Blend Labs Inc (BLND) 2022 Q4 法說會逐字稿

Good afternoon, and welcome to Blend's Fourth Quarter 2022 Earnings Conference Call. My name is Winnie Ling, and I'm Head of Legal for the company. Leading today's call are Nima Ghamsari, Co-Founder and Head of Blend; and Amir Jafari, our new incoming Head of Finance and Administration. Our outgoing Head of Finance, Marc Greenberg, is also with us. After Nima and Amir deliver their prepared remarks, our team will take questions. You can find the supplemental slides on our Investor Relations web page at investor.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 2023, 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're not undertaking any commitment to update these statements if conditions change, except as required by law.

I will now turn the call over to Nima.

Thank you, Winnie. 2022 was an extremely challenging year for our industry, as we continued to see a sharp uptick in mortgage rates and margin compression for our customers. We at Blend were not immune to the industry volume declines, which naturally impacted our financial performance. While the results are disappointing in the absolute sense, our total revenue was within the original guidance we laid out last March, when no one knew quite out historic the mortgage origination downturn would be.

It's important to note that despite these challenges, we continued to outperform the broader mortgage origination market in 2022, which points to the significant value we deliver through any part of the market cycle. The technology that powered our customers and drove productivity during the high-volume pandemic boom is the same technology that is helping our customers improve their speed, efficiency and ultimately, their margins today.

Outside of mortgage, we've also continued to see traction with our Builder-enabled consumer banking products, which grew by mid-double digits in Q4 versus the same period last year. I'm also proud to share that in Q4 2022, Credit One Bank signed deposit accounts that takes advantage of the drag-and-drop capabilities of our Builder platform.

We're also pleased to expand our relationship with Compeer Financial in Q4 2022, who is rolling out with our Builder-enabled personal loans, credit cards and specialty products. We believe the power of our Builder platform can accelerate this growth rate in 2023 as we focus on putting the power of composable origination in the hands of our customers. Even with all this momentum, we remain realistic about the challenging and uncertain macro environment, and you'll hear us talk more about some of our ongoing cost management efforts, which are intended to align our cost structure with our outlook.

Before diving into that topic, as well as where we are focused in 2023, I want to welcome Amir Jafari to the team. He's off to a flying start since joining earlier in the quarter and will play a big role in helping orchestrate Blend's continued evolution into a platform company as we advance our strategy around the Builder platform.

I also want to thank Marc Greenberg, who is here with us today, as well as Tim Mayopoulos, who stepped down from his management role a few weeks early to assist with the FDIC's recent efforts to protect insured depositors at Silicon Valley Bank. Tim will remain on Blend's board. This has been a real team transition, and it's been great to see everyone so invested in our success.

Lastly, we recognize the events of the past week have had significant impact on our industry, and we will continue to monitor the situation. While this is obviously a unique and dynamic time for the industry, we're staying laser-focused on what's in our control, which is to continue supporting our customers and executing our business strategy.

So that brings us to 2023 and how we're executing. This year, we're focused on three goals that I discussed in January, and I want to talk briefly about the early momentum we're seeing with each. First, we're focused on accelerating our path to profitability by reducing our cost structure. I'm pleased to affirm that we're executing well on our cost reduction targets and have line of sight to surpassing our previously stated net operating loss reduction objective. In Q1 2023, we'll see the full benefit of the cost-cutting actions we took last year. And across 2023, we expect to see ongoing improvements in our expenses from the actions we announced in January.

Amir will share more on the progress we've made so far. Over the course of the year, we will continue to be disciplined with our expenses and our focus around initiatives that are absolutely critical to our business strategy. Our second area of focus this year is to continue to deliver outstanding value to our mortgage customers. We know that our mortgage customers and the loan offices using our product value simplicity and efficiency above anything else.

This is especially important in this market environment, where shopping times have lengthened and costs of lending have increased. Our mortgage offering continues to lead in driving best-in-class self-directed experiences for borrowers while automating multiple steps of the lender process to reduce the cost of origination and lower pull-through times.

An ROI study of Blend's customers conducted by MarketWise Advisors in Q4 2022 showed that our mortgage solution helped increase transaction speed by 37%, which in turn drove a 34% increase in closing rates. In a tight purchase-driven market, the speed from initial contact to closing is a critical value driver for our customers, allowing them to convert more borrower leads into loans.

