Rocket Companies, Inc. (NYSE:RKT) Q4 2023 Earnings Call Transcript
Rocket Companies, Inc. (NYSE:RKT) Q4 2023 Earnings Call Transcript February 22, 2024
Rocket Companies, 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: Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rocket Companies Fourth Quarter and Full Year 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Sharon Ng, Head of Investor Relations, you may begin your conference.
Sharon Ng: Good afternoon, everyone, and thank you for joining us for Rocket Companies' earnings call covering the fourth quarter and full year 2023. With us this afternoon are Rocket Companies' CEO, Varun Krishna; and our CFO, Brian Brown. Earlier today, we issued our fourth quarter and full year earnings release, which is available on our website at rocketcompanies.com under Investor Info. Also available on our website is an investor presentation. Before I turn things over to Varun, let me quickly go over our disclaimers. On today's call, we provide you with information regarding our fourth quarter and full year 2023 performance as well as our financial outlook. This conference call includes forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mentioned today.
We encourage you to consider the risk factors contained in our SEC filings for a detailed discussion of these risks and uncertainties. We undertake no obligation to update these statements as a result of new information or further events except as required by law. This call is being broadcast online and is accessible on our Investor Relations website. A recording of the call will be posted later today. Our commentary today will also include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings release issued earlier today as well as in our filings with the SEC. And with that, I'll turn things over to Varun Krishna to get us started. Varun?
Varun Krishna : Thanks, Sharon. Good afternoon, everyone, and thank you for joining the Rocket Companies earnings call for the fourth quarter and full year 2023. Reflecting back on the last year, today, I'll talk about how our consistent execution drove exceptional results for the quarter and the year, especially given the backdrop of the market. I am so eager to share with you how we are positioning Rocket to operate with greater clarity, focus and velocity and how we will achieve growth and profitability at scale through our AI-fueled homeownership strategy. I'd like to begin on more of a personal note. It's hard to believe it's been nearly six months since I joined Rocket Companies, and time certainly flies when you're on a rocket ship.
I continue to be inspired by our team members whose talent, energy and grit are the lifeblood of our company. I am so confident about our future and the collective impact we will make as a team. And the best part is that our journey is just beginning. We delivered strong fourth quarter and full year results against the backdrop of extreme market challenges as the industry faced persistent constraints in affordability and inventory. In Q4, we reported adjusted revenue of $885 million, representing an increase of 30% when compared to Q4 of 2022 and the second consecutive quarter that we've accelerated top-line growth on a year-over-year basis. Now, adjusted revenue in the quarter was $85 million above the top end of our guidance range. We reported positive adjusted EBITDA for the third quarter in a row despite some of the most difficult industry conditions in three decades.
Now in 2023, we delivered $3.8 billion in adjusted revenue, and I'm proud to share that we grew market share in both purchase and refinance annually. Purchase market share grew by 14%, and refinance market share grew by 10% from 2022 to 2023. It's worth emphasizing that we delivered positive adjusted EBITDA for the year which is largely a function of two factors: one, a strong top line; and two, our commitment to operational efficiency. And as you'll hear Brian discuss in more detail shortly, we made significant reductions to our cost base over the past two years, and we took difficult yet necessary actions to rightsize the company. This has helped us prioritize and focus on what we do best and what matters most. Now, as we look back at our 2023 results, there are a lot of great accomplishments to be proud of, but we are even more excited about the opportunities that lie ahead.
We repositioned our organization in 2023, and we entered 2024 reinvigorated with momentum, clarity and a lean competitive edge. We are poised to deliver revenue growth, market share growth and further operational efficiency. Now I'd like to take a moment to recap what the leadership team and I have been focused on recently. And how it will position us for success in the future. Now, embracing transformation is an essential part of any big journey. A few months ago, I collaborated closely with our leadership team to write the next chapter of Rocket story together. We look inward. We spent thousands of hours engaging in a rigorous process of research, interviews, analysis, introspection and debate. We dug deep to review the state of our business, our competitive strengths, and we identified our gaps as well as our opportunities.
The outcome of this effort was a clear strategy to enable AI-fueled homeownership and a comprehensive blueprint that brings clarity and focus to our entire organization. By leveraging AI, we will transform an industry that is ripe for innovation, establishing Rocket as the premier choice for clients and partners, including local real estate agents, mortgage brokers and financial institutions. With a clear north star, we bend to bold steps to simplify our organizational structure, and we aligned our resources to our strategic priorities. We recently reviewed our full list of priorities and significantly narrowed the focus, reducing it by more than 80%. This allowed us to reallocate resources to areas where we wanted to double down while simultaneously streamlining our operational execution.
