Doma Holdings Inc. (NYSE:DOMA) Q4 2023 Earnings Call Transcript

2024-03-13 12:44:58

Yahoo! Finance

Doma Holdings Inc. misses on earnings expectations. Reported EPS is $-1.54 EPS, expectations were $-1.3. Doma Holdings Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello and welcome to the Doma Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce Chief Strategy Officer and Interim Head of Investor Relations, Dave DeHorn.

Dave DeHorn: Thank you, operator. Good afternoon, everyone, and thank you for joining Doma's fourth quarter and full year 2023 earnings conference call. Earlier today, Doma issued a press release announcing its fourth quarter and full year results, which is also available at investor.doma.com. Leading today's discussion will be Doma's Founder and Chief Executive Officer, Max Simkoff. 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 of 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 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 fourth quarter and full year 2023 earnings release, which has been filed with the SEC and is available on our investor website. And with that, I'll turn the call over to Max Simkoff, CEO of Doma.

Max Simkoff: Thank you, Dave. Good afternoon, everyone, and thank you for joining our fourth quarter and full year 2023 earnings call. 2023 was a transformational year for Doma. As we continue to navigate challenging market conditions, we successfully executed significant cost reduction actions, divested our non-core local agency operations and streamlined our business to focus on our core strengths and support our invaluable customers. We narrowed our strategy to better address the ever-growing market demand for more affordable and tech-driven title insurance offerings, including the launch of an innovative new product pilot called Upfront Title. This transformation was made possible by the incredible team that we have built here at Doma.

I want to start by thanking each of you for your hard work and contribution to get us where we are today. Turning to our fourth quarter results. We will discuss 4 key themes on the call today. First, I will provide an update on our path to reaching adjusted EBITDA profitability. Second, I will provide an update on the implementation of our narrowed strategy for the business, including more detail on the launch of our Upfront Title pilot and the early encouraging successes we have enjoyed. Third, I want to take a few minutes to talk about the continued strength of our core underwriter platform, which demonstrated another quarter of strong performance despite difficult market conditions. Fourth, I will discuss how the recent groundswell in public and political support for more affordable housing solutions, specifically driven by a need for more innovative title insurance options as exhibited in last week's state of the union address, is something we believe we are uniquely positioned to address in ways that could deliver upside to our long-term success.

Regarding our first theme, we successfully executed significant cost reduction actions in 2023 while still enhancing the customer service levels at our underwriter and our enterprise division. We struck a fine balance between reducing costs while still funding investments to support our future growth opportunities, particularly as it relates to our new strategy. While we fell just shy of our ambitious goal of reaching adjusted EBITDA profitability in Q4, primarily due to the continued degradation of the interest rate environment, we are encouraged by the significant improvement we made in our adjusted EBITDA and P&L. Our adjusted EBITDA loss for continuing operations was $3 million in Q4, an improvement from our adjusted EBITDA loss for continuing operations of $5 million in Q3 of this year.

As a more stark reminder, we've come a long way from our fourth quarter '22 EBITDA loss for continuing operations of $11 million, and we are proud of the progress we've made despite narrowly missing our target this quarter. Looking ahead, as we have previously discussed, Q1 is typically a seasonal low point for the housing market which, combined with continued macroeconomic uncertainty, presents risks to achieving adjusted EBITDA profitability in the first quarter and first half of the year. But overall, we are encouraged by the significant improvement in our cost structure which enabled us to get within striking distance of our goal. Now that we have significantly reduced our cost structure, our efforts and our focus going forward are on growing our revenue and expanding our margins through realization of operational improvements.

We believe the implementation of our new strategy will be key to achieving these goals, and we are extremely encouraged by the external support we are getting from our customers as we navigate through change. This brings me to the second key theme of our earnings call, an update on our Upfront Title pilot program, which we launched in the first quarter of this year. As we discussed on our last couple of quarterly earnings calls, our go-forward business strategy is centered around providing solutions to the growing market chorus for more affordable and tech-enabled title insurance and technology solutions. Housing affordability remains a critical issue for many Americans. By licensing our patented instant underwriting technology upstream, directly to the largest mortgage market participants in the country, and while continuing to serve independent agents through our underwriting channel, we are confident that we can meet market demands and ultimately bring down costs for homeowners who are in critical need of relief.

