Blend Labs Inc

NYSE:BLND

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Winnie Ling, executive]

Good afternoon, and welcome to Blend's Second Quarter 2024 Earnings Conference Call. My name is Winnie Ling, and I'm the Head of Legal and People for the company. Joining us today are Nima Ghamsari, Co-Founder and Head of Blend; and Amir Jafari, our Head of Finance and Administration. After Nima and Amir deliver their prepared remarks, we'll open up the call for questions, moderated by our Investor Relations lead, Bryan Michaleski. You can find the supplemental slides on our Investor Relations webpage at investors.blend.com.



During the call, we'll refer to certain non-GAAP measures, which are reconciled to GAAP results in today's earnings release and in the appendix to our supplemental slides. Non-GAAP measures are not intended to be a substitute for GAAP results. Also, certain statements made during today's conference call regarding Blend and its operations, in particular, its guidance for the third quarter of 2024 may be considered forward-looking statements under federal securities laws. The company cautions you that forward-looking statements involve substantial risks and uncertainties and a number of factors, many of which are beyond the company's control, could cause actual results, events or circumstances to differ materially from those described in these statements. Please see the risk factors we've identified in our most recent 10-K, 10-Qs and other SEC filings. We are not undertaking any commitment to update these statements if conditions change, except as required by law. With that said, I'll now turn the call over to Nima.

[Nima Ghamsari, executive]

Thank you, Winnie. Good afternoon, everyone. Welcome to our second quarter earnings call. The results we're sharing with you today reflect continued execution against the objectives we set out to achieve late last year, and I'm encouraged that our ongoing commitment to serving our customers through innovation and technology is paying off. We signed a number of important new deals this quarter. We brought more customers live on our platform, and we saw a record high economic value per funded loan, all of which showcase the applicability of our platform to the challenges facing origination broadly today. Before we get in the details of our progress, I want to spend a moment to share our latest perspective on the environment that we're operating in. Since we last spoke, there's been a meaningful shift in the tides in the lending environment across the U.S. and see in the bond market, the bond market seems to be signaling that the Fed's target rate could end the year potentially more than 100 basis points lower than where we've been for the last year.



Mortgage rates hit their lowest level since April 2023 earlier this week. And we're already starting to see this show up in our business through application activity levels. And while I'd say it's too early for us to tell how this is going to convert into fundings or revenue or what lies ahead going forward in mortgage rates because things shift seemingly day to day. It's an encouraging signal as we look into the second half of the year. Even more importantly though, I'm hearing from our customers, the market that there's now a greater sense of urgency to get ready for the new market environment. In particular, while profitability has been low for mortgage companies in recent periods, that's kind of led to an appetite for investment being low, but as they see the light at the end of the tunnel and they see rates coming down on the horizon, they're growing more optimistic. And that means that they're willing to have the conversation about how technology can move them forward.



Shifting away from the macro, our business is ramping up. We had several new customer wins across mortgage and consumer banking, as well as a pipeline that is as strong as it's been for quite some time, particularly strong in mortgage and home equity. As a reminder, our strongest periods of bookings typically in the third and fourth quarters because our customers were mostly banks and credit unions. They budget for the upcoming year in those quarters. And so, over the past 6 months, we've been building a pipeline, we've been seeing it mature in the past few months, and I feel confident that we're well positioned to execute some key partnerships during this important time. On the product front, we continue to be a leader in digital origination of innovation, and we're investing across our platform. Amongst the newer additions to our portfolio are products focused on helping consumers refinance in an automated streamlined way as well as a real-time home equity product, allowing borrowers to quickly tap the equity in their homes as well as new features in our platform to leverage the recent advancements in AI.



And this is timely because with so much money on untapped home equity and more loans becoming in the money as rates come down, we're confident these products will be at the forefront of helping people access this enormous opportunity. We also made a lot of progress towards our fourth quarter non-GAAP operating profitability goal, which Amir will talk a little bit about later in the work we've done in that area and how we're continuing to pace towards that goal. But before we get to that, let me share some more details on these highlights, starting with our platform. When we launched Blend Builder, we intended to create an ecosystem in which Blend, our customers and our partners could all innovate on a single platform. And we already have capabilities built into the platform that span credit bureaus, income verification, automated underwriting, digital closing, already integrating the platform. And every quarter, we're adding to this list, so I want to start highlighting some of the things that we're doing.



