Blend Labs, Inc. (BLND) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements. You should review the section titled “Special Note Regarding Forward-Looking Statements” for a discussion of forward-looking statements and the section titled “Risk Factors” for a discussion of factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
This section of this Annual Report on Form 10-K generally discusses fiscal years 2024 and 2023 items and year-to-year comparisons between fiscal years 2024 and 2023. Discussions of fiscal year 2022 items and year-to-year comparisons between fiscal years 2023 and 2022 that are not included in this Annual Report on Form 10-K can be found in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, which was filed with the SEC on March 14, 2024.
Overview
Blend Labs, Inc. was founded in 2012, with a vision to bring simplicity and transparency to financial services, so everyone can gain access to the capital they need to lead better lives. To realize this vision, we have built a market-leading cloud-based software platform and suite of products for financial services firms that is designed to power the end-to-end consumer journey for any banking product. Our software platform was built in an extensible, modular, and configurable fashion to support continued product expansion. We have technology, data, and service providers on our software platform, including access to an extensive marketplace of insurance carriers and settlement agencies. Our products and marketplaces provide multiple opportunities for us to serve financial services firms and consumers and drive revenue growth.
The development of our business reflects continued product innovation as we continue to attract financial services firms to our software platform and grow with them as they serve consumers. Financial services firms have been shifting for years to a digital-first approach to acquiring consumers, delivering products, and deepening existing consumer relationships. This imperative to compete through digital-first consumer experiences creates a compelling opportunity for Blend. We believe there is a large, untapped opportunity to provide additional product offerings and drive increased transaction volume for financial institutions and consumers using our software platform.
We are continually seeking to enhance the end-to-end banking journeys we power through our software platform. To accelerate the adoption of innovations in our mortgage and home equity products, on June 30, 2021 we acquired 90.1% ownership of Title365, a leading title insurance agency that offers title, escrow and other trustee services.
Our platform also includes Blend Builder, which gives our customers the ability to easily configure or build custom workflows from a pre-built set of components, all while leveraging existing infrastructure. Financial services firms can create custom solutions with Blend Builder, or choose from pre-built solutions for Mortgage and Consumer Banking, including Home Equity, Deposit Accounts, Credit Cards, Personal Lending, Auto Lending and more.
As we navigate through a challenging economic environment, we are focused on customer acquisition, maximizing existing partnerships and product expansion as well as efficient investment and disciplined cost management. We see opportunities for expansion into new markets, including markets outside the United States.
Our Business Model
Our success-based business model is designed to align our growth with the interests of our customers. We offer our products through software-as-a-service agreements where fees are assessed based on completed transactions, such as a funded loan, new account opening, or API call. For those products that involve a loan or deposit account application, we do not charge for abandoned applications or rejected applications, even though they cause us to incur costs. We provide the platform, including Blend Builder, under (a) subscription arrangements, in which customers commit to a minimum number of completed transactions at specified prices over the contract term, (b) usage-based arrangements, in which customers pay in arrears a variable amount for completed transactions at a specified price, (c) a fixed price fee, which provides stand-ready access to one or more of our products and services, or (d) consumption-based arrangements, in which customers commit to a certain amount of consumption at specified prices and prepay a fixed amount in advance of their consumption. Completed transaction fees are
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determined by the number and type of software platform components that are needed to support each product offering. Completed transaction fees are not impacted by the dollar size of transactions; however, we provide volume-based discounts to customers as they complete a higher volume of transactions on our software platform. Customers also have the opportunity to secure volume-based discounts determined by the size and length of contractual commitments. We may earn additional overage fees if the number of completed transactions exceeds contractual minimums or commitments for customers who elect to enter into subscription or consumption-based agreements, respectively. Other than our usage-based arrangements pursuant to which customers pay for a variable amount of completed transactions, our subscription and consumption-based agreements are generally non-cancelable during the contract term. Our usage-based arrangements generally can be terminated at any time by the customer. With our success-based business model, we are focused on driving revenue growth by enabling our customers to more efficiently process and complete transactions using our software platform.
We focus on customer success to drive transaction volumes and opportunities for follow-on sales. Our products are sold through a direct sales force that continues to manage customer relationships on an ongoing basis post-sale. Customers often complete an initial deployment for one or two products and may then add more products over time. The length of the sales cycle for our products generally declines for the second and subsequent products we sell to customers, highlighting our high customer satisfaction.
We also earn revenue through a combination of fixed and/or variable license fees when consumers use our Blend Platform integrated marketplaces, such as when they select a property and casualty insurance carrier. These license fees are typically generated from third-party providers that pay to access our platform and are incremental to what we earn from our financial services firm customers on completed transactions. Our marketplaces are intended to provide greater consumer choice and flexibility and to help financial services firms by providing them with a more complete offering in partnership with Blend. As we drive adoption of our software platform, we expect these license fees to comprise a larger part of our revenue.
The acquisition of Title365 has enabled us to provide our customers with a streamlined title, settlement, and closing process at scale for mortgages, home equity lines of credit, and home equity loans, and we plan to continue to invest in improving and integrating settlement services into those banking products. In performing title search services, Title365 serves as an agent to place and bind title insurance policies with third-party underwriters. Title365 escrow, closing and settlement services are primarily associated with managing the closing of real estate transactions, including the processing of funds on behalf of the transaction participants, gathering and recording the required closing documents, and providing notary and other real estate or title-related activities. Title365 also provides title services in connection with a borrower default and with the issuance of home equity lines of credit and home equity loans.
Recent Developments
Industry Trends
The mortgage market is heavily influenced by government policies and overall economic conditions. The real estate environment, including interest rates and the general economic environment, typically impacts the demand for mortgage and mortgage related products. Since 2022, increases in interest rates due to efforts by the Federal Reserve to manage rising inflation, combined with ongoing supply constraints, have resulted in a relative decline in mortgage origination activity, followed by a slight increase in 2024 as compared to 2023, based on the estimates of industry forecasters.
In 2024, we saw a decrease in total mortgage transactions on our software platform compared to 2023, which can be attributed to normal customer churn amidst continued high interest rates, decreased housing affordability, and uncertain worldwide political and economic conditions. We expect that the aggregate industry mortgage originations will be lower in 1Q25 relative to 4Q24 based on application volume observed to date through our customer base and our analysis of the latest relevant macroeconomic data. While industry forecasters currently project that mortgage origination activity will expand throughout 2025, we anticipate a more moderate growth rate in 2025.
Mortgage origination activity depends on many factors, such as changes in the Federal Reserve’s policies or pressures in the macroeconomic environment, all of which are uncertain and out of our control. We expect the Federal Reserve's decision-making to continue to have impacts on mortgage origination activity. As a large portion of our revenue is driven by mortgage and mortgage-related transaction volumes, changes in mortgage origination volumes have had, and are likely to continue to have, material effects on our business.
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Strategic Initiatives
We have taken actions to manage our operating expenses and focus our investments on initiatives critical to achieving our broader strategy. As part of our broader efforts to improve cost efficiency and better align our operating structure with our business activities and the current market, since 2022, we implemented several workforce reduction actions and in 2024, we entered into an agreement to fully terminate one of our leases and abandoned another leased facility. Refer to Note 13, Restructuring, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, for additional information regarding our workforce reduction actions and leases optimization.
Additionally, in April 2024, we paid off all of our outstanding debt into connection with the Haveli transaction. Further, in September 2024, we entered into a strategic partnership agreement with Covered whereby we granted Covered a five-year term license allowing Covered to integrate their insurance solutions into our platform for an annual license fee plus variable charges and sold our insurance business to Covered for cash proceeds of $10.1 million and a warrant to purchase up to 177,516 of Covered’s Class B Units, at a purchase price of $0.001 per unit (the “Covered Warrant”). Refer to Note 10, Redeemable Convertible Stock, and Note 16, Strategic Partnership and Sale of Insurance Business, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, for additional information regarding these strategic transactions.
Components of Results of Operations
Revenue
Blend Platform
In our Blend Platform segment, we generate revenue from fees paid by customers to access our software platform and complete the transactions. Fees are assessed based on completed transactions, such as a funded loan, new account opening, closing transaction or API call. Completed transaction fees are determined by the number and type of software platform components that are needed to support each product offering. We do not charge for abandoned or rejected applications, even though they cause us to incur costs related to these applications. Arrangements with our customers do not provide the contractual right to take possession of our software at any point in time. Revenue is recognized when access to our platform is provisioned to our customers or as transactions are completed, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. We also generate revenue from providing access to Blend Builder, professional services related to the deployment of our platform, premier support services, and consulting services. We also earn revenue from third-party providers which integrate their marketplaces into our platform for services such as property and casualty insurance. We typically charge third-party providers a combination of fixed and variable license fees.
Our customers have the ability to access our platform under subscription arrangements, in which customers commit to a minimum number of completed transactions at specified prices over the contract term, or under usage-based arrangements, in which customers prepay a fixed amount in advance, typically annually or semi-annually, based on their anticipated consumption of specified products at specified prices or pay monthly in arrears a variable amount for completed transactions at specified prices. Our subscription and prepaid usage-based arrangements are generally noncancelable, and we may also earn additional overage fees if the number of completed transactions exceeds the contractual amounts. Our usage-based arrangements paid in arrears can generally be terminated at any time by the customer. We recognize revenue ratably for our subscription arrangements because the customer receives and consumes the benefits of our platform throughout the contract period. We recognize fees for usage-based arrangements as the completed transactions are processed using our platform. Over the last year, we have seen a shift away from subscription arrangements towards prepaid multi-year usage-based arrangements in our customer contracts. Revenue from third-party providers for access to our platform is recognized ratably over the term of the contract.