The unfortunate reality is that most homes for sale in 2023 were not affordable for a typical U.S. household. According to an analysis by Redfin, just 15.5% of homes for sale in 2023 were affordable for the typical U.S. household, the lowest share on record. According to the National Association of REALTORS' data, the national median price for an existing single-family home jumped 3.5% from the year prior. They cite that home prices continued to surge in the fourth quarter of 2023 in the majority of major U.S. metros, and some markets even posted double-digit gains. While interest rates have begun to cool, they still remain elevated which, combined with low supply, have created affordability challenges for many families. We applaud the industry participants who are exploring new and innovative options to help with closing costs, especially for low-income, first-time homebuyers.

It is clear to us that Americans desperately need relief. We believe that our narrowed strategy positions us well to address this critical issue by offering a much lower cost and more streamlined solution for homeowners. Through the launch of our groundbreaking pilot product, Upfront Title, which we discussed on our Q3 call, we believe we will have a strong competitive advantage to deliver a far better, faster and more affordable suite of title solutions to American homeowners. As a reminder, our 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, number one, mortgage software systems utilized by large lenders to process borrower demand and issue prequalification decisions for mortgages, and number two, the core automated underwriting systems utilized by the government-sponsored enterprises. By offering our new Upfront Title product to mortgage software platforms as well as the GSEs directly, we will enable the lender customers of these platforms to obtain instant title certainty at the point of deciding whether or not to underwrite the loan as well as to provide their homeowner customers a price generally far below current industry standard rates for title insurance. Additionally, over time, this configuration of our technology will help us shift more of our revenue towards higher-margin software licensing revenue.

On our Q3 call, we announced an initial partnership with one of the largest mortgage technology platforms in the country to launch our Upfront Title products via a pilot program. We are delighted to announce today that earlier in Q1 '24, an early-stage configuration of this pilot program successfully launched ahead of schedule. We are already seeing encouraging early results, and they are helping to validate that the future could bring a transformational new configuration, which can deliver both meaningful savings and benefits to consumers and lenders alike. We believe that based on these early results, that we are on track, and if we are successful demonstrating pilot program success in the first half of this year, we would be in a position to expand our partnership in the second half of the year both on a geographic basis and also by offering a more enhanced Upfront Title product configuration to additional lenders and mortgage technology platforms.

While we are very encouraged by the early results, we do not expect revenue from this pilot program to be material in the first half of the year. We are thrilled to be partnering both with one of the largest mortgage technology platforms in the country and a major national lender customer to launch this innovative product and believe that the value proposition that we offer to this initial lender will be just as strong with other lender customers. And our technology platform partner has built an impressive customer base, so we are excited about our ability to expand within this partner's platform given their scale and market presence. For the Upfront Title product, Doma's underwriting division will provide the title insurance policy, while the escrow and closing services may be performed either internally or provided by external partners, which we believe will enable us to scale our product efficiently.

Our intent is to accelerate our go-to-market strategy and work over the next few quarters to expand our reach so that we can deliver meaningful cost savings to homeowners. As part of our go-forward strategy, and in parallel with the distribution of our technology on a license basis, our title insurance underwriting business and our independent agent customers remain of critical importance and will continue to be a core part of our business. This brings me to the third key theme of our earnings call, which is to provide an update on our core underwriting platform and its strong performance despite continued difficult market conditions. Our fourth quarter underwriting division retained premiums and fees and adjusted gross profit increased 7% and 22%, respectively compared to the third quarter.

During the fourth 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. We continue to launch significant tech initiatives in our underwriting division, which have been instrumental to our success. For example, we launched numerous APIs with major title production systems in areas like CPL, policy jackets and title production. We also launched online pay systems, allowing our agents to make their remittances electronically with the click of a button.

And lastly, we launched our new revamped agent education portal, Doma Academy, offering CE, CLE credits to our agents to satisfy licensing requirements. We believe our continued rollout of our innovative technology will benefit our independent agent-focused title production team by saving them time and expense, while also enabling them to improve their efficiency through a partnership with Doma. Our independent agent community remains of critical importance to Doma, and we are pleased to continue growing our community by onboarding new agents. We saw meaningful growth in the number of independent agent customers we service, having added 130 new customer relationships during 2023. Lastly, we saw positive results from our partnership with Lennar, which is the nation's largest homebuilder.

With the chronic supply shortage of homes and increasing demand for housing, we remain excited to partner with Lennar in order to continue servicing their title needs. Before wrapping up, I would like to touch on the fourth key theme of our earnings call. The public and political support for more affordable housing outcomes being driven specifically through more innovative title insurance solutions has grown significantly, even in just the last few weeks. And we believe we are extremely well positioned to address one specific opportunity that emerged coming out of last week's state of the union address. As you may have seen in his address last week, President Joe Biden announced his plan to lower housing costs for the millions of Americans who are struggling to afford the American dream of homeownership, and he specifically mentioned a focus on reducing title insurance costs.

In a separate announcement immediately ahead of the President's address, the Federal Housing Finance Agency announced that they have approved a pilot to waive the requirement for lenders' title insurance on certain refinances. FHFA's Director, Sandra Thompson, further clarified that this title acceptance pilot will waive the requirement for lenders' title insurance or a legal opinion on certain low-risk refinance transactions where there is confidence that the property is free and clear of any prior lien or encumbrance. The pilot only impacts the requirement for a lender's title policy or AOL and does not impact a borrower's title risk since it only applies to certain refinanced loans where the borrower has title to the property already.

We believe that Doma is one of the only players in our space who has the proven technology and underwriting capabilities to participate in the pilot program announced by FHFA. Our patented technology, which has been proven out over nearly 85,000 loans, is able to automate the bulk of the title search and exam process for the majority of conforming refinance transactions regardless of geography, borrower profile or other traditional manual underwriting characteristics that have been used. Our tech has also proven that we consistently reduce time to close by several days and enable significantly lower fulfillment costs for mortgage originators, all while exhibiting similar claims rates as the traditional title process. And because our technology operates using a completely automated front end, we can not only provide it as a licensed offering to the GSEs for the majority of refinances that they purchase from lenders, if they should decide that this configuration would best support the FHFA's announced pilot, but also provide a seamless and instant integration with any lender who might choose to participate in this program.

Further, if the external reporting that we've seen is correct in stating that Fannie Mae will be the first to launch this pilot, we have the added benefit of a relationship with Fannie Mae in helping evaluate and execute initiatives to drive more equitable and affordable homeownership outcomes. It's important to note that we've been dismayed by some of the commentary following last week's announcements that assume that the reported pilot program will both put the American dream of homeownership at risk as well as not benefit low-income and/or minority homeowners. Specifically, FHFA confirmed in their statement last week that the pilot program will not introduce any new risk to borrowers. Additionally, we have seen reports by some industry trade organizations that assumed, based on FHFA's language in their announcement last week, that the only transactions that qualify for the announced program will be those of wealthy homeowners and implying that these will be non-low income and/or high credit score borrowers.

Our own data from the past several years has shown that the majority of conforming refinances were completed by individuals who are below 120% of their area median income, the definition of lower moderate income utilized by the GSEs. And again, our technology was used to safely underwrite over 75% of these transactions. So we have confidence that there are multiple paths for FHFA and the GSEs to ensure that whatever configuration they decide to implement of the announced pilot, it will likely have a significant impact on low and moderate-income homeowners who desperately need relief. Overall, we're excited by the actions taken by the administration, and we share a desire and a sense of urgency to reduce closing costs for borrowers by a wide margin compared to traditional non-technology-based solutions.

We think that based on what we've heard about the announcements made last week that it's likely over time that the majority of the refinance universe should qualify for our more innovative approach to quantifying and helping the GSEs assess and underwrite title risk, and we look forward to further exploring this opportunity. This is a great example of the kinds of innovation that could make a lasting impact on helping to alleviate housing affordability challenges in this country in a safe and appropriate manner. In closing, I'd like to take a moment to celebrate the incredible work that has been done by the entire Doma team. Our success is a direct result of your efforts and ability to navigate a continually challenging environment. We believe we have a reasonable amount of runway ahead of us, thanks to all the cost savings initiatives of 2023 and our targeted go-to-market plan for 2024.

I would also like to thank our investors and analysts for your continued support. It's obvious to us that consumers need better options to help relieve the housing affordability challenges they face. We are passionate about not only removing the friction and frustration from an antiquated process but also for providing lower-cost title solutions for all, especially to those who need it most. I'll now turn over the time to Mike Smith, our CFO. Mike?

Mike Smith: Thank you, Max, and good afternoon, everyone. Today, I'll be providing an overview of Doma's fourth quarter financial results. Please refer to our earnings release issued earlier today for full details of the quarter and full year 2023. Unless otherwise specified, all the comparisons cited in my remarks are sequential comparisons to the third quarter of 2023. The latest MBA Mortgage Finance Forecast is projecting that the 30-year fixed mortgage rate will remain above 6% for the duration of 2024. As we 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 prior couple of earnings calls, we exited all of our local retail operations nationwide in 2023.

We have completed all of the related transition periods which have resulted in substantial savings and reductions of legacy local costs. As a result of these sales, the local branches and their associated operations are classified and reported as discontinued operations in our financial results. My remaining comments are focused on our continuing operations. Overall, our primary measure of unit economics is adjusted gross profit, which was $8 million in the fourth quarter of 2023 and which compares to $6 million in the third quarter of 2023. Adjusted gross profit as a percentage of RP&F increased to 47% in the fourth quarter compared to 39% in the third quarter of 2023, an overall increase of 8 percentage points due to increased RP&F and lower provision for claims as a result of lower claim emergence and favorable changes in reserving assumptions.

Adjusted EBITDA, our main profitability measure, was negative $3 million compared to negative $5 million in 3Q of 2023, an improvement of more than $2 million. This improvement was primarily the result of our previously discussed increase in RP&F, lower provision for claims and our workforce reduction actions and company-wide efforts to reduce overall spend. Moving on to our top line performance in the fourth quarter. We reported revenue on a GAAP basis of $85 million, which compares to $76 million in Q3 of 2023, an increase of 11%, primarily due to the continued strength seen in the homebuilder market. As a reminder, GAAP revenue includes a 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 premium 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 $17 million in the fourth quarter, up 7% compared to the third quarter of 2023, driven by strong homebuilder orders and stable independent agent results. Underwriting RP&F within our third-party agent channel increased 12% in the fourth quarter compared to the third quarter, primarily from the continued strength in the homebuilder market I just mentioned. As we noted on our prior earnings call, we are focusing on the performance of the underwriter. During the fourth 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, growing our revenues, expanding our margins, and we remain highly focused on becoming adjusted EBITDA profitable on a sustainable basis. I'll now pass the call back to Max for closing remarks before we open the call to questions. Max?

Max Simkoff: Thanks, Mike. Thanks, everyone, for joining us on our call today. We remain focused on our critical mission of making the home buying process better, faster and more affordable. Overall, 2023 was a transformational year for Doma. Throughout the year, we made progress in positioning the business for the long-term. We significantly reduced our expenses, narrowed our strategy and launched an innovative new product pilot. While our efforts have largely been on narrowing our strategy and adjusting our cost structure to align with the current macroeconomic environment, we believe that these efforts are largely complete and will provide us with a sustainable cost base as we push forward and work towards resuming growth in our business. Operator, we're ready for questions.

2024-03-13 News