This quarter, we're excited to announce some new functionality in the platform, starting with new account funding. So, for digital account opening, debit card funding is a critical piece of that. And we launched a new partnership with Astra. This unlocks a better deposit funding experience without the friction and cost it typically takes both for consumers, the friction to go through that process and the cost it typically takes for a bank or credit union to turn on that functionality. And so, in the end, now our customers can access this integration by being on the platform and offer more options to end consumers to be able to drive deposits to their institution. You'll hear about how Langley Federal Credit Union is already benefiting from this later. We're also incorporating some new advancements with AI on our platform. We've integrated some of the latest large language models and are applying them to some very practical use workflows, which is very important to me for it to be a very practical use case. And given the rate of improvement AI, we're now in a position to leverage it to automatically, for example, process documents provided during the workflows. There are still documents collected during most of the lending and origination workflows.



And so, for example, if you need to verify a birth certificate to open a new account, our platform can in real-time read and confirm the birth certificate name and date maps the data provided by the consumer. And if there's an issue or a difference, prompt the consumer to make a correction if there isn't a match. And the simple examples like this are important because they happen all the time, but it also illustrates the ability for AI to streamline things that people otherwise wouldn't have a very cheap economical real-time way to solve. And this application of AI is still in early stage and improving area, but we expect we can apply it broadly to all sorts of documents that come in the process to simplify and lower the cost of lending and account opening, and that could be spanning from income documentation, bank statements or other types of things that are needed throughout the process. We also bring together these capabilities, the income verification, the assets, the AI, all the things that I mentioned earlier for our customers to create end-to-end solutions that apply to the market more broadly. Our deposit account solution and our consumer loan solutions are great examples of this. And we've been expanding our product suite as time goes on.



And 2 new areas that I'm excited to share with you today are: one, around a next-generation refinance flow and the second is a next-generation home equity flow. In particular, I'll talk about the refinance flow because it's so timely. It's important because as rates look to come down in an ideal world, a consumer could see the rates come down, have a few taps to get approved, lock in their new rate and savings and then close that institution in a matter of a week or two. Unfortunately, today, it's a very arduous process that takes weeks to complete for the consumer, if not, in some cases, months and thousands of dollars in cost, and requires quite a bit of elbow grease from the institution that's offering that loan. Credit reports have to be reviewed; income has to be verified. The filing needs to be underwritten. Our new flow takes a lot of the capabilities that I talked about earlier to create a brand-new flow around refinancing these loans in a very automated, streamlined way to offer a great experience for consumers, quick savings and a much lower cost, faster way for the institution to produce those refinance loans.



And while this is still in the early stages, we already have one customer data, and we have a couple of other projects that we're starting with us to deploy. And as you can imagine, it has broad interest from the rest of our customer base. And it gets an example of something where everyone wins with technological innovation. Consumers get help with their finances, which they might need in this environment, lenders get to be able to serve a greater number of them and at a lower cost. And if solutions like this can be broadly deployed in the market, which is obviously our goal, more people will lower their payments and lenders are be able to serve them, which is more profitable for them and consumers will be more financially well off.



Citing some of our business highlights for the quarter, our continued focus on delivering leading mortgage capabilities and helping us land new customers and expand with our renewing customers. Last month, Horizon Bank, an $8 billion financial institution based in the Midwest, selected Blend as our mortgage partner, Horizon was looking for a technology provider with highly automated workflows and advanced loan officer tools that could help them significantly improve operational efficiency and loan officer productivity, all while delivering a great consumer experience. It was a pretty competitive process and we're excited Horizon chose to power their consumers' home buying journey. We also created another competitive takeaway with a large regional bank, which it was a customer coming out for renewal, and they were frustrated with their existing technology. They wanted a solution that was more than just an application intake tool and had the automation in place. So, loan officer didn't have to spend a lot of time manually inputting data into the loan origination system or chasing down documents. They are impressed with our integrations into these systems and the automation is built into our origination flows, including, for example, the automatic generation delivery of conditions and documents to borrowers, we're able to get this customer live in only a few weeks. And since then, they've already added home equity lending to their mix.



Before I turn to financial holds mortgage, I want to also talk about some investments we made to our product and specifically around the needs of independent mortgage banks who have, in particular, been hurt a lot in this environment. And so, we've taken a refreshed look at our product strategy within the customer segment to make sure we remain ahead of the curve. And that's resulted in a handful of new features in development that we're making good progress on. And I'll share a couple of them. The first relates to loan officer and branch configurability improvements. When you talk about top performing loan officers, many of them prefer to manage their own workflows rather than be constrained by our very broad standard. So, for example, a loan officer might prefer to have a conversation before they call a consumer's credit. While others may prioritize getting that consumer to get as much done before they get on the phone with them, so they can have a more detailed conversation. And so, we want to help loan officers have more autonomy on how they manage those workflows and help them manage their costs and their sales motion. And so, as a result, we're investing in the ability for loan officers to be able to configure their bond experience to better fit the preferences of the workflow.