Our goal is to focus intently on the things that matter the most to our clients and to do them better and faster than anyone else. I am personally committed to maintaining transparency regarding our progress, the cornerstone of which is providing visibility into how we are tracking against our goals and delivering on our commitments, which is what we internally refer to as having a high say-do ratio. We have incredible talent here at Rocket, and we will continue to build a team that drives our success. We've realigned our organization with key leaders stepping into expanded roles. We also welcomed new talent to propel us forward. In January, Alex Rampell joined our Board. Alex is a Partner at Andreessen Horowitz and is one of the world's leading experts in AI and fintech.
In addition, Jonathan Mildenhall, the former CMO at Airbnb, who Forbes is listed as 1 of the 10 most influential CMOs in the world recently joined our leadership team as the first ever Chief Marketing Officer for Rocket Companies. We're investing in world-class talent here at Rocket, and we're playing to win. Now our entire company is united behind a common vision and strategy, and we are executing at full speed. Earlier this month at Little Caesars Arena, right here in Detroit, we held our first all-company meeting since our IPO. More than 14,000 team members attended in the energy and the level of engagement were simply off the charts. The main focus of our all-company meeting was heavily geared towards artificial intelligence and the opportunity it presents for Rocket.
With AI, we are rewriting the rules of the game and structurally and fundamentally changing how this industry operates. Our mortgage origination has long been associated with inefficient up and down hiring cycles. Because of that, scale profitability has been notoriously difficult to achieve in the mortgage industry because that volatility and cyclicality have made it challenging to adequately plan ahead and invest for the future. The industry has traditionally staffed up rapidly to handle higher volume in upmarkets, only to reduce staff and respond to down markets. So those who don't manage capacity or liquidity effectively may be acquired or exit the industry altogether. And in 2023 alone, we saw this. We saw the industry with 62 M&A transactions, exits and bankruptcies, and recent data shows that capacity is down nearly 35% from the peak.
We believe AI will shape the future of the home buying industry and Rocket leading the way. Technology is the answer to better client experiences and capacity management in our industry. We aim to redefine the home buying experience through AI and deliver market share growth, scaled revenue growth and profitability. I will share with you that automation and AI are being aggressively deployed across Rocket, helping us to deliver better client experiences at scale across the entire home-buying process. Now I'm going to share three examples of how AI is driving impact today across mortgage banking, underwriting and servicing. Purchasing a home can be an overwhelming process, which is why at Rocket, we excel in blending personalized service with cutting-edge technology.
Now AI lets computers do what they do best, while allowing our team members to focus on what they do best, fostering relationships and connecting with our clients. So if you take, for example, our mortgage bankers, these team members play a crucial role because they guide clients through the entire mortgage journey. In Q4, we piloted an AI virtual assistant with 325 mortgage bankers or outbound client calls. Now previously, these bankers juggled notetaking, selling out applications, remembering regulatory requirements, all the while talking to our clients. What the AI assistant does is it seamlessly and accurately automatically transcribes, summarizes and populate hundreds of crucial application fields, hands-free in real time. So our bankers are more productive than they've ever been and they can now focus on what they do best with AI handling the rest.
Now the initial response from this pilot has been overwhelmingly positive, and we're already seeing signs of dramatically faster turn times. We're excited to roll this technology out to our broader banking force to deliver a better client experience through the millions of calls that we make in a given year. Now switching gears in underwriting. Automation and AI are helping to deliver higher accuracy and operational efficiency at scale. An underwriting decision typically requires the gathering and verification of thousands of data fields, which are drawn from disparate resources and formats to populate key categories of income, assets, collateral, property and the credit profile. Now, income verification is one of the critical inputs to an underwriting decision and also a very complex process that takes regulatory requirement, documentation accuracy, employment types and unstandardized data format into consideration.
So in December, nearly two thirds of income verification were automated without an underwriter needing to intervene. This provided a fivefold improvement compared to just 15 months prior here at Rocket. So thus far, our automated income verification has posted zero audit findings which is also highly impactful as income verification issues are amongst the top reasons behind GSE repurchase request. I'm also excited to share that we've recently rolled out this great income verification technology to our mortgage broker partners, further enriching the offerings we provide to help them thrive. Now imagine applying these advances in automation at scale across all underwriting categories as we continue to take market share and grow. Now in 2021, a record year for mortgage origination, when we processed 4 times the number of applications that we did in 2023, we demonstrated that our technology could scale up even when the industry was constrained by capacity.
