Blend Labs, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited results. Blend provides cloud-based software for financial services firms and, following its June 30 acquisition of Title365, also provides title, escrow and settlement services.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $89.6m | $27.9m | $153.5m | $65.4m |
| Gross profit / margin | $40.3m / 45% | $18.4m / 66% | $81.0m / 53% | $39.9m / 61% |
| Operating loss | $(70.5)m | $(15.3)m | $(137.4)m | $(59.2)m |
| Net loss | $(76.3)m | $(15.2)m | $(97.6)m | $(58.6)m |
| Net loss attributable to Blend | $(76.9)m | $(15.2)m | $(98.2)m | $(58.6)m |
| Operating cash flow | Not provided for the quarter | $(84.4)m | $(54.1)m |
- Q3 revenue rose 221%, including $54.5m from Title365; legacy Blend Platform revenue grew 26% to $35.1m. For the nine-month period, Platform revenue increased 51% to $99.0m.
- Q3 gross margin fell to 45% from 66%, reflecting the lower-margin Title365 business and higher Platform cost of revenue. Operating expenses were $110.9m in Q3, including $43.4m of stock-based compensation.
- The nine-month net loss includes a $45.0m income tax benefit related to a partial release of Blend’s historical valuation allowance following recognition of deferred tax liabilities from the Title365 acquisition. Blend still maintained a full valuation allowance against its net deferred tax assets at September 30.
- Cash and cash equivalents were $276.1m and marketable securities were $317.5m at September 30, totaling $593.6m in reported liquidity. Nine-month operating cash use was $84.4m; cash, cash equivalents and restricted cash ended at $281.7m.
- Debt principal was $225.0m; the balance-sheet carrying amount, net of discounts and issuance costs, was $213.2m. The $25.0m revolving facility was undrawn. The term loan bears floating interest, had an effective rate of about 10.2% at quarter-end, and matures June 30, 2026. Blend reported covenant compliance.
- Current assets were $661.7m and current liabilities were $63.6m. Accumulated deficit was $371.1m.
Material changes and notable events
- Blend acquired 90.1% of Title365 for final purchase consideration of $417.7m, including $416.8m cash. Q3 and nine-month results include Title365 revenue of $54.5m and net income of approximately $6.0m, both since acquisition.
- Title365 added $287.0m of goodwill and $194.0m of acquired intangible assets, including $192.0m of customer relationships. The purchase price allocation remained preliminary and subject to measurement-period adjustments.
- The remaining 9.9% Title365 interest is redeemable under a put option exercisable beginning five years after closing. Its reported carrying value was $46.5m; the filing states a $50.1m redemption amount if currently redeemable.
- Blend completed its IPO in July 2021, issuing 22.47m Class A shares at $18 per share and receiving $366.7m net proceeds. It also raised approximately $309.7m net from Series G preferred stock before the IPO conversion. The IPO and financing substantially increased cash and equity.
- Blend Platform banking transactions reached 525,000 in Q3, up from 422,000; nine-month transactions were 1.558m versus 957,000, a reported 63% increase. Q3 customer B represented 35% of revenue, highlighting customer concentration.
- Q3 general and administrative expense included $33.8m of stock-based compensation related to the co-founder’s performance-based option award, including expense recognized upon the IPO. Nine-month G&A also included $8.5m of Title365 transaction costs.
Outlook, commentary and risks
- Management expects operating losses to continue for the foreseeable future and says current cash, cash equivalents and marketable securities should fund operations for at least 12 months. The filing provides no specific revenue or earnings guidance.
- Management expects Title365 to increase reported revenue and near-term revenue growth, but cautions that growth rates are expected to decline after the first 12 months following the acquisition. It expects costs to rise near term, while certain expense ratios may decline over the longer term as the business scales.
- Management reported a 63% increase in platform transactions year over year for the first nine months and said digital transformation has supported demand. It also cautioned that COVID-19’s future effects remain uncertain.
- Key risks include ongoing losses and negative operating cash flow; customer and revenue concentration; mortgage and real-estate market cyclicality and interest-rate sensitivity; Title365 integration and acquisition-accounting uncertainty; debt service and covenant constraints; cybersecurity, privacy, service availability and third-party dependencies; and extensive financial-services, title and insurance regulation.
- Other relevant exposures include approximately $71.7m of customer escrow and trust funds held off balance sheet, for which Blend remains contingently responsible, and estimated title and escrow loss reserves of $1.3m. Blend reported no material legal proceedings and said disclosure controls were effective; no material changes to internal control over financial reporting were identified.
Investor verification priorities
- Separate organic Blend Platform growth from Title365’s contribution, and assess whether transaction growth and platform monetization continue.
- Track gross margin and Title365 economics, integration costs, synergies and purchase-accounting adjustments, including the final valuation of acquired assets and redeemable noncontrolling interest.
- Assess the drivers of cash burn and the sustainability of liquidity, while monitoring the floating-rate loan, minimum-liquidity covenant and any use of the revolving facility.
- Monitor customer concentration, mortgage and refinance volumes, Title365’s California exposure, and relationships with its two title underwriters.
- Evaluate dilution and governance: the co-founder’s performance award, equity compensation, and Class B shares carrying 40 votes each.