The second upgrade around the customer rolling out for these independent mortgage banks is a more automated disclosures flow, which is particularly important around the refinance experience because the automation is required. So, we're working on the ability to automatically generate the documents that loan officers are required to provide to borrowers such as a loan estimate and put in place the guardrails such that this disclosure delivered ideally in real-time, accurately in a regulatory compliant way. These are just 2 of the many upgrades in our development pipeline to empower loan officers and independent mortgage banks to provide a more tailored experience to their customers. And given the potential for an uptick in volumes based on what we're seeing with lower rates coming in, the timing couldn't be better.



Now, turning to some financial highlights. Our economic value per funded loan increased by nearly $5 this quarter. Customers are recognizing the benefit of applying our technology throughout the home buying process, and we're delivering more value as adoption and utilization of our attached products continue to rise. So, for example, Blend Close, we're seeing more customers adopt this solution and deploy it more broadly across their loan books. One particular area of strength that I'm excited about, and we're seeing is within our remote online notarization solution, which offers borrowers the flexibility to sign all their real estate documents with an online notary through electronic signatures from the comfort of their home, making the whole mortgage loan application process faster, more secure and fully digital from start to finish.



Our customers are already completing hundreds of these high-value closing each month. While this may not seem like a lot given the scale of our business and the scale of the mortgage industry, we're just getting started, and we expect these volumes to ramp up as the solution gets rolled to more eligible loans and more customers. This is a big deal both for consumers who want that digital closing experience but also for us because the price per unit on that is even greater than our mortgage software price, and it's something that our customers love as well because it saves them time. And some of the early data we received that shows that has been incredible. Our solution has taken defect rates on signatures down to nearly 0 in a couple of the cases. It saved nearly 1.5 days off of the typical origination time. And so, the solution is transformative with thesis highlighting why we think digital first and standardizing around that for closings in the industry is very important. And data points such as these add momentum to our sales strategy and service proof points that the power of the technology can drive better business results.



Our customers trust that we'll be able to continue to innovate in ways that serve their bottom line and are increasingly coming back to us for more ways to apply our latest technology to their current problems. One example of this is one of our oldest and largest anchor customers on our mortgage solution who's already expressed interest in embedding the digital closings and their mortgage experience ahead of their renewal next year. And that momentum exemplifies our growing confidence in continuing to expand the value we both deliver and earn on every loan that Blend touches. Further on this point, it was just last year that we shared our expectation to achieve an economic value per funded loan of $90 sometime in 2024. With the traction we've seen year-to-date, we feel like this achievement is behind us already. And as we've heard more from our customers about their latest plans to deploy our add-on solutions in more meaningful ways, it made sense to reset our expectations for this growth avenue. Our latest outlook is that the economic value per funded loan will exceed $100 exiting 2024 a nearly $10 improvement in just a year's time. We remain focused on enhancing these products in a way that simplifies their deployments as well as breaking down limitations to make as many loans eligible to utilize these accretive solutions.



Turning over to Consumer Banking. Q2 marks the first time this business generated $8 million of revenue in the quarter, representing 37% year-over-year growth. And we've shared our near-term expectations for this business, a $50 million run rate and 35% compounded annual growth from 2024 to 2026. We're now pacing ahead of that 35% growth rate, a testament to the speed and execution of our implementation teams who have been able to get customers up and running quickly as well as our go-to-market teams who have done a great job of sharing our consumer banking value proposition to new and existing customers. Last week, we shared some compelling statistics on the recent implementation of Langley Federal Credit Union, one of the top 100 largest credit unions in the United States with more than 5 billion assets. So, Langley selected Blend's deposit account opening solution. And since going live in March, they've reported significant improvements across several key areas. Starting with, they've seen a staggering 37% increase in new digital account openings since going live with Blend. And July representing the highest month on record for digital account openings ever for them.



On the back end, the rate at which they approved applications that come in required any contact center intervention decreased from 32% of applications to just 7% of applications after implementing Blend. The combination of driving new business while also improving operational efficiency creates a unique competitive edge for our customers. And this is why many of our customers who originally launched with 1 or 2 products on Blend end up expanding with us over time. And you can see that quantified in our pipeline. Coming to the second half of the year, we have about 40 cross-sell opportunities in our pipeline across our full suite of consumer making products. For years, there's been this trend of consumers wanting to have a simple single interface that they can understand everything the bank or credit union can do for them. And we've talked about this for some time, but we knew it would take time to evolve, which makes sense when you're an institution of billions of dollars in assets and numerous product lines, operating in different systems and different silos, it does take time. It does feel like we have recent inflection point. The signs are all there. We have some large deals with very large financial institutions like Navy Federal Credit Union and Citizens Bank. We have a growing interest from large credit unions for us to power their entire platform, and we have a pipeline of cross-sell that's accelerating growth. These are all signs that we've turned the corner and are making meaningful progress towards the vision of frictionless or encompassing banking.



