions in terms of addressing the capital concerns that I think have been top of mind for shareholders. Is that, you know, a conversation that you have with the board currently, to get ahead of these needs, for example, you know, dealing with the Title365 put option, if there's a way to address that or reduce that obligation sooner rather than later? And also on the term loan, you know, whether there's any discussions around negotiating an extension there or other factors we're not considering.
We take our balance sheet very seriously, and we are always in discussions around these things. As solutions or new things come up, we will share them with you, but nothing material to share with you at this time regarding those things.
Got it. Thanks for taking the questions, and congrats on getting these actions behind you.
There are no further questions at this time. Nima Ghamsari, I turn the call back over to you for closing remarks.
Thank you, everyone, for joining. That was probably the most questions we've gotten in a while, and I'm not surprised, because this is one of the most significant changes we've made to the business since we've been public, and one that we're confident in with the path forward. As you could probably see from the actions, we take our cost structure very seriously, and we take our customer base very seriously as well. It's hard to thread the needle, so we're finding a way to thread the needle to support both and ensure that we have a bright future ahead of us. We're committed to this industry. We're committed to the digital transformation that's set to continue. With that, I want to thank you all for joining. Have a great day.
This concludes today's conference call. Thank you for attending. You may now disconnect.