Earnings Transcript for DOMA - Q3 Fiscal Year 2023

Operator: Good day, and thank you for standing by. Welcome to the Doma Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session [Operator Instructions] Please be advised that today's conference is being recorded. I will now like to hand the conference over to your first speaker, David DeHorn. Please go ahead.

David DeHorn: Thank you, operator. Good afternoon, everyone, and thank you for joining Doma's third quarter 2023 earnings conference call. Earlier today, Doma issued a press release announcing its third quarter results, which are also available at investor.doma.com. Leading today's discussion will be Doma's Founder and Chief Executive Officer, Max Simkoff; and Chief Financial Officer, Mike Smith. Following management's prepared remarks, we will open up the call to questions. Before we begin, I would like to remind you that our discussion will contain predictions, expectations, forward-looking statements and other information about our business that is based on management's current expectations as of the date of the presentation. Forward-looking statements include, but are not limited to, Doma's expectations or predictions with financial and business performance, market conditions, competitive position and industry outlook. Forward-looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from historical results and/or from our forecast, including those set forth in Doma's most recently filed annual report on Form 10-K and subsequent filings with the SEC. For more information, please refer to the risks, uncertainties and other factors discussed in Doma's most recently filed annual report on Form 10-K and subsequent filings with the SEC. For more information, please refer to the risks, uncertainties and other factors discussed in Doma's most recently filed annual report on Form 10-K and other SEC filings. All cautionary statements that we make during this call are applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks and uncertainties and other factors discussed in Doma's SEC filings. Do not place undue reliance on forward-looking statements as Doma is under no obligation and expressly disclaims any responsibility for updating, altering or otherwise revising any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Additionally, during this conference call, we will also refer to non-GAAP financial measures, including retained premium and fees, adjusted gross profit, adjusted EBITDA and the other measures described in our earnings release. Our GAAP results and a description of our non-GAAP measures with a full reconciliation to GAAP, can be found in the third quarter 2023 earnings release, which has been furnished to the SEC and is available on our investor website. And with that, I'll turn the call over to Max Simkoff, CEO of Doma.