Today, we're in an even better position to drive operating leverage through automation and AI. We've made significant advances in automating income verification and then we're tackling asset verification next. Now, AI is also enhancing our client interactions at scale across devices, whether our clients are reaching us by phone, by computer or by mobile app. So take servicing, for example, in 2023, we facilitated 3.1 million client interactions with payment and escrow questions topping the list. Our servicing calls and chats are increasingly powered by AI, providing clients with smart, conversational self-service experiences 24 hours a day, 7 days a week. Approximately 70% of our servicing calls and chats are fully self-serve without the need of team member assistance with interactions only escalating to team members where the human touch is required.
We've seen a continued trend of lower call volume in servicing as our AI-powered digital experiences become the preferred choice for our clients. And we're not just handling interactions, we're actually turning them into actionable insights. With AI's assistance, we're transcribing and tagging these servicing interactions, organizing this invaluable data to construct unified client profile in a centralized repository. From this repository, we train models to gain deeper insights and analytics. Our next objective is to expand this initiative to other areas of the business which ensures that AI continues to drive enhanced client experiences and operational efficiency across the board. With these examples, the consistent themes I hope to convey are, first, to harness the power of our data and artificial intelligence; second, to simplify and automate; and to third, unlock team member productivity and deliver better client experiences through speed, certainty and value.
The efficiency gains when deployed at full scale will be an absolute game changer for our organization as we will be able to serve many more clients without adding to our fixed cost structure. So really just scratching the surface here. There's so much more impact that generative AI can bring, and we're incredibly well positioned to capitalize on the opportunity and lead the industry. I am so honored to be a part of this next chapter in Rocket story. Looking ahead to the coming year, I'm confident in our team, our capabilities and our mindset. We look forward to sharing our progress with you on future earnings calls and during our first Investor Day later this year when our senior leaders will present on how we're executing our strategic priorities to enable AI-fueled homeownership.
And with that, I will turn it over to Brian.
Brian Brown : Thank you, Varun, and good afternoon, everyone. On today's call, I'll cover our strong financial results for the fourth quarter and the full year 2023. I'll share how our AI-fueled homeownership strategy positions us for success this year and into the future. I'll conclude by sharing our outlook for the first quarter of 2024. In 2023, Rocket again made significant strides in market share growth, gaining share on a year-over-year basis in both purchase and refinance. More specifically, we grew purchase market share by 14% and refinance market share by 10% from 2022 to 2023. I am incredibly proud of what we accomplished in the face of an extremely challenging mortgage market. It's a testament to our grit and tenacity.
In my 10 years at Rocket, I have never been more excited about what's to come. Through the ups and downs of mortgage cycles, we have continued to invest in our data and technology foundation. And now with AI, Rocket will change this industry. As Varun shared, we are unlocking capacity at scale through higher team member productivity and delivering a better client experience. We have made material progress in increasing scale and capacity in 2023, and we expect those gains to accelerate into 2024. Said differently, we believe we can keep our fixed costs relatively flat while originating significantly higher volumes. Turning to the full year results. We delivered $79 billion in closed loan volume and $3.8 billion in adjusted revenue in 2023. After cutting roughly a quarter of our cost base in 2022, we further reduced expenses in 2023 by nearly 20%.
We are operating with greater clarity, and we're laser-focused on prioritizing the most important work that will deliver the highest impact. In 2023, we took action to pivot or sunset projects that were not meeting our expectations, such as Rocket Auto and Rocket Solar. More recently, after conducting a review of our entire portfolio of projects, we cut the list by more than 80%, which helped reduce cost, but more importantly, it freed up resources to work on the core business. Despite the persistent macro challenges in 2023, for the full year, we delivered $67 million in adjusted EBITDA. We reported an adjusted diluted loss of $0.07 per share in a GAAP diluted loss of $0.15 per share. Now, let's dive into our strong fourth quarter results.
We generated adjusted revenue of $885 million, well above the high end of our guidance range. The $885 million of adjusted revenue represents a 30% increase from the fourth quarter of 2022 and marks the second consecutive quarter of year-over-year growth. Our performance in the quarter was primarily driven by stronger-than-anticipated purchase and refinance volume and gain on sale margin as we continue to see capacity come out of the industry. We delivered these achievements in what was one of the worst quarters for mortgage originations in recent history. Gain on sale margin for the quarter was 268 basis points, up nearly 25% from 217 basis points in the fourth quarter of last year. Net rate lock volume for the quarter was $16 billion. We generated $55 million of adjusted EBITDA, a year-over-year improvement of more than $250 million from Q4 2022 and this marks the third quarter in a row that we've reported positive adjusted EBITDA.