MarketWise determined that using our technology resulted in savings of over $630 per loan, an increase of over 40% since the prior study was conducted in 2021. Simply put, our mortgage solution is expanding our customers' ROI over time. And so this year, we're focused on making sure our customers are fully utilizing the rich portfolio of features already available to them.

I'd like to call out a few highlights that pointed to the early momentum there. Adoption of our LO toolkit grew across all 10 features in Q4, and we see that trend continuing in Q1. We also sold a combined 17 new incoming closed deals in Q4 2022 and Q1 of this year. Stickiness and deepening relationships doesn't show up in the P&L right away, but strengthens our position for the long term as origination volumes recover.

Last but definitely not least, in 2023, we plan to drive adoption of our Blend Builder platform. We've been evolving our platform over the past 3 years to enable composable origination, a new capability that financial services firms have wanted for many years, that enables us or them to easily configure custom workflows from a set of modular components. Financial services firms are already able to achieve composable origination through our prebuilt consumer solutions like Instant Home Equity, deposit accounts, credit cards, and eventually they'll be able to build their own custom solutions using the Builder platform.

We're also working to make our mortgage offering available on the platform and all of our future offerings [so] that we can become the Platform as a Service company that we aim to be. And we already have a few limited Builder-powered features available to some of our mortgage customers, including a Spanish language intake form, which helps our customers serve their Spanish-speaking borrowers.

So whether through a prebuilt or custom solution, it's this level of flexibility and composability that allows our team at Blend to deliver product updates on a frequent basis, all while helping our customers quickly and easily bring product ideas to life and introduce unique experiences and lower origination costs through simplified workflows.

And when our customers win, we win. This is the kind of innovation that is driving the mid-double-digit growth in our consumer banking revenue so [while] it adjusts our customers' benefit from the speed, flexibility and innovation from our platform, Blend benefits from the growth, predictability and incremental margin that comes with it.

In Q4 2022, we introduced a platform fee for the blend Builder platform that will generate regular recurring revenue for all consumer banking deals. Over the next year, we aim to put the power of our Builder platform in the hands of our customers. Earlier this week, we hosted this first of several events introducing composable origination to our customers and prospects. We're pleased with the early reception and encourage everyone on this call to visit blend.com/platform to learn more.

To wrap up my remarks, in 2022 and year-to-date here in 2023, we have accomplished a lot of heavy lifting and moving Blend closer to our realizing our vision for the banking industry. Ultimately, we are building a business to last not just through this difficult cycle, but for many decades to come, and we've taken important steps to enable us to get all the way there as a sustainably growing and profitable business ultimately.

Now I'd like to hand it over to Amir, to recap the quarter this year and our outlook.

Thank you, Nima, and good afternoon, everyone. On today's call, I will cover our financial results for the fourth quarter and full year 2020. I will also provide an update on our progress to optimize our cost structure and accelerate our path to profitability. I will discuss the changes we expect to make to our disclosures, in order to align our financial discussion as we continue our evolution as a platform company. I will conclude with our outlook for Q1, including a few insights on cost actions you saw from us in January.

Please note that all figures referenced in our results are on a non-GAAP basis unless otherwise stated. We provide a reconciliation to comparable GAAP metrics alongside the earnings release we posted to our website prior to this call. As Nima explained, the industry we operate in has been facing incredible challenges. In 2022, interest rates increased at a faster pace than any time in recent history.

[Stake here] with expected inflation and the threat of a looming recession, we worked in combination to dampen confidence, delaying decisions regarding borrowing and home ownership from any consumer. Between Q4 2021 and Q4 2022, industry-wide refinance volume declined by nearly 90% as the rate environment portion

total mortgage origination in Q4 was less than 1/3 of the volume we saw in the same period last year. This represents a truly remarkable decline in activity. Against this market backdrop, our business continued to make investments in our lending products to improve experience, efficiency and access to financing, all while giving Blend the right set of solutions to enhance their own productivity and reach as many borrowers as possible.

In January, we announced additional cost reductions and efficiency initiatives that, combined with the swift actions we already took in 2022 across our business, are expected to reduce Blend's annualized cost of revenue and operating expenses by over $100 million on a non-GAAP basis exiting calendar 2023, from what we reported in Q3 2022. We are making great progress on these efforts, and I'm confident that we'll be demonstrating continued expense improvement quarter-by-quarter through 2023.

