BLND - Blend Labs: Little Progress Dire Straits

2023-05-16 13:08:02 ET

Summary

• Blend Labs has posted consistent and significant losses on both income and cash metrics.
• It has also seen a very large decrease in revenues, with 3 quarters straight of high double digit declines.
• The recent quarter indicates little progress towards turning this around, and the fundamentals do not look good enough for the firm to secure additional financing in this environment.
• This gives it less than 6 quarters of cash burn.

Overview

Banking technology provider Blend Labs ( BLND ) released Q1 2023 earnings last week and managed to beat across both top and bottom line estimates . While this may have been a good showing relative to expectations, this quarter was the firm’s 3 ^rd consecutive quarter of y/y revenue decline. Along with this, Blend Labs has continued to be unprofitable while continuing to lose cash flow.

In contrast to this ongoing and difficult fundamental scenario, Blend Labs stock is up roughly 2 standard deviations above its 20-day trailing average (10.63%) to start the week.

This article will review the company’s fundamentals and posit a view on the businesses forward prospects.

Fundamentals

As mentioned, Blend Labs has been experiencing rapid declines in revenue for 3 quarters running.

While the company previously had very impressive y/y growth in its revenues, this trend has now handedly reversed itself. For the prior 3 quarter’s Blend Lab’s revenue decreased in the high double digits, with consecutive y/y declines of 38.2%, 47.17%, and 47.8%. Q1 2023 revenue was only 52% of what it was for Q1 2022.

This rapid drop-off in revenue is due to Blend Labs seeing turnover across its product as well as its customer base. One of the primary pillars of its software offering, mortgage servicing, also encountered customers going out of business during the previous quarter. Management also noted turnover to ‘lower-cost alternatives’. There continued to be sign-ups to counteract the churn, but management only mentioned 3 new customers for this product.

These declines in revenue are particularly significant given the overall scale of Blend Lab’s operations. This is a firm that has never posted $100M in quarterly revenue or $250M in yearly revenue.

The overall trend here is decline, which we can confirm by looking at the company’s ongoing decrease in accounts receivable:

Profitability has also remained elusive even while a focus for management. Gross profit margin has ticked up somewhat over the last year, returning to over 40% for the first time in 4 quarters. This gross margin is still exceptionally low for a software company.

Operating margin has also remained abysmal, with the company suffering losses that represent 130.31% of revenues in the most recent quarter. SG&A expenses in their own right remained over 100% of revenues while overall operating expenses were 172.77%, far outpacing the gross margin that the company is putting up.

Net loss was also significant, with the latest quarterly net income margin at -177%. For the most recent quarter, Blend Labs overall lost $1.77 for every $1 of revenue that it generated.

This doesn’t look like material progress towards profitability to me; the firm still isn’t even close.

Cash from operations has also remained consistently negative and is nowhere near break-even. This company is losing money on both an accrual and a cash basis.

Given the consistently significant across both income and cash flow we must look at the company’s balance sheet to see how it is keeping itself afloat. Since Blend Labs is burning cash simply by operating I will focus on cash metrics instead of asset/liability ratios to determine its solvency and capacity for continuing operations.

Starting with its cash position, we see that the firm is deteriorating in this regard and has $306.9M cash on hand as of the most recent quarter.

Blend Labs also posted the most negative net change in cash than it has for 7 quarters at $78M last quarter.

It has also continued to pay cash interest on its liabilities, including $6.9M last quarter.

Taking last quarter’s operating cash flow burn and adding it to cash interest, we arrive at $53.6M in cash loss. Dividing that into the company’s current amount of cash ($306.9M), we get 5.7 quarters of runway for this firm. Giving the larger net change in cash that we saw last quarter I think 4-5 is a more reasonable estimate.

The situation here is that Blend Labs needs financing or it will very likely go bankrupt. The firm has not issued debt since Q4 2021. Notably, it also spent $2.4M last quarter to prop up its stock. This adds to my concerns as it is not money being put towards operations.

Given the company’s rapidly declining revenues and terrible unit economics, I am not too optimistic that it will be able to secure financing. This is all the more pronounced given the current macroeconomic context and significantly higher cost of capital that we now have due to higher rates. The firm also has an Altman Z Score -2.29 at present. This is worse than bad and is a flashing red signal for imminent bankruptcy.

Short interest on this stock is down from its high point yet still stands at 6.26% of its float. Given the risks of shorting a stock this cheap, it is significant to see that short interest has also ticked up over the last 30 days.

Conclusion

The picture for Blend Labs is bad all around. Without near-term financing, this company won't be able be able to operate for too much longer, and financing will be very difficult for the company to garner with its current set of fundamental metrics. Overall, I would rate this stock a sell.

For further details see: