Doma Holdings Inc. (DOMA) on Q3 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Doma Third Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. . I would now like to turn the conference over to your speaker for today, Chris Mammone, Investor Relations of Doma. You may begin. Chris Mammone: Thank you, operator. Good afternoon, everybody, and thank you for joining Doma's Third Quarter 2021 Earnings Conference Call. Earlier today, Doma issued a press release announcing its third quarter results, which is 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, Noaman Ahmad. 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 of financial and business performance and conditions, and competitive 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 forecasts, including those set forth in Doma's Form 8-K filed today. For more information, please refer to the risks, uncertainties and other factors discussed in Doma's 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 premiums and fees, adjusted gross profit and other measures described in our earnings release. Our GAAP results and a description of our non-GAAP financial measures with a full reconciliation to GAAP can be found in the third quarter 2021 earnings release, which has been furnished to the SEC and is available on our website. And with that, I turn the call over to Max Simkoff, CEO of Doma. Maxwell Simkoff: Thanks, Chris, and good afternoon, everybody. Thank you for joining us today for Doma's third quarter earnings call. I spent my opening remarks on our first call as a public company this past August talking about Doma's growth and how it is primarily driven through the application of cutting-edge machine learning technology to remove giant chunks of friction, frustration and expense from the historically tedious process of closing a residential purchase or refinance transaction. And I'm going to start today's call with the same focus on that same theme, as demonstrated by three key drivers in Q3. Number one, our accelerating growth in Q3 was driven by our technology. Number two, our outperformance is showing no signs of slowing down. And number three, we are now focused on applying our proven technology to more of the market, particularly the purchase market, as we look to further extend our market share gains in 2022. Now, let's examine each of these points a bit further. First, against the backdrop of a declining mortgage market, in particular for refinancings, Doma's closed order volume grew 39% year-over-year with Doma's enterprise segment growing at almost 400% year-over-year. As a reminder, Doma's enterprise segment is where all of our proprietary Doma intelligence platform and differentiated operations are fully deployed today, and therefore, where the transformational benefits of our technology are most evident. In Q3, our tech-driven differentiation benefited from continued investment in our product. Specifically, we rolled out important new functionality to our Doma Docs capabilities that deepens its algorithms to tackle the more complex closing disclosure scenarios. For context, the creation of closing disclosures involved the manual and error prone work of fee collaboration with lenders and typically represent roughly 20% of the entire closing process. Doma Docs uses machine intelligence to replace this manual process of delivering closing documents with a fully automated solution, driving better outcomes for our largest clients. As one example, we were able to drive a 32% increase in transaction processing efficiency for a top 5 national lender we serve, thanks to the reduction in turnaround time and manual file touches that's a set of new computer vision capabilities Doma Docs delivered in Q3. We also made further progress in building out new capabilities for our Doma Connect integration layer, which allows our largest clients to automate order creation and management. These new capabilities improved order flow across key middleware platforms used by our largest mortgage originators, making those connections more seamless and fostering further expansion of wallet share. The new Doma Connect capabilities delivered data elements via an XML endpoint to one of our largest strategic accounts that will enable them to automate a manual review process and drive faster transaction processing. Doma was their first partner to deliver this deep level of integration, which had been an outstanding request made of their traditional title and escrow partners for over 2 years. These new technology capabilities of Doma Docs, Doma Connect, building on the strong core foundation of our differentiated Doma Intelligence platform prove that our technology is a key driver of our growth. To dive a bit deeper now on the second key takeaway from Q3, our outperformance versus the market shows no signs of slowing down. In a quarter where overall market refinancing activity contracted by over 40% year-over-year according to the Mortgage Bankers Association, our enterprise channel, which is almost entirely refinance driven, turned in 386% year-over-year closed order growth due to both the addition of several new enterprise customers as well as the expansion of wallet share with a number of our existing enterprise customers. We also showed solid growth in closed local purchase orders versus double-digit market contraction in purchase according to the MBA. And despite the likelihood that overall volumes for the mortgage market are large, are expected to be significantly down in the near term, we remain bullish on Doma's expected outperformance going forward. This dynamic can best be seen by virtue of the strong growth in our open order volumes, which grew 41% year-over-year in the third quarter, also representing our third consecutive quarter of sequential growth. Finally, moving to the third key takeaway, to extend our proven technology and operating model to more of the market as soon as possible, we are accelerating the pace of key growth investments inclusive of increasing our focus on migrating our local channel transactions to the Doma Intelligence platform as well as beginning to capture a larger addressable market opportunity in adjacent markets. With respect to the migration of local channel transactions to the Doma Intelligence platform, we are confident that this will enable local realtors and local lenders to see more of the same value proposition that we've been delivering to our enterprise partners with a faster, better and more affordable closing experience. We started this effort by moving local refinance transactions to the platform this year and are on track to begin moving purchase transactions to the platform later this quarter. This will be a heavy lift for the team over the next several quarters, but the longer run benefits are expected to be exponential. Additionally, our ability to invest some of the proceeds we raised earlier this year in building out solutions for the two key adjacent market opportunities of appraisal and home warranty will help assure that we can maintain our record of outperformance not only through next year, but well beyond that as we execute on our long-term vision of creating an instantaneous digital and delightful closing process for our lender and real estate partners and especially for our shared homeowner customers. As our team has recently started to put together our investment plan for 2022, we are focused on utilizing a significant amount of the proceeds raised by going public to expand the use and coverage of our Doma Intelligence platform throughout the year ahead and to ensure our continued outperformance versus the overall title and escrow market. Additionally, we continue to develop our approach to enter adjacent markets, such as the $8 billion appraisal market and the $3 billion home warranty market. As we finalize our 2022 plan, we will look to ensure that our scope and pace of investment next year and beyond will set Doma up to capture a greater share of the residential real estate value chain and innovate in adjacent markets that are as manually intensive as the traditional title and escrow market. Going public and raising the associated proceeds for these investments established our place as a growth business, enabling us to more rapidly morph our local business, expand to do markets more quickly and launch new product functionality that extend the advantages of our Doma Intelligence platform. We intend to take full advantage of this favorable positioning. Heading into the fourth quarter, we also remain focused on recruiting and hiring world class talent, not only as the Company grows and evolves, but in many cases, ahead of our planned growth. We are at the beginning of a multi-year journey to expand and grow our customer acquisition and fulfillment functions, and we believe we will be best served by aggressively recruiting and onboarding uniquely talented individuals to drive our rapidly innovative customer acquisition and fulfillment functions, including many from outside the traditional real estate industry. In Q3 alone, we were able to add a number of critical new hires with diverse backgrounds from some of the leading tech companies on the planet, such as Amazon, Apple, Facebook, Netflix, LogMein and Splunk, among others. In parallel, our recruiting team added resources to ensure that we can continue to hire key talent across the Company as we head into another year of growth. As we deepen our talent bench, we are confident that the appeal of working to bring the real estate industry into the future will help us attract the best talent in the market. Our core vision and mission to make the homeownership process instant, delightful and more affordable resonates strongly with anyone that has been through a closing experience. Due to the strength in our sales pipeline, the continued focus on technology and talent investment and our accelerated pace of 41% growth in open orders during Q3, we are confident that we will finish the year at or above the high end of our previously stated full-year growth outlook despite a softening mortgage market. Before concluding my prepared remarks, I want to personally thank each and every one of our Doma associates across the country for their hard work, positivity and passion for client service. Doma is built not only on financial strength and flexibility, but also on an unwavering client centricity that is earning us enduring trust. We would have none of those attributes without