Blend Labs, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Blend provides a cloud-based software platform for financial-services firms and title, escrow, and settlement services through its Title segment. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $34.9 | $37.3 |
| Gross profit / margin | $18.1 / 52% | $15.9 / 42% |
| Operating loss | $(21.2) | $(61.4) |
| Net loss | $(20.7) | $(66.2) |
| Net loss attributable to common stockholders | $(22.1) | $(67.5) |
| Diluted loss per share | $(0.09) | $(0.28) |
| Operating cash flow | $(3.9) | $(46.7) |
- Revenue declined 6% year over year. Blend Platform revenue was $23.8 million, down 3%; Title revenue was $11.1 million, down 12%.
- Within Blend Platform, Mortgage Suite revenue fell 15% to $15.1 million, while Consumer Banking Suite revenue grew 29% to $6.7 million. Professional services revenue increased 21% to $2.1 million.
- Gross margin rose 10 percentage points to 52%. Blend Platform margin was 67%, versus 65%; Title margin improved to 19% from negative 2%.
- Operating expenses fell 49% to $39.3 million, reflecting lower personnel and stock-based compensation costs following restructuring, as well as lower restructuring charges. Q1 restructuring expense was $1.0 million versus $12.8 million.
- Interest expense declined 33% to $5.1 million, primarily following the $85 million term-loan prepayment in 2023. Other income was $5.7 million and included a $4.4 million gain from an observable price change in a privately held equity investment; the valuation uses significant unobservable inputs.
- Operating cash use improved to $3.9 million. The period included a $12.6 million increase in deferred revenue, a working-capital source of cash. Investing cash flow was positive $60.6 million, mainly reflecting marketable-security sales and maturities, offset by purchases; this was largely investment-portfolio activity rather than operating cash generation.
Financial position, debt, and liquidity
- At March 31, cash and cash equivalents were $84.5 million, marketable securities and other investments were $43.5 million, and restricted cash was $7.3 million. Management reported $128.0 million of cash, cash equivalents, and marketable securities available as principal liquidity sources.
- Total assets were $201.8 million; current liabilities were $42.6 million. Stockholders’ equity was negative $35.8 million, with an accumulated deficit of $1,362.3 million. Deferred revenue increased to $21.5 million from $9.0 million at year-end.
- Term-loan principal was $140.0 million at quarter-end; its carrying value, net of discounts and costs, was $138.9 million. The floating-rate loan’s applicable rate was 12.93%, and its effective rate was approximately 14.55%. The loan matured June 30, 2026; a conditional extension to June 2027 had not been obtained. The revolving facility had been terminated. Blend reported covenant compliance at March 31 after remedying prior noncompliance.
- After quarter-end, on April 29, Blend issued $150 million of Series A Convertible Preferred Stock to Haveli and issued a warrant for up to 11,111,112 Class A shares at $4.50 per share, exercisable for 24 months. Blend used approximately $146.1 million to repay the credit agreement in full and terminate it.
- Management stated that quarter-end liquidity and customer cash collections were expected to fund operations for at least 12 months. This statement precedes the subsequent preferred investment and debt repayment.
Changes, outlook, and risks
- The lower mortgage activity affected revenue: Blend reported 14.1% fewer mortgage transactions on its platform than in Q1 2023, particularly refinance transactions. Management attributed the decline mainly to high rates, reduced housing affordability, and economic and political uncertainty.
- Management expects elevated mortgage rates to continue weighing on mortgage and Title revenue in the near term, while describing long-term growth prospects for Blend Platform as positive. Industry forecasters expected mortgage originations to increase in 2024. Blend also expected ongoing expense improvements from cost actions during 2024.
- Management reported $93.0 million of remaining performance obligations; approximately half was expected to be recognized as revenue over the next 12 months. Timing depends in part on customer utilization and contract terms.
- The January 2024 workforce reduction was expected to be substantially complete in Q2 2024. Prior 2023 plans eliminated approximately 490 positions in total.
- Key risks include dependence on mortgage and real-estate activity, customer concentration, competition, continued operating losses, and uncertainty in forecasting transaction-based revenue. One customer represented 18% of revenue in both Q1 2024 and Q1 2023. The Title segment relies on two underwriters, which represented approximately 64% and 36% of title policy fees in Q1 2024.
- Title365’s 9.9% redeemable noncontrolling interest had a $47.7 million carrying value; its put-option redemption amount, if currently exercisable, was $56.6 million. The company also disclosed a $0.5 million accrual for litigation contingencies and potential exposure from escrow funds it administers.
- The Haveli preferred shares carry rights senior to common stock, including liquidation and specified redemption rights, voting on an as-converted basis following required approval, certain consent rights, and a board-nomination right while ownership conditions are met. Conversion and warrant exercise could dilute common holders. Blend disclosed that its disclosure controls were effective as of March 31, 2024.
Important facts for investors to verify
- Review the preferred-stock and warrant documents for conversion, redemption, voting, consent, and dilution terms, and assess the post-quarter liquidity position after repayment of the loan.
- Track mortgage-market activity, Consumer Banking Suite growth, Title segment margins, and customer and underwriter concentration.
- Assess the quality and repeatability of the Q1 margin and loss improvement, including the effect of cost reductions, lower stock-based compensation, restructuring, and the $4.4 million investment gain.
- Monitor cash consumption, deferred-revenue conversion, remaining performance obligations, and the timing and costs of completing the January 2024 workforce reduction.
- Review the Title365 put-option exposure, title and escrow loss reserves, litigation contingencies, and covenant status relevant to the quarter-end debt that was subsequently repaid.