Blend Labs, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Blend provides cloud-based software for financial-services firms and title, escrow, and settlement services through its Title segment. Unless stated otherwise, financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $40.6 million | $55.4 million | $120.7 million | $192.4 million |
| Gross profit / margin | $22.1 million / 54% | $21.1 million / 38% | $61.4 million / 51% | $75.2 million / 39% |
| Operating loss | $36.2 million | $129.9 million | $134.4 million | $671.0 million |
| Net loss | $41.8 million | $132.7 million | $149.5 million | $682.4 million |
| Net loss per share, basic and diluted | $(0.18) | $(0.57) | $(0.63) | $(2.95) |
| Cash used in operating activities | — | $106.9 million | $143.1 million |
- Q3 revenue fell 27% year over year. Title revenue declined 53% to $11.9 million; Blend Platform revenue declined 4% to $28.6 million. Consumer Banking Suite revenue grew 18%, while Mortgage Suite revenue decreased 11%.
- For the first nine months, revenue declined 37%. Title revenue decreased 61% and Blend Platform revenue decreased 13%. Management attributed the declines mainly to lower mortgage and title transaction volumes.
- Gross margin improved despite lower revenue, while operating losses narrowed substantially. The comparison is affected by 2022 impairment charges: $57.9 million in Q3 and $449.7 million for the nine-month period, with no such charges in 2023.
- Mortgage banking transactions on Blend’s platform fell 26% in Q3, to 217,000 from 292,000; Title closed orders were 4,000 versus 11,000.
- At September 30, cash and cash equivalents were $84.6 million and marketable securities and other investments were $160.4 million, for $245.0 million combined. Restricted cash was $7.3 million. Current assets were $283.2 million and current liabilities $36.8 million.
- Term-loan principal was $225.0 million (carrying value, net of discounts and issuance costs, $219.0 million); the $25.0 million revolving facility was undrawn. The term loan bears floating interest, had an effective rate of 14.68% at quarter-end, and matures June 30, 2026. The company reported covenant compliance.
- Cash, cash equivalents, and restricted cash decreased $37.7 million in the first nine months. Investing cash inflow of $74.1 million primarily reflected net maturities of marketable securities.
Material changes, outlook, and risks
- Operating expenses declined year over year, in part following workforce reductions. Blend recorded $24.3 million of restructuring charges in the first nine months, including $9.1 million in Q3. The August 2023 plan eliminated about 150 positions and 20 vacancies; implementation is expected to be substantially complete in Q1 2024. The company estimated annualized compensation expense reductions of approximately $33 million.
- Management expects higher interest rates and weak mortgage origination activity to continue to pressure mortgage-related and Title revenue in the near term. It expects Title revenue to face significant headwinds; it described long-term growth potential for Blend Platform but gave no specific company revenue or earnings guidance in the supplied filing text.
- Management stated that available cash, investments, and revolver capacity should fund operations for at least the next 12 months. It also noted continuing operating losses and negative operating cash flow, and that future capital needs depend on market recovery, customer growth, spending, and cost-reduction execution.
- Remaining performance obligations were $58.9 million at quarter-end; the company expects to recognize approximately 50% as revenue over the next 12 months. Timing depends partly on customer utilization and contract terms.
- Key risks include mortgage-market sensitivity, customer and title-volume concentration, continued losses and cash burn, floating-rate debt, execution and potential unintended effects of workforce reductions, and competition. One customer represented 18% of Q3 revenue and 19% of nine-month revenue. Title underwriter concentration and the Title365 minority-interest put option also warrant attention; the put option’s stated redemption amount if currently exercisable was $55.1 million.
- Other exposures include a $1.8 million title and escrow loss reserve, a $0.5 million litigation accrual, and contingent responsibility for customer escrow and trust funds. The company reported no litigation it believed likely to have a material adverse effect, while noting that future outcomes remain uncertain.
- The filing says disclosure controls were effective as of September 30, 2023. Blend also disclosed a multi-class share structure: its co-founder held approximately 63% of voting power at quarter-end. A Rule 10b5-1 plan adopted by him provides for sales of approximately $1.85 million of Class A shares, subject to market prices and plan terms.
Important facts for investors to verify
- Whether mortgage origination and Title order volumes stabilize, and how continued weakness affects revenue and gross margin.
- Whether expense reductions deliver the expected savings without impairing product development, service quality, or customer retention; also track remaining restructuring cash costs.
- Liquidity and cash-burn trajectory, revolver availability, minimum-liquidity covenant compliance, and the effect of floating rates on debt service.
- Customer concentration, the $55.1 million stated Title365 put-option redemption amount, and any changes in title reserves or litigation contingencies.
- Progress converting remaining performance obligations into revenue and adoption of Composable Origination and consumer-banking products.
- Potential dilution from equity awards and the implications of concentrated voting control and the disclosed insider trading plan.