Shifting gears to home equity lending. Home equity makes up a large portion of our current cross-sell opportunities. And these prospects are often ones that have seen firsthand, how much of a differentiated Blend solutions are in other areas, and they're ready to expand the partnership into this area of the business, particularly given the macro trend around how much equity has been built up in homes. Consumers have benefited from that home price appreciation over the past few years, and they may tune and find themselves owning a large amount of equity in homes that as the rate environment comes down, they can tap in a very low-rate way. And so, it may be common again to start of home remodeling project or renovation project or pay down some more expensive debt that they have that they can consolidate into one place. And so, as a result, it's become a very natural area for our customers to want to serve their consumers in this environment. Before I hand off to Amir that will help translate this into our quarter and the results we've seen in our upcoming guidance, let me take a moment to reiterate some of the key areas of momentum that I see for Blend in the second half of the year.



To start, the data we observed in just the past week tells we may be on the cusp of a shift in the lending landscape. It's an encouraging signal that the activity that underpins our business is nearing return to growth. Even more importantly, our business could be poised to benefit. We have more customers. We have a lot of loans going through the system. We have good market share. And every incremental one that we do, we're creating a lot more value and we're getting a lot more revenue from it. And so, the work we've done to optimize our expense structure on top of that will just give us a lot of financial leverage as the overall macro rebounds. Second, our investment in our platform is maturing at just the right moment. modern experiences such as the AI integrations or the real-time home equity experience or the refinance flow that creates much faster and much simpler refinance for consumers who need it. This has all been work that's come together after years of working on this platform from the ground up. This new evolution of the way that we build our technology is resonating and our customers are bringing more ideas of the applicability of our solution to their own businesses and new and compelling ways. And we haven't let up on our community to innovate in the ways that serve each of our various customer segments.



One of the great aspects of well-built technology that can be flexible enough to solve some of the broadest and most unique challenges facing the industry we serve. In RIs, there are almost no limits to the applicability of our solution, and we're continuing to evolve to the needs of our customer base that result in more value for them and us. And lastly, I'm excited to share with you that our pipeline opportunities that we just can apply to is as healthy as I've seen it for a long time. And I think a lot of that has to do with the macro as well as the maturation of our solutions. Our sales team, including myself, we're busy on the road, listing the customers, the growing wish lists from prospects as well as even existing customers who are using our products. And it's clear that Blend is top of mind and a top choice for them to deliver best-in-class modern origination experiences. And as more of our focus -- our customers, focus to what's ahead, our phones are staying incredibly busy. I look forward to sharing some of the new innovative partnerships that we're set to establish in the next few months with you all very soon. And with that, let me turn over to Amir to discuss our second quarter results. Amir, over to you.

[Amir Jafari, executive]

Thank you, Nima, and good afternoon, everyone. I'm pleased to be joining you today to discuss our financial results for the second quarter. Our second quarter marks another period of strong execution. We welcome several new customers to our platform. We increased the pace of growth in consumer banking. We've reached a new high for our economic value per funded loan, and we took one step closer to reaching our goal of fourth quarter non-GAAP operating profitability. Before I jump into the results, let me just remind you that unless otherwise stated, all results are non-GAAP. Total company revenues in the second quarter were $40.5 million, ahead of the midpoint and near the high-end of our guidance. We reported platform revenue of $28.7 million, which was also ahead of the midpoint of our guidance. Our mortgage suite revenue was $18.5 million, in line with our expectations for a decrease in aggregate industry originations in the quarter. As Nima shared, we brought in a number of new mortgage customers this year and put together a strong pipeline to fuel growth in the future quarters.



We do believe aggregate industry originations will likely be up in the third quarter as compared to Q2. And if the market is right and predicting multiple rate cuts this year, the volume increase should persist into next year, assuming affordability increases for homebuyers. Turning to another highlight. Our mortgage suite economic value for funded loan rose by more than $5 compared to last quarter and by approximately $11 compared to the same period last year, reaching $97. The step-up in our per funded loan rates continue to be primarily driven by higher attach rates of our value accretive add-on products. Shifting to the other key part of our platform. Consumer banking products continue to drive expansion of our footprint with customers with revenue for those products growing 37% year-over-year to a total of $8 million. Our pace of growth is accelerating as we launch new deployments that add incremental platform fees, as well as more adoption of our full suite of solutions. With 37% year-over-year growth, just 2 quarters into the 3-year guidance we provided at our Investor Day, we are on the right track to exceed the 35% CAGR target.