Maxwell Simkoff: Thank you, Dave. Good afternoon, everyone, and thank you for joining our third quarter earnings call. Last quarter, we unveiled several core components of our narrowed strategy in utilizing our instant underwriting technology to drive meaningful improvements to homeowner affordability. Today, we are providing specific details on how this strategy will work, including an exciting new product that we believe will help us drive profitable growth during a challenging time for the housing market. And while the overall housing market, is experiencing unprecedented headwinds, we feel that we have successfully repositioned our business model and our cost base, to allow for us to write an important new chapter for the company and for our industry overall. We'll discuss three key themes on the call today. First, I will provide an update on our path to reaching adjusted EBITDA profitability for Q4 of this year and the diligent steps we are taking towards achieving that goal despite a persistently challenging macroeconomic environment. Second, I will provide an update on the rollout of our new strategy for the business, including more specific details on the growing category of demand that is driving our focus on providing a newly configured solution to meet this demand. I will also shed more light on the key commercial institutions in the broader mortgage ecosystem across, both the primary and secondary markets who we are focused on partnering with in order to deliver a far better, faster and more affordable suite of title solutions to American homeowners. Specifically, I'll also be announcing an exciting partnership that we are planning to launch in Q1 of 2024, with one of the largest mortgage market participants in the country. Third, I want to take a few minutes to talk about the growing strength of our core underwriter platform, which is a stable source of profit for Doma that continues to perform well despite difficult market conditions. I will then turn the call over to our CFO, Mike Smith, who will discuss our financial results in more detail. Regarding our first theme, we remain highly focused on our ambitious goal of reaching adjusted EBITDA profitability, for Q4 of this year, and we continue to make steady progress in that regard. Our adjusted EBITDA loss for continuing operations, was $5 million in Q3, a significant improvement from our adjusted EBITDA loss of $12 million in Q2 of this year. This quarter-over-quarter improvement was driven mainly by workforce reductions, the sale of our local business and further cost reduction actions we have taken. Looking ahead to Q4, we expect to see the continued effect of our cost structure improvement initiatives as well as our new strategy helped to get us within striking distance of our goal of reaching adjusted EBITDA positive in Q4 of this year. That said, while we believe we are within striking distance of achieving this goal and expect to see continued significant improvement in our overall adjusted EBITDA, we do believe that there is risk to us achieving full quarter profitability in Q4, primarily due to the continued degradation of the housing market. As of now, we expect that risk to persist into the first quarter of 2024 against the backdrop of continued macroeconomic uncertainty and a seasonal low point for the housing market in Q1. In spite of this, we have successfully executed significant cost reduction actions, while still enhancing the customer service levels at our underwriter and our enterprise division. And also funding investments to support our future growth opportunities, particularly as it relates to our new strategy. As our significant improvement in P&L this quarter illustrates, we are confident that these adjustments are largely behind us now. And our efforts and our focus are currently on growing our revenues and expanding our margins, addressing the massive demand and need for a much lower-cost title insurance solution and getting our existing technology to market, to meet these critical needs. This brings me to the second key theme of our earnings call, an update on the implementation of our new strategy. As we discussed on our last quarterly earnings call, our go-forward business strategy is centered, around providing solutions to the growing market chorus for more affordable and tech-driven title and closing offerings. By licensing our patented instant underwriting technology upstream directly to the largest mortgage market participants in the country while continuing to serve independent agents through our underwriting channel, we are confident that we can meet market demands and bring down costs for homeowners. Today, we are providing more specific details about exactly how this strategy will work, the growing category of demand that is driving our focus on providing a newly configured solution to meet this demand, and the key commercial institutions in the broader mortgage ecosystem across both the primary and secondary markets, who we intend to partner with in order to deliver a far better, faster and more affordable suite of title solutions to American homeowners. Over the past several years, we have seen an increasing frequency of data points telling us that the housing industry is in desperate need of more affordable options not only across the entire spectrum of homeownership, but in title and closing specifically. And among lower-income minority borrowers, this problem is particularly acute. In 2022, two of the government-sponsored enterprises, or GSEs, released equitable housing plans that specifically pointed to a need to help facilitate the deployment of lower-cost title and closing solutions. Fannie Mae released research that analyzed approximately 1.1 million home purchase loans acquired by the enterprise in 2020 that, showed that within low-income first-time home buyers, 21% of Black home buyers pay closing costs equal or greater than their down payment. Just last month, the CFPB released a report showing that total loan costs and fees in 2022 increased 22% over the previous year, while the average monthly payment, excluding taxes and insurance for borrowers taking out a conventional conforming 30-year fixed rate mortgage, rose 46% from December 2021 to December 2022. This was driven almost entirely by the rise in mortgage interest rates. Further, in the last 12 months, our top three largest lending customers in our enterprise division let us know that they are actively looking for ways to reduce the fees that their borrowers spend specifically on title and closing. Put simply, American homeowners and particularly low-income minority homeowners, or potential homeowners are approaching a level of desperation, when it comes to being able to afford to buy or refinance a home. In a nutshell, our new strategy is focused squarely on providing a solution to these needs of American homeowners in the current housing market, to be offered much more affordable title solutions. Key to this strategy is shifting the placement of our instant title technology further upstream toward the beginning of the mortgage origination process, which allows us to significantly reduce our own cost of service, opens up higher-margin software revenue for us and thus allows us, in turn, to offer greater discounts to the homeowners, who are burdened with bearing the cost of lender's title insurance at this time of critical need. Our large enterprise lender partners, have told us for years that moving our instant underwriting decision closer to the loan underwriting decision itself, or even, in some cases, before the loan underwriting decision, enables them to significantly reduce key areas of cost and operational activity. Today, we are answering the significant demand for more streamlined upfront affordable title solutions with a groundbreaking new product, which will put our new strategy into practice and allow for us to start driving meaningful benefits to home affordability to homeowners across the country. We are calling this new product Upfront Title, and we intend to make it generally available, to both mortgage software providers, as well as the government-sponsored enterprises as soon as the end of this year. Because this new product is so central to our new strategy, it's important to understand exactly how it will work as well as how it will drive meaningful benefits for borrowers, lenders in the secondary mortgage market as well as Doma itself. Our new Upfront Title insurance product will enable us to provide an instant title underwriting decision as well as rate and coverage quoting all within or in communication with the core platforms used to determine eligibility for loan underwriting itself. Specifically, we have designed the product to integrate seamlessly with

Michael Smith: Thank you, Max, and good afternoon, everyone. Today, I'll be providing an overview of Doma's third quarter financial results. Please refer to our earnings release filed earlier today for full details of the quarter. Unless otherwise specified, all the comparisons cited in my remarks are sequential comparisons to the second quarter of this year. The latest MBA Mortgage Finance Forecast is projecting that the 30-year fixed mortgage rate will remain above 7% in the fourth quarter of 2023 and will remain above 6% for the duration of 2024. As we've stated in the past, these elevated rates will likely continue to put pressure on refinance and purchase order volumes industry-wide for the foreseeable future. As we discussed on our August Q2 earnings call, we exited all of our local retail operations nationwide, and during Q3, we have worked through the majority of the transition periods related to these sales. As a result, the local branches and their associated operations are classified and recorded as discontinued operations in our financial results beginning in the third quarter of 2023. My remaining comments are focused on our continuing operations. Overall, our primary measure of unit economics, is adjusted gross profit, which was $6 million in the third quarter of 2023 and, which compares to $5 million in the second quarter of this year. Adjusted gross profit as a percentage of RP&F increased to 39% in the third quarter, compared to 30% in the second quarter of this year, an overall increase of nine percentage points, due to lower provision for claims as a result of lower claims activity. Adjusted EBITDA, our main profitability measure, was negative $5 million, compared to negative $12 million in Q2, 2023, an improvement of $7 million. This improvement was primarily the result of our previously discussed workforce reduction actions and company-wide efforts to reduce operating spend. Moving on to our top line performance in the third quarter. We reported revenue on a GAAP basis of $76 million, which compares to $81 million in Q2 of 2023, a decrease of 6% primarily caused by the sale of our local retail operations, and partially offset by the continued strength seen in the homebuilder market. As a reminder, GAAP revenue includes the portion of agent premiums that Doma does not retain, so we focus on Doma's retained premiums and fees, or RP&F, as an important metric, which excludes the premiums retained by third-party agents. We believe this is a much better representation of Doma's underlying top line performance. With this in mind, RP&F was $15 million in the third quarter, down 7%, compared to the second quarter, driven by the sale of our local retail operations. Underwriting RP&F within our third-party agent channel decreased 3% in the third quarter compared to the second quarter, primarily from a decrease in policies from our independent agent network and partially offset by RP&F growth in our homebuilder business. As we noted on our prior earnings call, we are focused on the performance of the underwriter. During the third quarter, the underwriter performance was aided by the strength in the homebuilder portion of the business and positive improvement in gross profit resulting from favorable reserve development. And we also expect to see continued positive momentum in our underwriting business benefiting from lower costs, driven by our most recent cost reduction actions. As Max mentioned, we look forward to executing on our new strategy, and we remain highly focused' on becoming adjusted EBITDA profitable on a sustainable basis. I'll now pass the call back to Maximum, for closing remarks before we open the call to questions.