our talented associates who show up to work and improve their grip, selflessness and determination each and every day. We thank all of our shareholders for your continued support, and we look forward to updating you on our progress in the months ahead. With that, I'll pass it over to Noaman who can provide more color on our third quarter results and the financial outlook for the remainder of the year. Noaman? Noaman Ahmad: Thanks, Max, and good afternoon, everyone. As Max just discussed, we delivered strong third quarter results in a contracting market, driven by increasing market acceptance of our differentiated offering. Based on this ongoing momentum as well as our visibility into year-end, we are confident we'll finish at or above the high end of the expected ranges for full-year growth and profits. I'll come back to that outlook in a few moments. But first, we generated revenue on a GAAP basis of $162.6 million, up 34% from the third quarter 2020. As we have stated previously, GAAP revenue includes a portion of third-party agent premiums that Doma does not retain. We placed greater focus on Doma's retained premium in fees, or RPF, which excludes premiums retained by third-party agents. We believe this is a much better representation of Doma's underlying topline performance. With this in mind, we grew our RPF to $71 million, a 31% increase versus the same period the prior year. Our growth in the third quarter was primarily driven by a 386% year-over-year increase in closed orders in our Doma enterprise channel. The continued strength in this channel was a result of significant voluntary expansions amongst existing clients as well as four new client additions, a testament to the impact our machine intelligence technology is having in the market. Closed orders in our local channel were software but still significantly outperformed an overall 31% market contraction per the MBA. This outperformance was driven principally by a 9% year-over-year closed order growth in purchase transactions for Doma at a time when the overall purchase market fell 12% year-over-year. Keep in mind that in the local channel, we remain in the earlier stages of incorporating the full capabilities of our Doma intelligence platform and as such are more limited in our ability to drive outsized growth. It follows that these strong results are a real testament to the team's execution. Looking at our profitability trends for the third quarter, our main focus is adjusted gross profit, which grew to $30.3 million, a 10% increase compared to the same period in 2020. Adjusted gross profit as a percentage of RPF was 43% in the third quarter of 2021 compared to 51% in the third quarter of 2020. This change in adjusted gross profit as a percentage of RPF was driven by two main factors. First, continued investment in our fulfillment capabilities and staff in advance of the anticipated growth in our enterprise channel and the migration of our local channel volume to the centralized home intelligence platform; and second, a mix shift towards refinances as our enterprise business significantly outperformed the industry. Given our strong open order momentum in Q3, we expect these trends to continue in the near term. Turning to adjusted EBITDA, we continue to invest significantly across several areas, consistent with our long-term plan, namely customer acquisition, R&D, recruiting and other indirect costs related to the migration of our local business to Doma Intelligence. Combined with the impact of necessary investments made as a part of becoming a public company, our adjusted EBITDA this quarter decreased by $19.5 million year-over-year. With respect to the capital management side of the business, we continue to operate a capital-light infrastructure, consisting mainly of software development related to the Doma Intelligence platform, which resulted in a $10.7 million investment in software in the third quarter of 2021. Finally, in terms of our plans for the rest of the year and beyond, we continue to see strong momentum in our business with open orders in Q3 growing 41% year-over-year, the fastest open order growth we've experienced all year. Our recent performance and momentum allows us the confidence to invest more aggressively in our product rollout, particularly as it relates to the accelerated migration of our local purchase business to the Doma Intelligence platform, which we remain on track to start by year-end. We believe the acceleration of these investments is worth any short-term trade-off in margins that will likely be required to get us to a larger scale faster. Now to recap the key takeaways we opened the call with, our accelerating growth in Q3 was driven by our machine intelligence technology. Two, this outperformance is showing no signs of slowing down. And three, we are now focused on extending our proven technology to more of the market, in particular, the home purchase market. So with these key points in mind, I'll conclude with the outlook for the remainder of the year. Given our strong business momentum in Q3, we now expect to end the year at or above the high end of our previously communicated ranges for retained premium in fees and adjusted gross profit. With that, we will now open the call to questions. Operator? Operator: . Our first question comes from the line of Nick Jones with Citi. Nicholas Jones: Just a couple, can you talk about enterprise adoption? We know you've had some success getting kind of in the door. Where are you in terms of enterprise adoption in terms of the volume of mortgages versus what's kind of running through Doma? And then can you also remind us a little bit how -- what does it take to drive adoption for local -- within local transactions? Maxwell Simkoff: Great to hear your voice, Nick. This is Max speaking. Look, in terms of enterprise adoption, I'll speak in the aggregate and then maybe give a couple of specifics. I think simply put, enterprise channel, as you know, is nearly all refinanced. And given the significant growth in closed orders across the entire Company, but specifically the growth in closed orders, as we referenced for the enterprise channel, I think it's safe to say that between net new customers we added in the quarter who got implemented and rolled out, and existing large enterprise relationships we have where we significantly expanded wallet share, the adoption was strong across the board. And just as a reminder, the enterprise channel of course is where we also have fullest use of the Doma Intelligence platform, so all of that volume goes through our industry leading technology, including all of our machine intelligence capabilities and our Doma operating model. In the local business where you asked about purchase transactions, just as a reminder, we communicated earlier this year that we expect to start processing purchase transactions through the Doma Intelligence platform by the end of this year. We are on track to do that later this quarter. And as we use the Doma Intelligence platform across more of the transactions in our local markets division, we'd expect to see certainly more benefit and more adoption in that part of the business as well. The last thing I'll mention is, we mentioned earlier this year that in aggregate we were planning on having the majority of our direct order volume, inclusive of both enterprise and local, going through the Doma Intelligence platform by the end of this year, and we are also on track to do that as well. Nicholas Jones: Great. And maybe just a follow-up on appraisal and home warranty. I mean, are you able to give any kind of timeline of how we should think about when that could potentially start contributing to the P&L even from an investment standpoint or when early kind of signs of revenue could show up? Maxwell Simkoff: We do expect to continue investing in the home warranty and appraisal areas that was certainly one of the reasons for us going public, and we intend to use proceeds to invest in those areas as well as other market adjacencies and opportunities that may present themselves. We aren't going to provide any specific timelines yet, but I can confirm that we are actively building infrastructure to soon compete in those markets. Operator: Our next question comes from the line of Matt Carletti with JMP. Matthew Carletti: Good afternoon. So maybe I'll start with a follow-up on the kind of enterprise partnership channel and specifically around pipeline. Could you help us understand kind of kind of what the status is of ongoing discussions for new partners that maybe aren't announced yet? And then kind of for the partners you do have already, can you help us understand like some of the more mature ones, kind of what sort of ballpark wallet share does Doma have? And longer term, what sort of wallet share do you target or think that Doma could achieve down the road? Maxwell Simkoff: Sure. Look, without getting into too many specifics about any one customer individually, we feel like we've got a very strong pipeline with a number of mature sales cycles with top 25 mortgage originators. We continue to onboard new clients each month and we've also added a number of key team members to our Doma enterprise sales team, which we think will not only help us execute on the new customer pipeline, but further unlock additional volume from some of those existing large strategic clients that you mentioned. On the topic of what our wallet share is with existing enterprise clients, we don't announce specific wallet share numbers for key clients individually. But I will say two things. One is that when you look at our overall wallet share or market share rather, I mean, just kind of through the bookends of -- end of last year, it was less than 1% of the entire market. Certainly, we've been growing significantly this year, but we still have plenty of room to take share and that includes from existing accounts. And I think what's probably most important is just to frame where we think we can end up in terms of wallet share with some of these large enterprise customers. We think that over time, it's entirely reasonable for us to command north of 50% wallet share with strategic enterprise customers. We see the use of our solution as becoming more and more of a necessity for them, driving differentiated outcomes in terms of a better, faster and more affordable mortgage closing experience. And so, we feel like it's entirely reasonable to be able to get north of that 