Rocket Companies announced Q1 2024 earnings, reporting $0.04 adjusted diluted EPS and adjusted revenue of $1.163 billion, surpassing the high end of guidance.
The company achieved double-digit adjusted EBITDA margin and continued to expand market share in both purchase and refinance sectors.
Adjusted EBITDA stood at $174 million, marking a significant improvement from the previous year.
Adjusted revenue represented a 32% increase year-over-year, with gain on sale margin improving to 311 basis points.
Market Share and Business Performance
Rocket captured market share from large industry players and big banks, demonstrating growth in both purchase and refinance market share.
Introduced and scaled a home equity loan product, witnessing over 3.5x growth from Q1 2023. Rocket is now among the top players in the home equity loan market.
Rocket’s servicing portfolio is viewed as a strategic asset, with acquisitions of 4 MSR portfolios and a recapture rate more than 2x the industry average.
Strategic Initiatives and Industry Trends
Rocket Companies is strategically positioned to capitalize on industry consolidation and capacity rationalization, with a significant decrease in mortgage employment indicating pressures on smaller industry players.
Banks have been steadily losing mortgage origination market share since the global financial crisis, a trend expected to continue with upcoming Basel III capital requirements.
The National Association of Realtors Settlement presents an opportunity for Rocket to disrupt the traditional home buying and selling experience.
Technological Advancements and AI Integration
Rocket has made significant strides in integrating AI across its operations, enhancing client experiences, and improving operational efficiency. Examples include the Explore Spaces visual search and voice-based generative AI for updating approval letters.
AI-driven tools like Rocket Logic Assistant and Rocket Logic Docs have been instrumental in reducing manual tasks and improving processing speed and accuracy.
The company’s AI initiatives have led to a 25% reduction in the number of interactions team members have with each loan and a 25% improvement in closing times.
Financial Position and Outlook
Rocket ended Q1 2024 with a strong liquidity position, with $3.5 billion available cash and $6.7 billion in mortgage servicing rights, totaling approximately $10.2 billion in value.
The company’s Q2 guidance anticipates adjusted revenue in the range of $1.075 billion to $1.225 billion, reflecting confidence in continued market share growth and top-line growth.
Question and Answer
Outlook for Originations, Revenues, and Profitability
Question
How will Rocket Companies’ outlook for originations, revenues, and profitability in 2024 evolve, considering the market dynamics and the company’s focus on growth and market share?
Answer
Rocket Companies believes that despite a challenging market with shifting interest rates and lower mortgage applications, the company’s focus, track record of share gain, and strategic advantages will enable it to outperform and capture a significant portion of the market.
The company’s investments in technology, talent, and a diversified platform covering various aspects of the homeownership journey position it well for sustained growth and profitability, regardless of the market size.
Market Share and Margin Expansion
Question
Do you believe the strategic initiatives, such as capacity rationalization, banks exiting the market, and the NAR settlement, are sufficient to drive accelerated market share growth for Rocket Companies? Additionally, do you see the opportunity for margin expansion back to historical levels despite the current favorable dynamics?
Answer
Rocket Companies sees a combination of innovation, internal focus, and top-of-funnel improvements as key drivers of market share growth, with early signs of acceleration.
The company views the NAR settlement as an opportunity to drive efficiency, transparency, and cost reduction in the home buying process, aligning with its focus on customer value and innovation.
While the company acknowledges that current margins are still below 2018 and 2019 levels, it expects gain on sale margins to continue expanding from last year, driven by capacity rationalization and favorable market dynamics.
Q2 Outlook and Conservatism
Question
Is there any conservatism built into the Q2 outlook, and is there potential for upside to the guidance, considering the current market environment and varying industry forecasts? Additionally, are you seeing an acceleration in market share gains in the current quarter and beyond?
Answer
Rocket Companies considers the $1.8 trillion industry forecast as outdated and potentially unrealistic, with April data showing a different rate environment and potential challenges in reaching that volume.