Diving into the full year results, our total company revenues in 2022 were $235.2 million, within the original guidance we provided at this time last year when industry forecasts of mortgage volumes were more than 20% higher than where they ultimately landed. We credit this performance to a number of factors. Our mortgage business continued to gain market share, increasing by 510 basis points on a Blend funded volume basis between the end of 2021 and the first half of 2022. We demonstrated strong gross revenue retention at 97% for the fourth quarter. We feel this metric demonstrates the need of our product during all phases of the mortgage cycle.

We grew wallet share with existing customers through cross-sell of ROI-positive add-on products like Income and Close, and aligning our pricing at renewal with the incremental value we delivered through continuous product enhancements. We also credit this growth to our investment in our consumer suite of solutions. As an example, home equity behaved countercyclical to the broader decline in mortgage activity and benefited our results this year. We are seeing the right ROI and customer demand in a suite of solutions which are consistent with our platform journey. We believe this positions Blend well to become a leader in the space and continue to provide better revenue diversification against mortgage market cyclicality.

Our Blend Platform segment revenue was $132 million, down 3% year-over-year. Within our Platform segment, our mortgage banking revenue declined by 23% year-over-year in 2022 to $83.4 million, amidst the 56% mortgage market volume decline over the same period. Our Consumer Banking and Marketplace revenue totaled $44.2 million in 2022, an increase of 91% as compared to the prior year. This increase includes $10.2 million of software-enabled Title revenue that is now integrated to the Blend Platform.

Looking at our fourth quarter results, our platform performance reflected a steeper-than-expected decline in mortgage origination activity compared to our prior expectations. We expect this to carry forward into Q1 2023, given the timing between lower Q4 application activity and the timing of loan funding when we recognize revenue. Closing up the revenue discussion, we recognized $4.4 million in professional services revenue in 2022.

Moving to gross profit. Blend non-GAAP gross profit was approximately $91.7 million, down from $116.7 million in the prior year, impacted by lower mortgage origination activity. Our Blend platform aggregate gross margin in 2022 was 54%. However, excluding software-enabled Title and professional services, our gross margin was approximately 73%. Despite the market headwinds, we remain focused on providing value to our customers, not just through the cross-sell of add-ons like Close and Income Verification, but with our core mortgage product itself.

As Nima shared, as we enhance our core mortgage product, the ROI we deliver increases incrementally. We continue to align our price at renewal with the incremental value we deliver. To this point, in Q4, we executed more than 75% of available renewals at higher rates, which on average was 14% above the prior funded loan pricing.

Non-GAAP operating expenses for the fourth quarter totaled $58.1 million compared with $73.9 million in the prior year. The decrease reflects our continued progress in resetting our cost structure to support our path to profitability. While we have started to achieve sequential reduction in our expenses in 2022, as we have mentioned in prior calls, we will begin to show the full benefit of last year's actions in the current first quarter. Our Q4 operating expenses were generally in line with our expectations, other than a few accounting-related adjustments that impacted G&A expenses.

Our non-GAAP loss from operations was $43.1 million versus $38.7 million in the prior year, reflecting both the G&A impacts and lower revenue. While macroeconomic conditions remain challenged, our goal to reduce our quarterly non-GAAP net operating loss by 50% to $20 million per quarter by the end of 2023 year remains unchanged. We are at the beginning of our platform journey. We are committed to meeting and beating the targets we reaffirmed in January, and we'll continue to manage the cost structure to align our path to profitability.

Now turning to our balance sheet. Our cash, cash equivalents and marketable securities as of December 31 totaled $354 million with total debt outstanding of $225 million on our 5-year term loan. Our $25 million revolving line of credit remains undrawn. We have ample runway and liquidity based on our current outlook. As always, we will continue to be opportunistic when it comes to improving the strength of our balance sheet.

I'll shift now to how we expect to shape the discussion of our financial and operating KPIs as part of our evolution to a platform company. First, beginning next quarter, we'll be modifying our revenue presentation in a couple of ways. As our consumer suite matures, it warrants a separate presentation in our discussion of financial results.

We plan to accomplish this by including all of our consumer banking products, which include deposits, home equity and personal lending products such as credit cards and personal loans, as well as our platform subscription access, in a single consumer suite line item. During Q4, our consumer suite revenues were a significant driver of organic revenue growth, and we expect this to continue in 2023.

In mortgage, we will begin consolidating revenues from our marketplace, and add-on products like Income and Close into a single mortgage suite line item. This move reflects our focus on expanding relationships with our mortgage customers by including the incremental dollars we gain on mortgage fundings from our marketplace products.

In addition to the refined revenue reporting, we are also refreshing the metrics and KPIs we report to reflect how we're managing the business and to enable you to better track our progress as our platform strategy comes to fruition. First, consistent with our planned mortgage revenue presentation, we will be measuring our per funded loan rate inclusive of the incremental dollars we [garner] from products like Income and Close.

Currently, I know many of you calculate our implied mortgage rate for funded loans by taking our mortgage revenue and dividing it by the number of market transactions we report. Generally, this is an indicative measure of the rates we charge for our mortgage-only product, though I'd caution there are some GAAP adjustments to our revenue related to longer duration contracts, as well as the tiered element of our transaction pricing, that both influence this calculation.

To illustrate, doing that simple math implies we achieved $71 per loan in Q4, which is an increase of 10% from the same period last year. Including the add-on products would have added another 20% to our per funded loan rates in Q4. Including all products utilized in the mortgage funding process better reflects how we view our earnings from the same loan across our platform. In 2023, we expect to expand this rate further as we increase adoption of our feature set and add multiple touch points on our platform for the same loan.

The second KPI change is that we have retired our net retention calculation. This is the one change we are making effective immediately. It has become clear that the inherent market volatility has made this measurement challenging to calculate within our mortgage transaction-based business model. We also understand it may be less helpful to the investment community, given the backward-looking nature of the metric in a highly cyclical market.

Additionally, next quarter, we're going to be retiring our consumer banking transaction counts as we focus on driving customer adoption of Blend Builder. Our pricing model for Builder will include both subscription and activity-based consumption fees, and as such, transaction counts are no longer the best way to measure our success.

Finally, across the full business, we will continue to report our gross retention. Gross retention was 97% for the fourth quarter, reflecting the stickiness of our product, albeit with a small decrease related to smaller mortgage customers consolidating or closing their operations. On the same point, given recent headlines, I wanted to share that Blend does not have any affiliation with or direct exposure to Silicon Valley Bank or Signature Bank.

Blend works with a diversified network of banking partners to ensure that our business operations remain resilient even during uncertain times. We will continue to monitor the situation and take the necessary steps to maintain the security and stability of our business. We recognize there are a number of changes here. Our team has worked through this carefully with the objectives of ensuring our analysts and investors have the right disclosures to monitor our progress as we continue our evolution towards becoming a Platform as a Service company, as well as to simplify our story for everyone.

I'll wrap up now with a discussion of our near-term outlook. While we continue to make great progress on the elements of our business that are within our control, the market we operate in remains highly uncertain. Industry outlook for 2023 mortgage origination volumes remains more than 20% below 2022 levels and nearly 1/3 of 2021 volume. Recent uncertainty around the pace of rate increases and the staying power of a higher interest rate environment clouded the outlook for the year.

We have already seen volatility in mortgage application activity during the first quarter, as rate optimism and pessimism oscillate. Based on this, for the time being, we are going to be guiding on a quarterly rather than annual basis. We'll revisit that approach as the industry conditions clarify.

We expect platform revenue to be between $24.5 million and $25.5 million in Q1 2023. We expect our Title business revenue to be between $8.5 million and $9.5 million. Our total company revenue outlook is expected to be between $33 million and $35 million for the quarter. Our Q1 outlook reflects the most recent available industry forecasts, which indicated that Q1 will be the mortgage origination low point for the year.

Also note, as I mentioned earlier, that the drop-off in application activity in late Q4 implies lower completed loan fundings in Q1, and this is reflected in our outlook. Should industry forecasts for originations hold for the year, we believe that our platform business would be poised to continue its sequential growth in Q2 and each subsequent quarter thereafter in 2023.

I would note that our 2023 outlook doesn't reflect any significant new Blend Platform deals. So new customer activity would provide potential upside. Our total net operating loss is expected to be between $37 million and $39 million. This range includes a $72 million decrease in annualized run rate operating expenses from Q1 2022. We expect to see sequential improvement in our operating loss and believe our Q1 operating loss outlook has us on track to surpass our net operating loss reduction target for the year. I'm also happy to share that I expect Q1 will be the last quarter of our net operating loss carrying at [3 handed].