Adjusted EPS for the quarter was breakeven. On our last earnings call, we committed to a further reduction in total expenses in the fourth quarter of $50 million to $100 million. Excluding the $51 million onetime charge in the third quarter, and we came in at the top end of the range, reducing total expenses by approximately $100 million in the fourth quarter compared to the third quarter. Our innovative products were also a key driver of our success in the period. Our home equity loan product continued to resonate with clients as we saw volume more than triple in the fourth quarter compared to the first quarter. This product offers a solution for clients who may want to tap into their home's equity without impacting the lower rate on their first lien mortgage.
It also provides us with a great opportunity for a refinance transaction because when rates move lower, we will have the opportunity to consolidate the client's first and second lien mortgages. Home equity loans, ONE+ and BUY+ are unique products that have resonated strongly with both existing and new clients. Notably, the vast majority of our clients who came to us through these products were new clients who did not already have a loan with us. These innovative solutions helped us attract new clients into the Rocket ecosystem where they can experience our award-winning service for the first time and many times thereafter throughout their lives as homeowners. From a capital perspective, Rocket's strong balance sheet and substantial liquidity continued to serve as a major competitive advantage.
Our financial strength provides us with flexibility and optionality that most of our competitors simply do not have. We ended the fourth quarter with $3.6 billion of available cash and $6.4 billion of mortgage servicing rights. Together, these assets represent a total of approximately $10 billion of value on our balance sheet. Our $3.6 billion of available cash consists of $1.1 billion of cash on the balance sheet and an additional $2.5 billion of corporate cash used to self-fund loan originations. Total liquidity stood at approximately $9 billion as of December 31, including available cash plus undrawn lines of credit, plus our undrawn MSR lines. Our servicing portfolio is a key strategic asset and one where we have delivered award-winning service to our clients.
J.D. Power has recognized Rocket Mortgage as being the best servicer in 9 of the last 10 years. We've notched these repeated wins by delivering amazing service. We meet our clients where they are, augmenting the human touch with technology to provide confidence and peace of mind. As Varun mentioned, AI is driving impact across our organization, including servicing, where we are enabling better client experiences through AI-powered interactions and insights. As of December 31, our mortgage servicing portfolio included nearly 2.5 million loans with $509 billion in unpaid principal balance. Our net client retention rate in the fourth quarter was 97%, which continues to be multiples higher than the industry average. Retention rate serves as a key metric engaging client satisfaction and is one of the primary indicators of client lifetime value.
We also drive significant recurring revenue from mortgage servicing. During the fourth quarter, we generated $348 million of cash revenue from our servicing book, which represents approximately $1.4 billion on an annualized basis. Our industry-leading recapture rates resulting in significant client lifetime value allows us to be opportunistic with MSR acquisitions, and this will continue to be a focus of ours during 2024. Turning to our outlook for the first quarter of 2024. We expect adjusted revenue to be in the range of $925 million to $1.075 billion, the midpoint of which would represent a 13% increase quarter-over-quarter. This sequential improvement demonstrates notable strength as the industry's typical seasonality calls for a double-digit decline in origination volume from the fourth quarter to the first quarter.
On a like-for-like basis, the midpoint of our Q1 outlook implies year-over-year growth of 13.4%, building on the trend of year-over-year revenue growth we've achieved in each of the past two quarters. Regarding operating expenses, we expect Q1 to be slightly lower compared to the same period last year due to savings realized from our operational efficiency efforts implemented in 2023. These savings will be partially offset by reinvestments in performance marketing, leveraged by Rocket Mortgage and a seasonal Rocket Money campaign. As always, our forward-looking guidance is based on our current outlook and visibility. We are entering 2024 with momentum, and we are poised for growth. We are optimistic about market conditions improving from 2023.
Industry forecasters expect the size of the mortgage origination market to grow by north of 30% in 2024. But regardless of what the market does, we expect to continue growing market share through our AI-fueled homeownership strategy and by driving scalable revenue growth and profitability. As I mentioned earlier, I have never been more excited about Rocket's future and what we can accomplish. The opportunity is tremendous, and we are poised to continue taking share and be the leader in the home ownership category. With that, we're ready to turn it back over to the operator for questions.
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