The company remains optimistic about growing its volume in Q2 through market share gains, despite acknowledging the uncertainty surrounding the market size.
Rocket Companies is seeing an acceleration in market share gains, driven by capacity rationalization, banks’ reduced presence, and the company’s strategic initiatives.
Freddie Mac’s Second Lien Program
Question
What are your early thoughts on Freddie Mac’s proposed program for second liens on agency mortgages? Do you view this as a growth opportunity and how might it impact your current business and product offerings?
Answer
Rocket Companies generally supports increased liquidity in the mortgage market and sees potential benefits from Freddie Mac’s proposed program.
The company has already developed a successful closed-end second lien program and believes private capital will continue to play a significant role in this market.
Rocket Companies will continue to evaluate the specifics of Freddie Mac’s program and its potential impact on the company’s business and product strategy.
Expense Management and Product Focus
Question
Can you provide updated thoughts on expense management in light of the recent backup in rates, and are there any specific product focus areas that could help generate more revenue in an environment of higher rates?
Answer
Rocket Companies emphasizes the importance of both profitability and efficiency and sees expense management as a key component of its strategy.
The company plans to leverage its cost savings to invest in growth through accelerated execution, innovation, and efficiency while maintaining a focus on product development and value creation for clients.
Rocket Companies’ AI strategy is designed to create operating leverage, enabling the company to grow its capacity without significantly increasing headcount, and the company will continue to invest in technology and talent to drive sustainable growth.
Bank Partnerships and White Label Offerings
Question
Are there any ongoing conversations or plans to collaborate with banks on white-label origination offerings or other branded partnerships to access their customer base or potentially help them navigate the current market environment and Basel III requirements?
Answer
Rocket Companies acknowledges the trend of banks exiting the mortgage market and sees potential opportunities to create value through partnerships and white-label offerings.
The company is actively exploring various collaboration options with banks but cannot provide specific details at this time.
Rocket Logic and Origination Improvements
Question
How will Rocket Logic, your AI platform, improve the origination side of the business, and what are the key benefits and outcomes you expect from this technology?
Answer
Rocket Logic, the company’s AI platform, brings transformative benefits to the business, including efficiency, speed, and personalized client experiences.
The platform is being extended to every part of the homeownership journey, from digital experiences to document management, underwriting, and servicing, resulting in significant time savings, faster resolution times, and improved accuracy.
Rocket Companies is excited about the potential of Rocket Logic to drive further improvements and is actively investing in this strategic initiative.
Servicing Portfolio Acquisitions
Question
Can you provide more details on your recent servicing portfolio acquisitions, including the sources of these transactions and the availability of similar high-coupon products in the market?
Answer
Rocket Companies views servicing assets as strategic and high-return investments, with a focus on recapture rates and the potential for both organic and acquired portfolios to contribute to profitability.
The company is actively bidding in the market for servicing portfolios, particularly those with higher coupons, and sees opportunities to leverage its recapture capabilities in this space.
Purchase Market Share Growth
Question
How is Rocket Companies addressing the inherently localized nature of the purchase market to drive long-term growth and market share gains in this segment?
Answer
Rocket Companies has made the purchase market a strategic focus area, with dedicated teams, resources, and a deep understanding of the funnel and client journey.
The company is integrating its ecosystem assets, such as Rocket Money, Home Search, and Servicing Portfolio, to create a seamless and efficient experience for clients and drive market share growth.
Rocket Companies is investing in AI, both organically and inorganically, to enhance its capabilities and take a significant leap forward in the purchase market.
AI Investments and Differentiation
Question
How do Rocket Companies’ investments and capabilities in AI differ from industry competitors, and has AI been a prominent topic in recent industry discussions?
Answer
Rocket Companies believes that success in AI requires significant activation energy, including access to large client bases, extensive data, engineering resources, and investments in data science and talent.
The company sees AI as a strategic imperative at every level of the organization and is actively investing in this area, as evidenced by its recent Board appointment and Chief Technology Officer hire.