As Nima shared, continued mortgage and overall lending market volatility impacts our visibility into the revenue recovery. However, we set our longer-term path to profitability with an extended downturn in mind. And because of this, we remain confident in the commitments we have made.

It's only been a little over a month since I joined, and I'd like to share my perspective of what I have seen to date. We have an incredible customer base that we have historically served through a single application. We are now able to execute on a platform strategy with Builder being used by our customers to drive digital transformation through a composable origination platform. This brings to fruition our vision from day 1 as the leading banking platform.

This evolution will continue to bring us closer to our customers, while also improving our unit economics and free cash flow. Our vision and focus internally on our existing mortgage customers remains paramount. Builder allows us to add new buyers, for example, CTOs, and increases our mind share with our existing customers while allowing us to land new logos across an array of financial products. To support our customers, we have incredible people across all of our teams.

We will double down on efficiency and velocity through the lens of operational excellence to increase the financial leverage of our spend, providing a clear path of profitability. 2023 will be a pivotal year for Blend as we focus on execution and setting the stage for our next phase.

With that, let me turn the call back to Nima for his closing remarks.

Thank you, Amir. Clearly, our near-term market environment will remain challenging, but this is an important and exciting moment for Blend. The launch of the Blend Builder platform with the industry's first composable origination capability is the culmination of several years of investment and careful planning, and is central to our vision of transforming how the modern day industry drives productivity, efficiency and service delivery to their customers.

Importantly, we are putting the right business structure behind our vision. We are significantly streamlining our cost structure, and we have leaders in place who know how to drive the migration to a Platform as a Service model. We're excited by our early momentum, but we also know we have a lot of work to do. With that in mind, we are heads down on execution in 2023.

With that, thank you again for joining. Winnie, we are now ready for questions.

Thank you, Nima and Amir for your remarks. We'll now turn to Q&A. Our first question comes from Ryan Tomasello from KBW.

Appreciate all the color in the prepared remarks. I think, obviously, macro is in focus right now. And so it would be helpful to understand beyond what you've said in the prepared remarks, how are you thinking about the puts and takes in terms of macro and drivers from here.

Specifically, any parameters around your exposure to the regional bank space and more broadly, how that situation there, realizing it is fluid, including just recent announcements over the last few hours, how that could impact Blend in terms of demand and attrition this year? And then second, as it relates to mortgage rates, if those continue to be very volatile, obviously. But to the extent we get more significant relief here with rates declining,

at what point do you think that ends up being a more meaningful impact for Blend in terms of direct volume exposure on the revenue base? Are there limitations there based on the dynamics around refi and what could actually move the needle? Yes, so I'll leave it there with that macro question.

Yes, Ryan. I think so on the regional bank side, we are paying close attention on the regional bank side. We have some of them as our customers, not all of them, obviously. We didn't have exposure to Silicon Valley Bank, which we put out some information on. But yes, we're paying attention. Sometimes industry consolidation is a good thing for us.

But we looked at our overall revenue, that's a risk in that segment, and we deemed it not material. So we're feeling pretty good about it. We're here to support our customers in this time, and we're making sure that they have everything they need from us. But at the moment, it doesn't look like it's -- we're obviously monitoring the situation. At the current moment, we don't feel it's a major area that we need to be doing anything on. On the mortgage market, we're -- we did see -- we have been following application volumes and mortgage rates are coming down a little bit as a result of recent news.

It does affect application volumes. As soon as mortgage rates come down, we will see application volumes go up. It does take time. People have to find homes or forget the refinance done. So it does take time for that to hit. Like think about it as like a 60- to 90-day lag for our numbers from the time that mortgage rates come down. So that's kind of how we think about the time that those things hit the numbers. And Amir, if you want to add anything there.

Happy to. Ryan. Just a few comments to complement what Nima was saying. With regards to the exposure for SVB, we also just want to confirm we don't have any exposure to Signature Bank. And I think on top of that, from a macro lens and to your question with regards to risk exposure, we believe strongly, and we follow what Treasury Secretary Yellen mentioned, which is the U.S. banking industry is sound. it's well capitalized. And so we remain optimistic. And like Nima said, we're just going to support our customers.

