Blend Labs: Fighting To Survive (NYSE:BLND)

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It doesn’t matter what you do, in the end it’s all about survival.”― Pradip Bendkule.

Today, we put Blend Labs, Inc. (BLND) in the spotlight for the first time since our initial assessment on this small cap developer of cloud-based software platform solutions back in March of last year. We concluded that article with the following due to the nature of its business:

Until the mortgage markets settle down, I am passing on any investment recommendation on Blend Labs even if I like the company’s business model and its balance sheet seems rock solid at the moment.”

That turned out to be right call, as the stock has dropped some 75% since we last looked at this name. Is the stock oversold or is there still more pain ahead for shareholders? A follow analysis is provided below.

Company Overview:

Blend Labs, Inc. is a San Francisco-based cloud-based software platform solution provider. It serves the financial services sector and services banks, credit unions, financial technology companies, and non-bank mortgage lenders. Blend Labs offers a suite of white-label products for mortgages, home equity loans and lines of credit, vehicle loans, personal loans, credit cards, and deposit accounts. The platform capabilities include income verification for mortgage, homeowners insurance as well as title search procedures for title insurance policies, escrow, and other closing and settlement services. The company operates in two segments, Blend Platform and Title365. The stock currently trades at $1.50 a share and sports an approximate market capitalization of $350 million.

Third Quarter Results:

Blend Labs, Inc. posted third quarter numbers on November 10th. Third quarter results clearly showed the impact of the slowdown in the housing market. The company lost 57 cents a share on a GAAP basis as revenues fell over 38% on a year-over-year basis to just over $55 million. Title365 revenue came in at $19.3 million, down 65% from the same period a year ago. Rising interest rates severely impacted refinancing volume. As part of third quarter results, the company wrote off all of the intangible assets and goodwill related to its Title365 business segment, resulting in a $57.9 million impairment charge.

November Company Presentation

From the Blend Platform side of the business, Mortgage Banking revenue came in at just less than $20 million, down 27% from 3Q2021. The one bright spot for the company during the quarter was from its Consumer Banking & Marketplace segment, where revenue came in at $15.3 million. This was an increase of 132% from the same period of 2021. $6.1 million of this was due to migration of software-enabled title revenue, primarily from the transition of Mr. Cooper title volume to the Blend platform. Consumer Banking & Marketplace consists of home equity loans, personal lending, credit cards, deposit accounts, etc.

November Company Presentation

Management reduced significantly its full year revenue guidance for FY2022 to $235 million to $240 million, which would reflect a 56% reduction in home mortgage volume for this fiscal year, much worse than the 41% decline leadership projected at the end of the second quarter. This obviously affects its Title365 business division, which is mortgage-related.

November Company Presentation

Now, to be fair, Blend did gain market share in the mortgage space, as can be seen above. This is a small victory at best given the plunge in mortgage volume.

Then in the second week of January of this year, Blend Labs, Inc. management announced a major restructuring. The company made several management changes and is laying off just over a quarter of its employees. These reductions are expected to yield $100 million of annual cost of revenue and operating expense savings by the end of FY2023.

Analyst Commentary & Balance Sheet:

The analyst community certainly has soured on Blend Labs. Since third quarter results were posted, seven analyst firms including UBS and Piper Sandler have maintained Hold/Equal Weight ratings on the company. Price targets proffered are in a tight range of $2 to $3 a share. Here is the commentary from William Blair on the company’s restructuring announcement:

We view these announcements as a necessary step but continue to look for more consistent execution on the company’s long-term growth drivers to become more positive on the stock. A brief summary of the initiatives and our takeaways are below . The headline of Blend’s announcements was a workforce reduction impacting roughly 28% of the company’s onshore employee base, amounting to more than 300 people. The cuts will affect Blend Title alongside corporate operations across the research and development, sales and marketing, and general and administrative functions. In addition to the reduction of Blend’s onshore employee base, the company pointed to additional cost-saving opportunities through the offshoring of other business functions in the finance and support departments.”

Approximately five percent of the outstanding float in these shares are currently held short. Insider selling noticeably picked up in the fourth quarter of last year prior to this year’s restructuring announcement. Several insiders sold nearly $3 million worth of shares collectively during the quarter. So far in 2023, there has been only one insider sale of stock for slightly less than $25,000.

As of the end of the third quarter, Blend Labs had had cash and marketable securities of approximately. The company also has total debt outstanding of $225million in the form of a five-year term loan. Blend Labs had a non-GAAP loss from operations of $37.1 million during the quarter.

Verdict:

The current analyst firm consensus is that Blend Labs, Inc. will lose 73 cents a share in FY2022 on flattish revenue growth and sales of $237 million. They project sales will fall just over 10% in FY2023, but losses will be cut to just over 40 cents a share.

It is easy to see why analyst firms are negative around the company’s prospects. Overall mortgage volume is at 28-year lows and the Fed is still likely to take up the Fed Funds rate by another 50 bps to 75 bps by year’s end based on current projections.

The company’s recent restructuring should lower operating costs significantly but will not lead to profitability in, and of, themselves. Growth from Blend’s Consumer Banking & Marketplace is encouraging. That said, the pickup in insider selling in the fourth quarter prior to the huge layoff announcements in early January is somewhat of a red flag. Fourth quarter results also seem overdue to be posted.

Therefore, the prudent course for Blend Labs, Inc. investors is to avoid these shares until the housing sector stabilizes and the company shows significant progress in reducing losses. Right now, Blend Labs, Inc. seems locked in the fight for survival or at least to avoid dilution at some point via a future capital raise.

Extinction is the rule. Survival is the exception.”― Carl Sagan