Blend Labs, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited results are compared with the corresponding 2022 periods. Blend provides cloud-based software for financial services firms and title, escrow, and settlement services through its Title segment.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $42.8 million | $65.5 million | $80.2 million | $137.1 million |
| Gross profit / margin | $23.5 million / 55% | $25.3 million / 39% | $39.3 million / 49% | $54.1 million / 39% |
| Operating loss | $36.7 million | $471.4 million | $98.2 million | $541.2 million |
| Net loss | $41.5 million | $477.2 million | $107.7 million | $549.6 million |
| Net loss per share, basic and diluted | $0.18 | $2.06 | $0.45 | $2.38 |
| Cash used in operating activities | Not separately presented for Q2 | $81.0 million | $92.6 million |
Q2 revenue comprised $28.1 million of software, $2.2 million of professional services, and $12.5 million of Title revenue. The six-month operating cash outflow was partly offset by $2.3 million of investing cash inflow; financing used $3.5 million. Cash, cash equivalents, and restricted cash totaled $47.3 million at June 30, including $12.3 million of restricted cash.
At June 30, cash and cash equivalents were $35.0 million and marketable securities were $230.6 million. Debt was $225.0 million principal, with a net carrying value of $218.2 million. The $25.0 million revolving facility was undrawn, and Blend reported compliance with its debt covenants. Total current assets were $309.4 million versus current liabilities of $34.9 million.
Material changes versus the prior comparable period
- Q2 revenue fell 35% year over year; six-month revenue fell 42%. The main driver was lower mortgage and title activity.
- Q2 mortgage banking transactions on Blend’s platform declined 31% to 239,000; Title closed orders declined to 5,000 from 14,000. For the six months, transactions fell to 420,000 from 728,000 and Title closed orders to 9,000 from 41,000.
- Q2 Blend Platform revenue decreased 10% to $30.3 million; Title revenue decreased 61% to $12.5 million. Consumer Banking Suite revenue grew 27% in Q2 to $5.8 million, but did not offset mortgage and Title declines.
- Gross margin improved to 55% from 39%, while gross profit decreased 7%. Operating expenses were substantially lower, including because the prior-year comparison included a $391.8 million impairment charge and $4.1 million of acquired-intangible amortization. Q2 2023 had no impairment charge.
- Q2 stock-based compensation expense was $14.4 million versus $29.2 million. Interest expense rose 39% to $7.9 million, primarily reflecting higher rates on the floating-rate term loan.
Outlook, commentary, risks, and unusual items
- Management gave no specific revenue or earnings guidance. It expects mortgage rates and weak origination activity to pressure mortgage and Title revenue in the near term; management cited the MBA outlook for further mortgage-originations decline in 2023 before recovery in 2024.
- Management expects operating expenses to improve from cost actions and believes cash, cash equivalents, marketable securities, and revolver availability are sufficient for at least the next 12 months. Blend also said it expects operating losses to continue for the foreseeable future.
- On August 9, 2023, after quarter-end, Blend committed to another workforce reduction affecting approximately 150 current positions (about 19% of its onshore workforce) and approximately 20 vacancies. It estimated $7.2 million of charges, substantially complete in Q3 2023, and approximately $33.0 million of annualized compensation expense for eliminated positions.
- Blend incurred $15.1 million of restructuring charges in the first half of 2023, including charges associated with a January plan that eliminated approximately 340 positions. The remaining restructuring liability at June 30 was $0.5 million.
- The term loan bears floating-rate interest; the applicable rate was 12.75% and the effective rate, including discounts and issuance costs, was approximately 14.51%. A 100-basis-point rate increase would raise estimated annual interest expense by approximately $2.3 million. The loan matures June 30, 2026.
- In June 2023, Blend entered into $17.5 million of new minimum cloud-computing purchase commitments through June 2026. Title365’s minority interest is redeemable under put/call provisions; its stated redemption amount if currently redeemable was $54.5 million at June 30.
- Revenue concentration remains a risk: one customer represented 18% of revenue in both Q2 and the first half of 2023. Blend also cited mortgage-market dependence, customer concentration, competition, execution of cost reductions and Title365 integration, cybersecurity, regulatory exposure, and continued losses as important risks.
- Blend said it regained compliance with the NYSE minimum-price requirement on July 31, 2023, after receiving a deficiency notice in April. Management reported disclosure controls were effective as of June 30 and no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether mortgage transactions and Title orders stabilize, and whether consumer-banking growth can offset continued mortgage and Title weakness.
- Whether cost reductions deliver the expected savings without impairing product development, customer retention, or execution; track the Q3 workforce-reduction charges and cash payments.
- Cash burn, liquidity-covenant headroom, and the cost and refinancing implications of the floating-rate $225.0 million term loan.
- Customer and Title-underwriter concentration, the potential timing and amount of the Title365 minority-interest put option, and the new cloud purchase commitments.
- Share dilution and governance: Class B shares carry 40 votes each, and the co-founder held approximately 63% of total voting power at June 30. Also monitor NYSE listing compliance.