The next question comes from Terry Tillman from Truist.

I guess -- so I think what you all said, you're not guiding to the full year, but I thought I did hear something about potentially sequentially, there could start to be some uplift from first quarter revenue levels, maybe on the platform side. But I don't know if you can like either confirm or help me on that, maybe I was just confused. But you definitely have some sort of internal assumptions that are informing this idea of that kind of $20 million or lower loss by the end of the fourth quarter.

So if you're not going to be able to give us some of those planning parameters more formally, anything you can share maybe on the consumer banking side or how low, does it go to 0 on Title365? Just trying to understand anything more though you could share for the full year that informs that EBIT loss kind of target. And then secondly, after that long-winded first part of the question is, how do we think about free cash flow?

Because I think people are also looking at your free cash flow, just given kind of the balance sheet. And how do we think about free cash flow in relationship to maybe EBIT losses? And then I had a follow-up.

Yes. On the Title side, we don't expect that to go to 0. We have migrated the major customers that we think we're going to migrate. There are certain parts of the Title business, like default and home equity, that won't migrate to the platform. that are not part of the refinance business that's tied to our platform, the software-enabled title. And then I'll turn to Amir for the remainder of the question.

Terry, there was a few items to unpack there. Let me just start with one of the pieces. With regards to free cash flow, just for us, as it pertains to our overall cash position, we feel strongly -- we've analyzed it. We understand it -- we feel strongly that we're in a great position from a cash perspective. As to the generation of free cash flow, given Builder and our execution on cost, I think we believe strongly that we can deliver on free cash flow generation early, but it's not something that we're going to comment on today.

If I miss any part of it, I think you had one more with regards to net operating losses. I'll point us back to what we shared, which is we feel that there is just good momentum with regards to the actions that were taken on January 10. And as I mentioned in the prepared remarks, we're making great progress on those front.

You asked one more -- yes, just one more piece that you asked for, and then let's get your follow-up, which was, you asked with regards to just our overall macro and indications from a guidance perspective. You are correct. We're not guiding to the full year today. As you can expect, it's really just driven by the overall uncertainty. We follow Fannie Mae and MBA. And I think what we would point you to is that as we follow their forecasts, they are pointing to Q1 being the low point. And from there, the ability to show sequential growth.

Last comment too, Terry, and then I will pause for yours is, remember, just we noted that none of the new Builder deals are in our forecast. And so as we continue to stay focused on our mortgage customers and the rollout of Builder, that's where we feel optimistic.

Wonderful. And then sorry for that like 15-part question, and this is the final question, and it's a 1-parter. It does seem like going forward, the model could have less volatility, particularly with Platform fees. And I know it's early, but could you give us kind of a guidepost how a typical deal would look like in terms of how much of the deal would be those more recurring Platform fees? And then how much would be activity, if I think of like a percentage of a dollar between the 2 or something, so some sort of balance of the 2?

Yes, we're not going to share that right now, Terry, because it's still evolving, but it's a newer concept that we said we introduced late last year, early this year and so we're vetting it out with some customers. As we get more color there, we plan to spend more time with you all later this year, and we'll walk you through that model in detail. I just want to say one other thing on the sequential growth.

One thing that we look at is applications, and we've -- for example, we looked at applications in Q1, which are an early indicator for closings, not always, but seem to be an early indicator. And that's what gives us more confidence that the outlook is a little better than every -- the quarter forward than it is today. If that makes sense.

Our next question comes from Michael Ng from Goldman Sachs.

First, I just wanted to ask about the cadence of non-GAAP operating expenses for 2023. Any way you could help us with how we should think about that for the first quarter, and how that will progress throughout the year? I certainly appreciate there's some macro uncertainty, but this feels like it's more directly in your control.

And then second, it was encouraging to hear about the expectation for per funded loan rates to increase over time. When should we expect those feature sets to expand to help that funded loan rate number? Is this something that's more meaningful this year? Or was that a longer-term comment?

Happy to. Michael, let me start with what you asked with regards to non-GAAP operating expenses. As you heard in our guidance, we don't give specific feedback or guidance as it pertains to operating expenses for our outlook. What I would point you to is what we've shared with regards to our net operating losses. And what we highlighted was a great progress with regards to the actions that we took, not just in 2022, but also in January 10.

