Blend Labs, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. Blend provides cloud-based software for financial-services firms and also operates Title365, a title, escrow and settlement-services business acquired in June 2021. Comparisons with 2021 are affected by Title365 being included in 2022 but not in the reported 2021 results.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $65.5 million | $32.1 million | $137.1 million | $63.9 million |
| Gross profit / margin | $25.3 million / 39% | $19.7 million / 61% | $54.1 million / 39% | $40.7 million / 64% |
| Operating loss | $471.4 million | $39.6 million | $541.2 million | $66.8 million |
| Net loss | $477.2 million | Net income $5.8 million | $549.6 million | $21.3 million |
| Net loss attributable to Blend common stockholders | $478.4 million | — | $551.9 million | $21.3 million |
- Revenue rose 104% in Q2 and 114% in the first half, principally because 2022 included Title365 revenue of $31.9 million in Q2 and $70.9 million in the first half. Blend Platform revenue grew 5% in Q2 and 4% in the first half.
- Blend Platform mortgage-banking revenue fell 6% in Q2 and 7% in the first half; consumer banking and marketplace revenue increased 53% and 52%, respectively.
- Q2 and first-half operating expenses included a $391.8 million impairment charge: $240.1 million against Title365 goodwill and $151.7 million against customer relationships. The charge followed deterioration in market conditions and Title365’s current and projected operating results.
- Operating cash outflow was $92.6 million for the first half, versus $53.1 million a year earlier. Cash, cash equivalents and restricted cash declined $80.4 million to $138.0 million. Investing activities provided $10.9 million and financing activities provided $1.2 million.
- At June 30, cash and cash equivalents were $132.7 million and marketable securities were $317.8 million, or $450.5 million combined. Current assets were $503.3 million and current liabilities $48.0 million.
- Term-loan principal was $225.0 million; debt was carried net at $215.2 million. The $25.0 million revolving facility was undrawn. The term loan has a floating rate, an effective interest rate of approximately 10.44%, and matures June 30, 2026. Blend reported covenant compliance at quarter-end.
Changes, outlook and risks
- Management reported a 25% year-over-year decline in Q2 mortgage transactions on Blend Platform, particularly refinances, while consumer-banking transactions increased. Total Blend Platform banking transactions rose 5% to 563,000. Management attributed mortgage weakness to rising rates, reduced housing affordability and uncertain economic conditions; it cited an industry origination-volume decline of 37% over the same period.
- Blend expects higher mortgage rates to weigh on transaction volume and revenue, with significant near-term headwinds for Title365. Management said it expects Blend Platform to continue positive overall growth, but supplied no numerical revenue or earnings guidance in the provided filing text.
- Usage-based contracts represented 52% of Blend Platform revenue in the first half, up from 24% a year earlier. These arrangements generally can be terminated by customers at any time, and revenue depends on completed transactions.
- An April workforce plan eliminated approximately 200 positions (about 10% of the workforce) and incurred $6.4 million of charges; the company said cost savings began in Q3. A further plan announced in August eliminated approximately 220 positions, with about $4.0 million of expected charges and approximately $27.3 million of annualized compensation expense eliminated; savings were expected to begin in Q4.
- Management said existing cash, securities and revolving-credit availability should fund operations for at least 12 months, while also expecting continued operating losses and noting that additional capital may be needed. First-half accumulated deficit was $956.2 million.
- Disclosure controls were reported ineffective because of an unremediated material weakness in controls over the Title365 acquisition accounting and customer-relationship valuation. Management described remediation efforts but gave no assurance as to completion timing.
- Other key risks include mortgage-market cyclicality, customer and revenue concentration, Title365 integration and potential further impairment, cybersecurity and regulatory exposure, floating-rate debt, and the ability to execute planned cost savings. Customer B represented 30% of Q2 revenue and 33% of first-half revenue. No material legal proceedings were reported as of June 30.
Important facts for investors to verify
- How much of reported revenue growth reflects Title365 consolidation versus underlying Blend Platform growth, and how mortgage-volume declines affect both businesses.
- Whether the Title365 impairment assumptions remain supportable and whether further impairment is possible.
- Actual cash burn, liquidity and compliance with the credit facility’s minimum-liquidity covenant, particularly as floating-rate interest costs change.
- Whether workforce reductions deliver the expected savings and what additional charges or operational effects arise.
- Progress in remediating the material weakness and whether controls are tested and operating effectively.
- Customer concentration, usage-based contract exposure, and the $52.0 million stated redemption amount of the Title365 minority-interest put option if it were currently redeemable.