We also generated $2.2 million of professional services revenue, which was consistent with the same period last year. We reported title revenue of $11.8 million, exceeding the high-end of our guidance range. Moving on to gross profit. Total company non-GAAP gross profit was $21.8 million. Our non-GAAP Blend platform segment gross margins were 71% compared with 74% a year prior. Our software, we reported non-GAAP software gross margins of 79% compared with 81% a year prior. Our non-GAAP title margins came in at 11% for the second quarter, which was consistent with the same period last year. Non-GAAP operating costs for the second quarter totaled $27.4 million compared with $41.6 million in the previous year. And as we invest in our platform and go-to-market functions, we continue to boost efficiency to balance out our investments. This is also leading to a business that is more durable and resilient than ever.



Our non-GAAP loss from operations was $5.6 million in Q2, coming in well ahead of the high end of our guidance range. We expect more improvement in Q3 as we pace towards our target of non-GAAP operating profitability in Q4. For the second quarter, our remaining performance obligations landed at $87.4 million, which represents an increase of $34.2 million compared to the second quarter of 2023 when RPO was $53.2 million. This marks the fifth consecutive quarter where our RPO balance increased year-over-year, with Q2 growing by 64% year-over-year. RPO in the second quarter decreased by $5.6 million compared to Q1 of 2024, given the pace of go-live to ramp for our customers. Now that we're in the second half of the year, we're starting to negotiate a number of renewals and new deals, which should bring us back to quarterly growth, along with year-over-year outperformance. Free cash flow for the quarter was negative $8.5 million, which compares to negative $34.6 million in the same quarter last year. Free cash flow for the quarter did include approximately 1 months' worth of interest expense from our term loan, which we paid down in full at the end of April with the capital received from a valued investment. Our unlevered free cash flow, which includes -- which excludes the impact of interest expense, was negative $6.9 million in the second quarter. Despite the decrease in Q2, the momentum that we've created in pushing towards positive free cash flow isn't slowing down.



Many of our customers time their renewals at the end of their fiscal year. So, Q1 seasonally tends to have a larger influx of prepayment cash inflows. The company is debt-free, and we're operating at a high level of efficiency. The expectation is that we'll still generate positive quarterly cash flow sometime shortly after reaching non-GAAP operating profitability. Beyond this, we are also seeing additional leverage from our partnership with Haveli. We ended the quarter with approximately $120 million of cash, cash equivalents, marketable securities, inclusive of restricted cash. In light of the visibility that we have towards profitable growth, combined with our strong balance sheet and significantly reduced cash needs, we are excited to share that our Board has authorized our first share repurchase program of up to $25 million. We continue to believe that our current valuation does not properly reflect the market opportunity, our comprehensive product offerings and the expense discipline that we have instilled in our business. Additionally, this decision was contemplated in conjunction with all of the planned investments we are making into the next generation of our origination technology that Nima shared with you.



We are confident our balance sheet is in a position of strength to achieve our current set of investment objectives and provide shareholder return. Lastly, let me move on to our outlook for the third quarter of 2024. We expect platform revenue to be between $28 million and $31 million in Q3 of 2024. We expect our title business revenue to be between $11.5 million and $12.5 million. Our total company revenue outlook is expected to be $39.5 million and $43.5 million for Q3. Our guidance is based on an internal assessment of customer level growth as well as our own outlook of Q3 origination activity based on application volume observed to date through the customer base. Our total non-GAAP net operating loss is expected to be between $4 million and $7 million for Q3, with the midpoint representing a 65% improvement year-over-year. And with that, I thank you again for joining. Bryan, we're now ready for questions.

[Bryan Michaleski, executive]

Thank you, Nima, Amir and Winnie for your remarks. With that, we'll now ship to the Q&A portion of the call. [Operator Instructions]. Our first question comes from Dylan Becker with William Blair. Dylan, you can mute and please go ahead.

[Dylan Becker, analyst]

Gentlemen, nice job here. Maybe Nima, starting for you. Obviously, some recent news on the rate dynamic here throughout the balance of the year. I wonder, obviously, that has an impact on affordability, but supply has been a big constraint as well. You kind of called out some of the home equity piece. But can we start to shift away from some of that lock in that incentivizes more sellers into the market here, kind of getting a push from both the supply side and the demand side to help fuel some of that recovery.