We're on track as we reported in (technical difficulty) we are very focused on the thing that we know that we need to take and the clear top profitability that we've kind of paid for ourselves (technical difficulty) is indicative of the work that's been with regards to our (technical difficulty) to provide customers through the add-on solutions perspective in products that carry us throughout the -- allow us to provide more value to our customers. It's not something that we are going to speak to today as it pertains to forward-looking, but we will come back to it in the future. And what we shared with you is just where we are right now.

Our next question comes from Joe Vafi from Canaccord.

Just on Builder, just -- I know it's very early, but could you give us a feel for the types of customers or financial institutions you're engaging with there? Is there any change in size or, I guess, perhaps entry point with those financial institutions kind of versus your, I guess, kind of some of your historical products? And then a quick follow-up.

Was that a question on Blend Builder Joe, just so I understand?

I'm sorry, yes, it was on Builder. Yes, sorry.

Yes. So yes, think of Builder as it has 2 major things that it does for us. One is it accelerates our ability to build solutions. So when we go into new markets, like deposit accounts, we announced is on the platform, Instant Home Equity was built in a few months by configuring on Builder.

So that allows us to create solutions, which is very important. And then the second thing that its allows is, it allows our customers, like some of the ones we mentioned on the call today, to take advantage of those things and so -- and take advantage of that flexibility. And so Credit One is a good example of one. Compeer is a good example of one.

So it doesn't necessarily change the size of customer, although typically it's larger institutions who will want that level of flexibility and power, and be willing to pay a premium for it. What it really does, it expands the accessible market for us because it allows us to get into solutions that historically would not have been possible with out-of-the-box very rigid solutions. And so it really expands the opportunity size for us and the total spend that we could target with a customer over time, because we'll be able to create a lot more value for them. And speed really matters for them, and it matters for us.

Great. And then just -- I know you're guiding by the quarter based on, obviously, the macro is a big input. But it seems like you're continuing to gain share. Is there anything we should look at in terms of -- or extra color you can provide on what you could potentially do on share gains in 2023, the macro is kind of out of our control?

Yes. That's a really hard one, Joe, because there's a lot of change happening in the mortgage industry as we speak. So I don't want to comment on it right now, but it is something we're paying close attention to. First and foremost, our primary goal this year is make sure our mortgage customers are happy, and the existing ones are successful, because it's a tough macro for mortgage companies right now.

And we want to make sure whether they're part of a bank or they're independent, that they are getting the value from Blend so they can thrive and come out the other side and gain share on the other side. That's what's really important.

Our next question is a follow-up from Ryan Tomasello from KBW.

I guess, realizing that the macro is clearly out of your control. Just be helpful to understand additional levers you have to pull from here depending on how ultimately that shakes out. Flexibility around the cost structure from here, if there's any more room? And then just regarding balance sheet and liquidity, are there certain options you could explore?

I think you alluded to being opportunistic. What exactly does that mean? For example, because you exit the Title business, the legacy Title business, address some sort of restructuring of the term loan? Just trying to understand all these different levers that are under your control, notwithstanding macro.

Let me start with the second part of the question, Ryan, which is just with our balance sheet. I think what we shared for the most part is we feel great with regards to the cash flow that we have, we feel strong with regard to our path to profitability. And so outside of going into more detail with regards to just the options or the actions that we fortake, (sic) [undertake], it's not something that we are going to speak to right now.

Of course, it's our -- it's just as a management team, it's our duty. It's our responsibility, as it is for the Board, for us to a, always be prudent in terms of what we review and make sure that in areas that we can strengthen our balance sheet. Of course, that's an area that we will monitor. We will review and if needed to, we'll take an action if it benefits the company.

You also asked -- Ryan, you also asked about shares. I think what's important with regards to shares for us to highlight is we shared with you the perspective and albeit a lagging metric from a (technical difficulty), I think what we're focused on is that in the short term, sure, there may be some oscillations with regard to market share. Where we feel strongly is that the customers that we serve from a long-term perspective, what we're seeing is our customers win. And when they win, we gain market share. And in the long term, we believe that that's a trend that will continue.

Our next question comes from Matt Stotler from William Blair.

