Blend Labs, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Blend provides a cloud-based software platform for financial-services firms, with related title, escrow, and settlement services through its Title segment. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $37.3 | $71.5; down 48% |
| Gross profit / margin | $15.9 / 42% | $28.9 / 40% |
| Operating loss | $(61.4) | $(69.7) |
| Net loss | $(66.2) | $(72.4) |
| Net loss attributable to common stockholders / diluted loss per share | $(67.5) / $(0.28) | $(73.5) / $(0.32) |
| Operating cash flow | $(46.7) | $(45.8) |
Revenue declined in both main segments: Blend Platform revenue was $24.7 million, down 24%, and Title revenue was $12.6 million, down 68%. Mortgage Suite revenue fell 33% to $17.8 million; Consumer Banking Suite revenue rose 34% to $5.2 million. Title segment gross profit was negative $0.2 million, versus positive $8.7 million a year earlier. Consolidated gross margin improved to 42% from 40%, despite lower gross profit dollars.
Research and development, sales and marketing, and general and administrative expenses decreased year over year, but Q1 included $12.8 million of restructuring charges. Interest expense rose to $7.6 million from $5.6 million; investment income contributed to other income of $2.9 million. Stock-based compensation was $16.4 million, down from $24.3 million.
At March 31, cash and cash equivalents were $46.2 million and marketable securities were $260.7 million, totaling $306.9 million. The company had a $25 million revolving facility available and undrawn. Management said these resources and expected customer collections should fund operations for at least 12 months, while noting potential future financing needs. Operating cash use was $46.7 million; cash, cash equivalents, and restricted cash fell $78.0 million during the quarter, ending at $51.6 million.
Debt included $225.0 million of term-loan principal, with a net carrying value of $217.5 million; the loan matures June 30, 2026, with principal due at maturity. The borrowing rate was floating; the filing reports an applicable rate of 10.03% and an effective rate including debt costs of approximately 13.96% at quarter-end. The company reported compliance with its covenants, including the minimum-liquidity covenant. Accumulated deficit was $1,228.4 million.
Material changes and operating context
- Mortgage banking transactions on Blend’s platform were 182,000, down 52% from 380,000. Title closed orders were 4,000 versus 27,000. Management attributed the mortgage decline mainly to higher interest rates, reduced housing affordability, and economic uncertainty; industry mortgage originations declined 58% over the comparable period.
- The Title segment’s traditional revenue fell 76%. Consumer Banking Suite growth partly offset the decline in mortgage-related revenue.
- Blend changed its segment and revenue presentation in Q1: software-enabled title was moved from Blend Platform to Title, and prior-period amounts were reclassified for comparison.
- The January workforce plan eliminated approximately 340 positions, about 28% of the then-current workforce. Q1 restructuring charges included $11.7 million for the plan and $1.1 million of executive transition costs. Eliminated positions represented approximately $43.4 million of annualized compensation expense; execution and cash payments were expected to be substantially complete in Q2 2023.
Outlook, risks, contingencies, and unusual items
- Management expects near-term mortgage-rate and origination-volume headwinds to weigh on Blend Platform and Title revenue; Title revenue is expected to face particularly significant headwinds. Management expressed a long-term expectation of positive Blend Platform growth but did not provide numerical revenue or earnings guidance in this filing.
- The company expects operating losses to continue for the foreseeable future. It says ongoing cost improvements from expense actions are expected during the remainder of fiscal 2023, but cautions that workforce-plan savings may not be achieved and additional charges may arise.
- Revenue concentration is material: one customer generated 18% of Q1 revenue, compared with 36% a year earlier. Management also disclosed substantial customer concentration in Title, including Mr. Cooper’s 57% share of Title segment revenue in 2022.
- Title365’s 9.9% redeemable noncontrolling interest was recorded at $42.0 million; its stated redemption amount if currently redeemable was $53.8 million. The related put option may require Blend to purchase the minority interest when exercisable under the agreement.
- The company recorded a $0.7 million litigation contingency accrual. Title and escrow loss reserves were $1.8 million. Blend also administers customer escrow and trust funds off balance sheet and is contingently responsible for their disposition.
- On April 28, 2023, after quarter-end, Blend received notice that its average share price had fallen below the NYSE’s $1 minimum over 30 consecutive trading days. It has six months to regain compliance; the stock remained listed during the cure period. Blend said it intended to regain compliance and may consider alternatives, including a reverse stock split.
- Blend previously recorded major Title365-related impairment charges in 2022, including full write-offs of goodwill and customer-relationship intangible assets. No acquired-intangible amortization was recorded in Q1 2023, compared with $4.1 million in Q1 2022.
- Key risks include continued mortgage-market weakness, customer concentration and retention, floating-rate debt costs, access to financing, competition, cybersecurity and service availability, regulatory compliance, and execution of restructuring and Title365 integration. Blend also disclosed that its dual-class share structure gives its co-founder approximately 64% of total voting power as of March 31, 2023.
Important facts for investors to verify
- Whether mortgage and title transaction volumes stabilize, and how that translates into revenue and segment profitability.
- Whether the workforce reductions deliver the stated annualized savings without impairing product development, customer service, or revenue generation.
- Whether liquidity remains adequate as operating cash use continues, and whether Blend maintains debt-covenant compliance amid floating-rate interest expense.
- How customer concentration, especially in Title, changes and whether key customer relationships and volumes persist.
- Whether Blend regains NYSE minimum-price compliance within the cure period.
- Potential cash requirements from the Title365 noncontrolling-interest options, litigation, title-loss reserves, and customer escrow responsibilities.