[Nima Ghamsari, executive]

Yes. It's a good question, Dylan. Thanks for the question. I think it's interesting -- everyone understands that refinance are very interest rate-sensitive because you have to be in the money unless you're taking cash out, but you have to be in the money to refinance otherwise. But actually, purchase tends to be relatively sensitive to interest rates as well. So, I think it will unlock new supply, new demand. And I also think the general macro that we're seeing where consumers have sort of been waiting for a long time. We might start to see some of those who felt locked in when rates start having a 5 handle on them. Start feel like it's, okay, it's going to move and think rates are moving in the right direction. So, I can move homes and refinance that new home that I buy in a year or 2 in the for handle and not feel like it's a big difference because, yes, people have been waiting on the sidelines for a long time and only wait so long.

[Dylan Becker, analyst]

Sure. Okay. That makes perfect sense. And maybe obviously, great to see the consumer strength as well here and what sounds like healthy pipeline commentary. I know it's a bit of an earlier initiative too, but it sounds like there's been some notable go-lives. So, kind of help us get a sense of the referenceability, some of the value that's been tied and realized from some of those early customers that's helping kind of fuel the later-stage pipeline activity that seems to be growing pretty nicely?

[Nima Ghamsari, executive]

Yes. Actually, I love the idea of reference ability as a key tenant because it's the same word we use internally. We want every customer to be referenceable. We want them to be that happy to get the solution. And when we did the Langley Federal Credit Unit case study, I was, frankly, even surprised by how good it turned out. Obviously, we believe in our solutions, but the numbers were so good, the 37% growth in accounts going down from 32% requiring contact center intervention now to 7%. That's almost 3 quarters drop, maybe more than 3 quarter drop in how many contact interventions they needed. So, things like that become really critical. Actually, another anecdote from a customer today that I saw that their -- they had a new feature that they rolled out and almost doubled the number of people who are getting to the flow without that contact center intervention. It was a different customer.



And then so I think those kinds of things that we do because it's building more capabilities into our platform, every future product that we offer, not even for that same product, not just for deposit account opening, but every future product we build or capability rollout is going to have that benefit built into it. So, it becomes this sort of self-fulfilling prophecy over time if we can keep executing on making these flows better and having a good true north for our customers.

[Bryan Michaleski, executive]

Our next question comes from Joe Vafi with Canaccord Genuity. Joe?

[Joseph Vafi, analyst]

Guys, good afternoon, and really nice to see really nice progress in the business. I guess, Nima following up when -- on the commentary that customers kind of now know it's time to get ready for a rebound. Can they get ready quickly here? Or is it going to take them a whole another budget cycle to get ready if they want to be in a position to, I guess, be positioned for a rebound in mortgage volumes. And then I'll have a quick follow-up.

[Nima Ghamsari, executive]

Yes. It's a good -- I mean, another great question. One, I think it is something where they see it as a critical part of their business going forward, being able to help customers if they want to lower their monthly payments, if the macro on mortgage does shift. And so, we are seeing some customers who were kind of standing on the sidelines in terms of deploying new technology. They suddenly came to the table in the last month or 2, wanting to move really quickly. And by really quickly, I mean, abnormally quickly for organizations of their size. And so, it turns out that these organizations can move quickly if it's important enough at the very top of the house. Now, that won't be true to all of them, but we're definitely seeing it a sizable institution as well as smaller, more nimble ones. And so, I think it just sort of goes to show how important this is going to become for their long-term ability to serve their customers, getting something in place.



And we're excited that we can build a solution like that. Having a solution where a consumer can go through and get through the process of refinancing a loan and locking their rate mostly in the first few minutes, I mean, it's pretty -- it's going to be pretty -- should it all work out how we hope and how we think it's going to work out. It should be pretty powerful for the market and help lots of consumers, hopefully, millions of consumers long-term.

[Joseph Vafi, analyst]

Sure. That's pretty exciting. And then kind of on that same note, I think you called the refinance product, I think, refinance flow or something like that. And I know you mentioned that you were in beta with one customer there. Just wondering if there's a time line on getting that out to general production because it does feel like it's a great product. And I definitely know that sometimes the refinance process is even more arduous than a purchase mortgage. So, just wanted to get a little more color on that next-generation refinance product.

