Rocket Companies Posts Its 1st Quarterly Loss

For the first time since Rocket Companies Inc. went public in August 2020, the Detroit-based fintech platform company reported a quarterly loss.

The company that includes tech-driven mortgage, real estate, and financial services businesses released its results for the fourth quarter and full year ended Dec. 31, 2022, after the markets closed.

For the fourth quarter, the company reported a net loss of $493 million, or 14 cents per diluted share, compared to a net profit of $865 million, or 32 cents per diluted share, in the same quarter a year earlier. 

Net revenues in the quarter totaled $481 million, down 81% from revenues of $2.59 billion in the fourth quarter of 2021. 

For the full year, Rocket reported net income of $700 million, or 28 cents per share, down 88% from $6.7 billion or $2.32 per diluted share, a year earlier. Revenues for the year also fell dramatically, totaling $5.84 billion, down nearly 55% from $12.9 billion for all of 2021.

The results nonetheless exceeded the consensus estimates of analysts, who expected an annual loss of 9 cents per share on revenues of $5.21 billion, according to SeekingAlpha.com.

Both the fourth-quarter and full-year results were affected by steep drops in close loan origination volume. For the quarter, volume totaled $19.03 billion, down 75% from $75.86 billion in the same quarter a year earlier.

For the full year, closed loan origination volume totaled $133.13 billion, down 62% from $351.2 billion for all of 2021.

Fitch Ratings analyst, Shampa Bhattacharya, explained that Rocket has been taking cost-cutting action but it will take time to see the results flow through. That along with originations dropping is what primarily drove Rocket's losses in the fourth quarter. 

"Because of that, they're not gonna be able to generate a profit this quarter... and then, seasonally, as originations pick up and revenues pick up, we'll have to see if the cost cuts they've undertaken so far is enough for them to be put on a path to profitability like second quarter this year (2023)," Bhattacharya said.

During a webcast with analysts and the news media, Rocket CEO Jay Farner, who has announced plans to retire in June, said 2022 was a challenging year for the housing and mortgage industries.

“It was a year marked by rapid change,” he said, noting that the Federal Reserve increased the benchmark federal funds rate eight times in its fight against inflation. That helped to boost mortgage rates, which he noted increased from 3% in January to more than 7% by the end of October.

That significantly affected mortgage refinancing, a key part of Rocket Companies revenue stream. 

“Last year marked a period of transformation for Rocket,” Farner said. “We right-sized our business to respond to a challenging market; we also made key investments to serve our clients better on every step of their home ownership journey.”

He continued, “With foundational pieces of our client engagement program in place, we are focused on expanding our top of funnel, lifting conversion, and lowering our client acquisition cost, with the ultimate goal of growing our purchase market share and extending client lifetime value.”

Among the foundational pieces he cited were unifying under one brand and the integration of the Rocket Money app, which he said started 2023 as the top downloaded app from the IOS store. He also cited the launch of Rocket Rewards, a loyalty program launched in November that allows customers to accrue points that can be redeemed toward various financial transactions across the Rocket platform. Farner said the loyalty program had enrolled 1 million clients as of Dec. 31.

He also said Rocket’s Inflation Buster program, which was launched in September 2022 and offers a buydown that lowers a mortgagee’s interest rate by 1% for the first 12 months of the loan, was more popular than expected.

Those are just some of the programs the company has launched to engage with its customers, and Farner noted that Rocket has reached 25.4 million accounts across its “ecosystem” as of Dec. 31, 2022.

That, he said, has helped the company produce a 90% retention rate for customers, as well as producing a lead-to-close conversion rate via the Rocket Money app “that is more than double for those who did not download the app.”

“We are uniquely positioned to help our clients through the home-ownership journey,” Farner said.

Company officials also said they worked hard to position Rocket Companies for growth in 2023. According to CFO Brian Brown, that includes reducing expenses by almost $3 billion, or 40%, from the fourth quarter of 2021 to the fourth quarter of 2022. The expense cutting included offering buyouts to 8% of its workforce in April 2022.

“We ended the fourth quarter with $3.3 billion in cash and $6.9 billion in mortgage servicing rights,” Brown said during the webcast. “Our total liquidity is $8.1 billion as of Dec. 31, and our mortgage servicing portfolio has 2.5 million clients with $535 billion in unpaid principal balance.”

As a credit analyst, Bhattacharya looks at liquidity and leverage, and deemed their equity position as very solid. But can Rocket take sustained losses like this for a few quarters? Bhattacharya said probably not.

"It helps that they are very conservatively leveraged as a starting point," Bhattacharya said. "On a liquidity standpoint, they have a lot of cash, even after this cash loss. They have over $3 billion in cash, including the self-funding loans. In addition to that, they have the unsecured line of credit, they have the MSR book, they have a lot of liquidity. So financially speaking from a credit standpoint, this loss itself is probably not going to compromise. But anything sustained like this for a long time, that's a different situation, and we don't expect that to happen as of now." 

Farner said Rocket will continue to add programs and services with the intent of growing its share of the purchase mortgage market, which he said is filled with opportunity as other companies retrench or get out of the market completely.

“We believe grabbing that purchase market share is the best place to focus, especially with our 90% retention rate,” he said.

In regard to Farner's retirement, Bhattacharya doesn't believe their management is in any unstable condition.

"It's not great to have a CEO transition while Rocket is navigating unfavorable macro environment," Bhattacharya said. "But the depth of the bench is very solid."