Maxwell Simkoff: Thanks, Mike, and thanks, everyone, for joining us on our call today. We are focused on our critical mission of making the home buying process better, faster and more affordable. While our efforts have been largely on adjusting our cost structure to align with the current macroeconomic environment and we have significantly reduced our expenses over the past year, we believe that these efforts are largely complete and will provide us with a sustainable cost base as we shift gears into resuming growth in our business. As we work towards offering our solutions via lower cost of customer acquisition channels and higher margin opportunities, we are excited about the growth potential ahead of us. We look forward to updating everyone with our progress on our next earnings call. Operator, we are ready for questions.

Operator: Thank you [Operator Instructions] Our first question comes from Michael Ward with Citi. Go ahead. Your line is open.

Michael Ward: Hi guys. Good evening. Thank you for taking the questions. I was wondering if you guys could maybe discuss specifically for 4Q, what goes into the expectation for the EBITDA improvement?

Michael Smith: You bet, Mike. Thanks for the question here. One of the things when we look at the fourth quarter, you can see the trend that we've made and we've made some great progress here on adjusted EBITDA in the third quarter. We expect that to continue into the fourth quarter, but we do believe that, that's at risk. And additionally, as we move that into the first quarter as well, that's a historically seasonally soft period is the first quarter. But we expect to see a lot of the efforts and cost reduction measures that we've executed here in the recent past, along with our sale of our local business, to come to bear here in the fourth quarter. And we still feel the best profitability as well within striking distance in that quarter.

Michael Ward: Got it. Thank you. And maybe the pilot program with the software company and also the deal with the national lender, kind of wondering if - is the earnings stream from those an underwriting stream or is it more of like a royalty stream?

Maxwell Simkoff: Yes. Good question, Mike, and this is Max. It's both. So this is part of why we're so excited about this particular launch of the new product, Upfront Title, and the structure of this product. We've effectively configured our patented and proven instant underwriting technology to be licensed really a lot further upstream in the mortgage decisioning process. Think about it as much closer to or even before the decision to qualify the borrower for the loan to be underwritten. And because we can license that decisioning, we anticipate getting both software licensing revenue for that piece of it. But then the configuration and the accessibility of that algorithm upfront in the process allows us, in turn, to offer a significantly discounted rate of title premium for the insurance policy itself. So, the primary benefit, again, accrues to the benefit of homeowners who are facing an unprecedented affordability challenge, but it has the dual purpose of providing us a pretty significant advantage in driving a new insurance premium revenue stream. And even at a discounted amount where it benefits homeowners, we believe that, that insurance premium revenue can be highly accretive, to our underwriter and helps improve our margin profile.

Michael Ward: Got it. That's helpful. And if I could sneak a third, a number of exciting opportunities, it sounds like. Just kind of curious if there's one that you see as being the biggest driver of earnings growth, call it, next year or next 12 months?

Michael Smith: Sure. So I mean, I'd say thematically, what we're most excited about as the strategy of the business, which clearly we're investing resources in to drive a significant new source of revenue and earnings growth, is our ability to be arguably the only provider in this landscape who is going to be offering a technology-driven solution, to help provide significant relief for homeowners who are facing an unprecedented affordability challenge, right? I mean, we cited some of the data in the script itself. But no matter what metric you look at, I mean, I think that the simplest one is if you were to just run a Google search today, for housing affordability, the top story is that housing affordability is at 39-year low, okay, the lowest level it's been since 1984. And so, what drives our strategy and what we anticipate will drive revenue and earnings growth for us in the future will be our ability to offer a much lower cost and much more streamlined solution for homeowners who desperately need relief. And we think we've got a strong competitive advantage in the way we've configured the product to do that and we're excited to invest behind the growth of that.

Michael Ward: Thank you, guys so much.

Operator: [Operator Instructions] If there are no more calls -- or questions, excuse me. This does conclude the question-and-answer session and it does conclude today's conference. You may now disconnect. Thank you.