[Nima Ghamsari, executive]

Yes. And I mean, it's the same question a lot of our customers are asking us right now, Joe. They're sort of a growing interest list, and there's only so much capacity we can handle at once to roll that out. But we have -- like I said, we have the next 2 already lined up. I mean, we plan to make this available as soon as we can because we realize the timeliness of it, we just want to be able to do it in a really, let's call it, highly impactful way. I'll say there's 2 things working in our favor in terms of be it in this case. One is we're using existing capabilities in our platform that have already existed for a long-time. Think about the things you need to do to do a refinance, you need to run credit, you need to check the new price of the loan, what the new interest rate will be and you compare your old payments to your new one, you need to calculate the fees, bake in those fees to make sure that, that is encapsulated in the loan capture.



You need to do income verification in some cases, an asset verification in some cases, if you're on underwriting steps, if it generates documents and then get what's called intent to proceed in order to lock the rate. Those steps, those have already existed in our platform. It's really about how we bring it together in a seamless way. I mean, it's unique to have all those steps in a platform that a consumer accesses, but how we bring it together is very important. And so, we already -- it's bringing together something we've already been doing for about 8 months. And so, we feel good about the state of our product. And the reason I think we'll be able to roll out our customers effectively is that it's going to reuse a lot of the same integrations to their middle and back-office systems that we already have in place with them. So, I think we'll benefit from those things. I would say, in aggregate, it's too soon to tell how long it will take for us to get broad adoption in the market with something like this because sometimes these are as regulated institutions, they want to take extra measures to make sure they do the right things. But we're going to move as fast as seemingly possible.

[Bryan Michaleski, executive]

Our next question comes from Ryan Tomasello with KBW.

[Ryan Tomasello, analyst]

In terms of the add-on products and mortgage, you've called out nice traction with the closed solution Nima. It'd be helpful if you could quantify where those attach rates are today, where you think they can go? And just generally, what you find is the biggest hurdle to overcome for getting customers to adopt that solution? And then as a follow-up on the same topic, income verification seems like a pretty interesting opportunity for the company given the competitive dynamics in that space with some of the higher cost incumbents. Have you seen any notable traction in that product? And just generally, how are you thinking about that opportunity for income verification?

[Nima Ghamsari, executive]

Yes. We don't share specific attach rates on either of these 2 products. I can say we've done great traction in the Blend closed product, but we still have a lot of white space ahead of us. There's a lot of opportunity still within our current customer base. And we also are seeing -- actually, it's interesting because we see a lot of benefit for our customers to doing digital close, I called some of this out during the call, where digital closings can help them close loans faster, have less errors on the loan files and the signature documents, things like that. And so, it ends up being a win-win. It just sometimes takes time to answer a question, why is it not 100% today? It seems obvious that 100% of people want to -- not have to -- even if they go in person, not have to go and sign on 50 different pieces of paper, it seems pretty natural not want to have that as part of your process.



It just takes time and there's a lot of myth in this industry around digital closing. I even hear today from some of our customers well, there's a lot of states where you can't do digital closings. And that's not entirely true. I mean, there are certain parts of the country and certain counties even that make it more difficult than others. But those are very rare. It's a small, call it, less than 10% or around 10% of the volume in the country that's not eligible for a fully digital closing. And in which case, you can even do a hybrid digital closing, which is an offering we have to do the note digitally, but do the D electronically. And so, the short answer is we have a good attach rate, but a lot of runways ahead of us to close, and we're excited to keep building on that solution. And we want to make that the market standard for how all the closings of the mortgage industry happen. On the income piece, I am excited about the income piece. The interest thing about the income piece is it's not about one vendor or one solution. If you're a customer of ours, what you want is a provider that can bring together all those solutions and all the necessary pieces so that a consumer -- you can help them with a consumer who is self-employed. You can help them with a consumer who's traditional payroll provider, you can help them with a consumer who wants to upload their documents and you want to read the data from the documents using AI in real-time.



And so, I think that Blend will bring to that space is the best-in-class orchestration of what I'll call the broader income set of things that have to happen in the broader income waterfall. I think that's the real opportunity for Blend long-term. But we're definitely seeing interest from our customers. They want to find a way to make income verification, automated and faster and cheaper. And so, I won't share specific numbers around that. It's near another area of business we find very interesting.

[Ryan Tomasello, analyst]

And just a follow-up for Amir. It sounds like this is the case, but just to clarify, the 4Q operating income profitability for the fourth quarter, that's still something you think is achievable? And I guess, given 4Q is typically, has negative seasonality. Maybe that's more muted this year in light of rate cuts. But just help us understand the bridge from the second quarter that gets you there or the leverage you have to pull on the expense side, better remaining? And then also, if you'd expect operating income to be sustainably profitable after that fourth quarter inflection?