50% number in that channel. Matthew Carletti: And then a follow-up, if I could, on your comments, Noaman, around kind of accelerating some investments to capture share, you've got momentum and so forth. And just want to understand, the comment was made about investment to capture share and basically the trade-off is maybe some margin in the near term. Can you help us understand how that might differ? Not looking for guidance, but just ballpark-wise or qualitatively versus kind of the original plan and then lag time, as you make those investments, what do you view as kind of that -- you make an investment today, how much time before you see result from that? Noaman Ahmad: Yes, hey Matt, good to catch up again. So with respect to the comments around investments, look, we risk raised a significant amount of funds by virtue of going public with the idea that we can invest those funds to drive faster growth and acceleration of our product platform. And so, we intend to do that now. We are in the process of building out a plan, as I mentioned the last time we spoke. And we will be sharing that plan at our next call. But to provide you some qualitative guidance, again we want to accelerate investments in customer acquisitions, as you would expect. We want to accelerate investments in our product and development -- developing both our product as well as migrating the purchase volume onto our Doma Intelligence platform. So, we intend to accelerate those investments. What that means is, in just in the short term, there are trade-offs because, one, very simply we do hire sometimes 3 to 4 to 5 months in advance of growth and so there's a short-term impact. But I think nothing in our long-term plan changes. We are doing exactly what we had outlined we would be doing with the funds raised. And so, I think the comments are just in line with that earlier commentary around capturing greater share than what we had outlined previously. Matthew Carletti: Great. Congrats on a nice quarter and best of luck. Noaman Ahmad: Thanks. Maxwell Simkoff: Thanks. Operator: Our next question comes from the line of Jason Helfstein with Oppenheimer. Jason Helfstein: Two questions. Can you give us a sense of what kind of progress you've made, either sequentially since the beginning of the year, even year-over-year with wallet share expansion among existing enterprise accounts? And then second, any risk that as refinance slows you're not able to offset it with purchase and just kind of talk about that transition. Maxwell Simkoff: Happy to, Jason. This is Max. So on the year-over-year sequential gains in wallet share, without getting into again specific client numbers, I would just say that it's safe to assume that in a quarter where overall refinance volume across the industry contracted by north of 40% and we grew our enterprise channel, which is substantively all refi by nearly 400%, that we've seen both significant new customer adds and significant expansions of wall share consistently throughout the year kind of across the board. So -- and I really think that, that's kind of important in answering the second part of your question, which is, while we remain very confident we will be able to move purchase volume to your platform and as demonstrated by the targeted investments we made in sales and marketing this past quarter to drive more purchase volume into the business in general. As Noaman mentioned earlier, we saw 9% growth in purchase transactions at a time when even the purchase market contracted year-over-year. We also still are quite confident that with our differentiated solution, we can continue significantly outperforming the market and taking share in the refinance side, despite the fact that the mortgage -- the refinance market is expected to contract. And if you remember, this is all really factored into our original plan and projections. We use the backdrop of the Mortgage Bankers Association forecast for what they thought would happen with the refinance market, which I think at the time that we communicated our original plan earlier this year, they were certainly expecting refinance volume to I think to start contracting sooner than it actually did and then happened to a significant degree where 75% of refinance volume fell away inside of I think the next 24 to 36 months. So all of that was already factored into the plan. And I think as you've seen in the last quarter, we're demonstrating that we can significantly outperform the market regardless of what the macro backdrop is. Operator: Our next question comes from the line of Tom White with D.A. Davidson. Thomas White: Thanks guys for taking my question, and nice quarter. I guess I wanted to just circle back on the comments around -- or in the press release about accelerated -- kind of investing in an accelerated migration of Doma Intelligence to local. I guess -- what does that mean exactly? Is that just sort of like putting kind of more heads and engineers on the project? And it sounds like you're saying you're still on track for kind of rolling it out at the same time you've been talking about. So if you're putting kind of more investment towards it, does it mean that the rollout may kind of happen faster over the course of next year? And