This is Alex on for Matt tonight. Just a couple for me. One, can you just, building on the macro dynamic, can you give us an update on your observations regarding the impacts of the current macro that it's having on your business? Specifically regarding the pace of rollouts at newer customers, buying patterns of existing customers and the overall demand environment?

Yes. A good question. I think definitely on the mortgage side, there are some customers or prospects that are saying, hey, we're lowering our mortgage budgets this year because the market is not great. They do see it as a long-term important part of their business, but -- and they have turned their focus elsewhere to their business. Like we spend time across many product lines of customers now, and digital transformation, I mean I will tell you, it's never been more top of mind for our customers. They understand the necessity to serve the consumer across multiple asset classes, and that is where Blend can help them.

And especially with Blend Builder, we can offer them a lot more capabilities than we could historically and do it a lot faster. And so we're hearing requests from things all -- ranging from things like credit cards to personal loans to deposit accounts to even small business, which is an area we've only lightly played in historically. But it is top of mind, and we're spending so much time with our customers on those things.

And I'll just end with this. Always, the #1 thing for us is maintain our existing customer base and manage them and make sure they're successful. And that is the most important thing in tough times, because on the other side, the ones that come through will have more market share because it will be a smaller subset of players that make it to the other side. And so we want to make sure we're there for our customers and we make them more successful, so they're winners in the long run.

Our next question comes from David Unger from Wells Fargo Securities.

Just one for me at this point. So anything coming out over the last week that would change your go-to-market approach with the financial institution community and their receptivity to embrace technology investment at this point?

Can you elaborate on sort of the ...

Well, a lot -- certain banks spend differently through potential contractions and expansions. And just trying to understand if, [I mean] a lot of your customers are focused on risk management right now. And obviously, you have a great solution. So just trying to get a sense for if your go-to-market approach could change over time in the way that banks think about technology investment and partnering with you.

Yes. Actually, I think you said it right, which is I feel like our value proposition actually really marries up well to this, where a lot of the banks that are being affected had really high concentration in commercial business, but not as much consumer business. And so a lot of them are trying to figure out how to build that consumer muscle, which is exactly in the direction that we play with this.

That's how we help our customers win. That's how we help our customers continue to grow their customer base, have better lifetime value with those customers, better economics on a per customer basis, more diversification within their customer base.

And so if anything, I think that some of this in the long run -- again, we don't want to be part of any sort of macro situation like what we're going through now. I think it's while we do have good faith in the Fed, we're definitely -- we don't want to see Silicon Valley Bank going under.

That's been a stable in the tech world for a long time, even without our exposure. But in the long run, it's going to allow companies who use systems like us to be even better and even stronger and we're excited, and we're a premier software partner for them going forward for -- not for Silicon Valley Bank, but in general, I should say, for the banking industry.

Up next is a follow-up question from Terry Tillman from Truist Securities.

Yes. And this will be a easy one, I promise. I think you all talked about the gross retention was at about 97% in 4Q. Should we expect that maybe that could drift a little bit lower on a gross basis because of maybe some of the fallout in the nonbank mortgage provider side? Or just anything more you can share about how you're thinking about gross retention in the near term?

Yes. We're not sharing any forward numbers there, but you're exactly right, where we are seeing independent mortgage banks sometimes get consolidated. And so because gross retention is calculated based on the total customer base, if -- even if that customer gets acquired by another customer or the LOs at that customer go to another 1 of our customers, it doesn't -- we don't get the uptick on the gross retention for them going to another customer.

So even if the consolidation is good for us, gross retention could in theory go down. We don't have forward-looking numbers on that. We're reacting as we see things.

And so a lot of the retention -- a lot of the times when we churn a customer, it's because they -- like you said, they go out of business or some consolidation. So that's where we're paying attention. And I think generally, we think consolidation is good for us.

Thank you, everyone. That concludes our Q&A and today's earnings conference call. Thank you, everyone, again, for joining us.

Yes. And just a quick closing remark. Yes, thanks for everyone joining us. I know there's a lot going on in the banking world. Like I said, we're paying close attention to it. And I just want to clarify when I said earlier that there is no material risk. We're monitoring very closely.

We don't foresee anything, but we're reacting in real time. So as we see things, we're paying attention. And obviously, the banking sector is very dynamic right now. So I just wanted to clarify that point where there's a lot of unforeseen things that have happened in the past few weeks that we don't want to overstate what's happened or not. So -- but that (technical difficulty)