[Amir Jafari, executive]

Thanks for the question, Ryan. Yes, I think, first and foremost, just to confirm for everybody, although we've stated this, yes, we're definitely confirming our path to breakeven in Q4, and we still have line of sight to that. So, we feel great, including just how we're stepping with regards to our operating expenses, and ultimately, what you saw in our net operating loss results. Second, you're right, Q4 definitely has an aspect of negative seasonality and putting aside maybe what you're seeing from the overall kind of movements in the news and in the macro, it will still take a little bit of time. And so, for us to be able to achieve this whole notion of being breakeven in Q4, it's important to us because it is at a seasonally low point, which is, I think, an important point of emphasis to us. That takes us to maybe also wear your head, which is, is this going to be something sustainable? And so, although we haven't given forward guidance outside of Q4, our intentions are quite consistent with what we shared at our Investor Day, which is in the foreseeable future, we will shift to becoming much more free cash flow oriented in how we speak.



And as I stated on this earnings call, we do have line of sight and our plans are to be able to move to just that in the foreseeable future. And then lastly, this notion of just kind of where do we have levers. Our levers are not just expenses maybe the way that we've looked at them historically. The way that we operate today, again, through the lens of operational excellence is to dissect every process to ensure that it's just operating not just with the velocity, but in terms of its maximum efficiency. And Builder, by the way, is one aspect that's helping us kind of find more and more ways to be efficient. And we're kind of using the momentum, not necessarily Builder directly, but across the rest of the organization to do just that, you're seeing a trickle to what we shared in results this quarter.

[Bryan Michaleski, executive]

Our next question comes from David Unger with Wells Fargo.

[David Unger, analyst]

So, just building on the breakeven comments, as you work towards achieving profitable free cash flow in the somewhat near future with the support of a strategic partner, how should we think about the balance between improving cash flow versus investing for growth, especially as you think through buying back stock?

[Amir Jafari, executive]

David, I'd say the best answer for us is just -- it's been what we've been consistently saying around the following notions. One, we plan to remain extremely balanced. And by that, I mean, we never kind of let this pendulum swing too far when there was a negative sentiment nor will we let it swing too far when maybe things are happening quite quickly in the short-term. The reason that we stay balanced is because, again, the mindset that we've created in Phase 2 of Blend is everything is very ROI-centric. And so, we have a high level of conviction in some of the initiatives. A few of them you've heard Nima speak to, our next-gen refi flows, elements of home equity as an example. And so, that conviction exists in either scenario, and it's part of kind of this balanced approach followed by ROI. And then lastly, I'd take just a notion of free cash flow. The approach that we've taken is -- as we build up the customer base and as you hear the sentiment of what we're sharing with you, some of what you can see in things like RPO, over time, as we continue to land more and more of these customers and drive our renewals, you'll see that build, which is what is going to get us to this path to free cash flow positive.

[Nima Ghamsari, executive]

Maybe I'll just add a quick note there, David, too. On one of the prior calls, I think it was 3 or 4 quarters ago, I talked about innovation per dollar going up as it relates to building new things because we have our own platform that we built from the ground up, and we spend a lot of time and money doing. And that platform is very powerful. It has so many built-in capabilities. Those capabilities are like building -- they are like LEGO blocks, so you can drag and drop for different flows. And just to give you a very practical example, this next-gen refi flow is the most integrated, most complex products. We probably -- I have to think through all the examples of things we've built, but that we've ever had to build, and we built it for a fraction of what we built our first mortgage product, a small fraction. And it's because when you like we've invested so much in this underlying platform that allows us to innovate at extremely high level of efficiency and almost like allow us to innovate too fast for the market to even, in some cases, absorb that innovation. And so, it's a little bit on us for making sure that we continue to innovate. But I want to make that clear. We have our foot to the gas and innovation, and we're still managing to hit these great operating loss targets and hopefully operating profit here soon, like we've guided to targets and a longer-term free cash flow positivity despite all those things. So, I'm pretty excited about our path forward and the innovation side.

[David Unger, analyst]

I Very much appreciate all the detail. And just a follow-up for me. So, in terms of the 3Q guide, sorry if I missed this, so it's based off your internal forecast, but I'm just wondering the timing of when you came up with that guide, given how much the market's moved in the past couple of weeks.

[Amir Jafari, executive]

The movements that you're seeing for the last 2 weeks per se, David, they're not necessarily in those numbers. It takes time as you think about the conclusion of a funded loan to go through a start and submit. And so, I'd say to the gist of your question, it's -- we are seeing some early indicators that are very positive, as Nimo alluded to, but our guidance was built just off of what we're seeing with our customers, that was really built off before what you're seeing in the last few weeks.

[Bryan Michaleski, executive]

Seeing no further questions. This concludes today's earnings call. Thank you all for joining. Have a nice rest of your day.