Rocket profitable for the first time in three quarters

Rocket Cos. results were stronger than analysts' expectations, as it turned a GAAP net profit for the first time in three quarters, helped by a positive change to its servicing valuation.

However, the analysts were using an operating metric in looking at Rocket, under which lost money for the second quarter.

The Detroit-based company had net income of $139 million for the quarter, including a $42 million fair value gain for its mortgage servicing portfolio.

On an adjusted basis, Rocket lost $33 million. That 2-cents-per-share loss still beat consensus estimates of a 4 cents per share loss, Wedbush's 5 cents per share and Keefe, Bruyette & Woods' estimate of 3 cents per share.

In the first quarter, Rocket lost $411.5 million per share, while one year ago, it earned $60 million.

During the quarter, Rocket closed $22.3 billion of mortgages, compared with $16.9 billion for the prior three months and $34.5 billion for the same period in 2022. Net rate lock volume of $22.2 billion was 22% higher than KBW projections of $18.1 billion.

Its gain on sale margin of 267 basis points was in line with KBW's 265 basis point expectations. That compares with 239 basis points in the first quarter and 292 basis points a year ago.

Rocket reports sold loan activity for its origination segments. Its direct-to-consumer business produced $12.4 billion in the second quarter at a 367 basis point gain-on-sale margin. This compared with $9.8 billion at 371 basis points in the first quarter and $19.5 billion with a 417 basis point margin for the second quarter of 2022.

Meanwhile, its partner network, primarily wholesale production, did $9.6 billion with margins of 93 basis points. Both were higher than the first quarter's $7.1 billion at 83 basis points. But for last year's second quarter, the partner business produced $13.6 billion with margins of 129 basis points

Including the fair value addition, Rocket had servicing income of $386 million in the second quarter, up from a $31.9 million loss three months prior and income of $345.1 million one year ago.

During its earnings call, management discussed ongoing expense reductions, not just from the latest round of buyouts, but also from exiting projects outside of mortgage that no longer meet its expectations, explained Brian Brown, chief financial officer.

"Most recently, we pivoted from investing in a sales platform for solar to only offering solar financing through the Rocket Loans platform," Brown said. "We also recently wound down Rocket Auto operations."

All of those should result in cost savings of $150 million to $200 million on an annualized basis, fully starting with the fourth quarter, he said.

It will take a charge to earnings of between $50 million and $60 million, primarily in the current period, as a result of those buyouts, Brown added.

The company guided to adjusted revenue of $850 million to $1 billion.

"This guidance takes into account current market conditions including challenges presented by the historically low housing inventory levels," Brown said. "We expect Q3 expenses to be roughly flat compared to Q2, excluding the $50 to $60 million in one-time charges."

That is good news for Rocket's financial picture going forward, Jay McCanless of Wedbush said.

"Given expected trends in origination volumes and net revenue, the company should be operating close to break-even in 4Q23 and be well on the way to GAAP and adjusted profitability in FY24," McCanless wrote in his recap on Rocket.

When asked to provide color around the hiring of Varun Krishna, who will be coming on board as CEO, the person currently occupying that slot on an interim basis, Bill Emerson, said "we were looking for somebody who had great business acumen, somebody who had consumer product skill sets [and] somebody who was really good with people."

Krishna "had alignment with us in the fintech space and the abilities that we have and the things that we're looking to do as it relates to expanding our business and our platform and our ecosystem," said Emerson, who will take on the role of president and chief operating officer.