curious how that might impact kind of the financial model, if that's correct? And then I have one quick follow-up. Noaman Ahmad: Tom, this is Noaman. So what I would again say is we'll share the specifics of our plan again next quarter. But here's what I can share right now. When we say accelerate investments, especially around purchase, it is us accelerating the transfer of purchase volume on to Doma Intelligence. And that requires significant upfront sort of cost. Again, longer term it's a wash and again consistent with our plan. So, there is a trade-off in the short-term because of that acceleration and that acceleration again goes to our thesis around going public, which was to drive significantly higher growth than what we had outlined in our original plan. So, we're looking forward to deploying the capital in that area. On top of that, I think that as we think about market adjacencies and not just home warranty and appraisal, and we think about what else we can build-out in terms of product, we intend to use our funds to invest in that specifically next year. So again, we will share more specifics at the next call, but those are sort of the broad strokes around that investment. Thomas White: And then just one follow-up. You guys launched a couple of interesting innovations, it sounds like, with the Docs and Connect. Can you maybe update us on how you're thinking about your kind of the legacy competitors in this space, their ability to respond kind of technology-wise? Like -- I don't know if you can provide it, like in terms of how far ahead you are or anything like that, but any color there would be helpful. Maxwell Simkoff: Sure, and great to hear your voice, Tom. So this is Max. Look, I think our unique patented technology, our differentiated approach has demonstrated that really no other company has brought things like property-based predictive underwriting to this industry in the way that we have. We've seen some noise about quick or automated title technology that some of the other players in this space have attempted. But really none of them offer the coverage or instant underwriting capabilities that we offer with our Doma Title product. And then with respect to the broader machine intelligence technologies that we've applied across escrow and closing, which include, as you mentioned, Doma Connect and Doma Docs, we just -- we feel like we're pretty far out front of the space here. We don't know of any title companies that are using technology similar to ours and even kind of more generalized experts in machine intelligence like Google offer solutions that are kind of generally focused and don't perform as well as our very specific capabilities focused on the mortgage process. So, we really believe that our differentiation here arises from the wealth of over 20 years of data that we possess, the really, really strong team that we've built, I mean, really a world-class group of PhDs and machine learning experts who bring diverse backgrounds to solving problems and represent a unique competitive advantage. And we haven't seen anything close to it across any of the competitive landscape. Thomas White: Thanks so much for the color, appreciate it. Maxwell Simkoff: Absolutely. Operator: I'm showing no further questions in the queue. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.DOMA Ratings Summary
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Doma Holdings Shares Up 3 Days in a Row Following Q3 Results
Doma Holdings Inc. (NYSE:DOMA) shares up 3 days in a row, closing $7.79 on Friday as a result of strong Q3 earnings report, with total revenues coming in at $163 million, up 34% year-over-year. The results emphasized the secular growth opportunity behind digitizing title & escrow. While US refinancing demand contracted 40% throughout the quarter, the company was able to grow closed order volume 35% year-over-year, with its high growth enterprise segment growing closed orders +386% year-over-year. Direct agent premiums drove business outperformance, as Q3 RP&F grew 31% year-over-year.
For the full 2022-year, the company expects revenue to range from $475 million to $525 million. The company remains on track to launch purchase transactions on the Doma Intelligence Platform by year-end, which could provide upside to 2022 numbers.
Oppenheimer Initiates Coverage on Doma Holdings Inc. With Outperform rating and $11 Price Target
Oppenheimer initiated coverage on Doma Holdings Inc. (NYSE:DOMA) with outperform rating and $11 price target.
Analysts view the company as well-positioned to capitalize on the digitization of mostly manual and time-consuming residential real estate closing process with its technology to automate repetitive tasks involved in finalizing a purchase/refinance and as a result reduce a traditional 50-day process to less than a week.
The brokerage projects a long runway given the adoption of digital closings is still in its beginning phase, as local agencies and enterprises increasingly realize the efficiencies brought forth by automation.
According to the analysts at Oppenheimer the company is expected to materially grow wallet share of enterprise accounts as legacy incumbents with greater headcount cannot afford to compete on price.
