Rocket reports steep decline in profit in 2Q

Rocket Cos. was barely profitable in the second quarter, earning a mere $60 million of net income, versus $1.03 billion in the first quarter and $1.04 billion for the second quarter of 2021.

In its earnings call, management focused on how its various parts, including its new programs in solar and home equity, as well its acquisition of Truebill — now called Rocket Money — can help develop business in other parts of its organization.

On the mortgage side it announced a new partnership with Santander Bank to originate loans for its customers. Plus it noted its second quarter cost-cutting efforts were more successful than planned.

Rocket set out a goal of $200 million in expense reductions in the current period.

"However, as we closely monitored the challenging macro-environment during the quarter we made a concerted effort to accelerate expense reductions," Julie Booth, chief financial officer, said on the call. "We took additional cost savings measures beyond the crew transition plan including but not limited to marketing, production and other vendor related costs, which resulted in a reduction in cost of $300 million."

In the current quarter, Rocket is looking to save another $100 million and that includes looking at vendor contracts as they mature, Booth said.

However, the one word not mentioned here was layoffs.

With all of the work that Rocket is doing to drive market share on what Vice Chairman and CEO Jay Farner described as its "engagement platform" across the company's various brands, involuntary headcount reductions are not part of the plan, even though right now it has a little bit of excess capacity.

"We'll need that capacity as we move into 2023 as we grow market share again," Farner said. "So it wouldn't make a lot of sense for us to go through a significant capacity reduction only to turn around and have to hire again four or five months later."

The outlook on Rocket from analysts
While analysts were bearish on the Detroit-based company's outlook for the rest of this year, they're relatively positive about its future beyond that.

"We are looking past this year and towards what this company is going to do with its 4 million-plus active customers (Truebill and servicing) over time," said Jay McCanless of Wedbush Securities in a report.

In general, the second half of 2022 "will clearly be tougher than the first for mortgage companies," McCanless said.

Rocket management's guidance for the rest of the year came in weaker than what Keefe, Bruyette & Woods expected.

"Commentary from the earnings call suggested that the operating environment could remain challenging well into 2023," a report by KBW's Bose George noted.

Executives guided to loan volume of between $23 billion and $28 billion for the current quarter. Gain on sale margins should end the period between 250 basis points and 280 bps.

Still, a positive takeaway was "Rocket has done a good job reducing costs, and has guided to further reductions in the second half of 2022, suggesting that the company will not chase volume at lower margins," George continued.

The Santander partnership
As another competitive advantage, Rocket is spending the "millions and millions of dollars" on its various businesses or in creating partnerships like the one with Santander, where other mortgage companies are not, Farner said.

During the call, Farner touched on the Santander agreement. In February, as part of its overall downsizing effort, the multinational bank announced it was getting out of the U.S. mortgage business.

With this arrangement, Santander clients can access mortgages via a link on the bank's website or by speaking with a dedicated team of Rocket loan officers, a press release said.

Rocket also signed a partnership agreement with Q2, a banking fintech, which will "embed the digital Rocket Mortgage experience directly into the online banking apps used by their clients," said Farner.

The company is having additional conversations with banks and credit unions and expects to make this technology available to them in the fall.

Wedbush's McCanless noted the partnership as a positive development.

"As the nation's largest, and arguably only, branded mortgage originator, the 4 million touch points represent a broad range of revenue from new and existing products, including closed-end home equity loans, solar installation and finance, co-branded or co-originated third party opportunities (Q2, Santander, Salesforce, the TPO broker channel, etc.), real estate brokerage, and credit card," McCanless said. "We are expecting Rocket to build on this with future acquisitions of both other mortgage-related assets and new product sets."

Rocket's partner network, which besides working with other institutions includes its wholesale channel, did $13.6 billion in production during the quarter, well down from the $26 billion originated in the first quarter and $30.1 billion in the previous year.

Over the same time frame, direct-to-consumer volume dropped to $19.5 billion from $36.2 billion and $48.9 billion respectively.

Gain-on-sale margins from all channels of 292 basis points was above KBW's estimate of 280 bps. This was down from 201 bps on a quarter-to-quarter basis, but year-over-year was up from 278 bps.

Rocket also reported loan servicing income of $345.1 million for the second quarter, versus $820.6 million in the first quarter and a loss of $72 million for the second quarter of 2021.