Title
In our Title segment, we earn revenue from title search services for title insurance policies, escrow, and other closing and settlement services. In performing title search services, we act as an agent to place and bind title insurance policies with third-party underwriters that ultimately provide the title insurance policy to our customers. Revenue related to title insurance is recognized net of the amount of consideration paid to the third-party insurance underwriters. Our revenues from escrow, closing, and settlement services are primarily associated with managing the closing of real estate transactions, including the processing of funds on behalf of the transaction participants, gathering and recording the required closing documents, and providing notary and other real estate or title-related activities. Revenue related to these services is recognized at the closing of the underlying real estate transaction. We also offer title services in connection with a borrower default and with the issuance of
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home equity lines of credit and home equity loans. Revenue for default title services and home equity services is recognized at the time of delivery of the title report.
We expect mortgage interest rates will continue to impact the demand for mortgage and mortgage related products, including refinance transactions. In most cases, higher interest rates have led to higher loan rates charged to consumers, which has adversely affected the ability of our customers to generate refinance transaction volumes. Refinance activity was strong in 2020 and 2021 relative to historical averages over the preceding decade; however, an increase in interest rates due to efforts by the Federal Reserve to manage rising inflation resulted in a decline in refinance transactions volume in both 2022 and 2023, resulting in lower title insurance and other services revenue within the Title segment. Since September 2024, the Federal Reserve lowered the federal funds rate by 100 basis points, easing monetary policy for the first time in four years. Should the Federal Reserve continue to ease monetary policy and further lower its interest rate target, we expect refinance transaction volumes may increase, which in turn may have a positive impact on Title revenue.
Cost of Revenue
Blend Platform
In our Blend Platform segment, cost of revenue consists primarily of software-related costs, which include costs of subscribed hosting and support, costs of premier support services, and the costs of delivering professional services.
Software-related costs of subscribed hosting services and support consist primarily of expenses related to hosting our services, third-party fees related to platform connectivity services, which include verification of income, assets, and employment, software licenses and expenses related to providing support to our customers.
Costs of premier support and professional services consist primarily of personnel-related expenses, including stock-based compensation expense, expenses associated with delivering implementation and other services, travel expenses, and allocated overhead costs.
For each application submission, we incur third-party costs as described above, including costs for incomplete transactions for which we do not charge fees to our customers. The timing of those costs may not be aligned with the revenue recognized. We expect our cost of revenue to continue to increase in dollar amounts as we grow our business and revenue and decrease as a percentage of our revenue over the long term as we achieve greater scale in our business, although the percentage may fluctuate from period to period.
Title
In our Title segment, cost of revenue consists of costs of title, escrow and other trustee services, which represent primarily personnel-related expenses of our Title segment as well as title abstractor, notary, and the cost of recording services provided by external vendors.
Since the cost of revenue for our Title segment is largely variable in nature, we expect that the cost of revenue for this segment will be impacted by the fluctuations in the segment’s revenue and the number of title orders we receive in each period.
Operating Expenses
We have taken actions to manage our operating expenses and focus our investments on initiatives critical to achieving our broader strategy. We expect to see our expenses remain relatively flat in 2025 as compared to 2024.
Research and Development
Research and development expenses consist primarily of personnel-related expenses, including stock-based compensation expense, associated with our engineering personnel responsible for the design, development, and testing of new products and features, professional and outside services fees, software and hosting costs, facilities costs, and allocated overhead costs. Research and development costs are expensed as incurred, unless they qualify as capitalizable internal-use software development costs.
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Sales and Marketing
Sales and marketing expenses consist primarily of personnel-related expenses, including stock-based compensation expense, costs of general marketing activities, advertising and promotional activities, travel-related expenses, facilities costs, and allocated overhead costs. Sales commissions that are incremental costs of acquiring a contract with a customer as well as associated payroll taxes, are deferred and amortized on a straight-line basis over the estimated period of benefit. Sales commissions that are not incremental costs of acquiring a contract with a customer are expensed in the period incurred.
General and Administrative
General and administrative expenses consist primarily of personnel-related expenses, including stock-based compensation expense for our finance, accounting, legal and compliance, human resources, and other administrative teams, certain executives, stock-based compensation expense related to the stand-alone stock option award granted to our Co-Founder and Head of Blend in 2021, professional services fees, including audit, legal and compliance, facilities costs, software and hosting costs, external consulting expenses, and insurance expenses.
Restructuring
Restructuring charges relate to our workforce reduction plans and facilities restructuring actions. Charges related to workforce reduction plans are comprised of cash expenditures for compensation and severance payments, executive transition costs, employee benefits, payroll taxes and related facilitation costs. Charges related to facilities restructuring actions are comprised of costs related to early termination of the lease agreement and impairment of the right-of-use asset in connection with the abandonment of the property. Refer to Note 13, Restructuring, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, for additional information.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income earned from our investment portfolio. For the year ended December 31, 2024, other income (expense), net also includes a gain on sale of insurance business in connection with strategic partnership, an adjustment to the carrying value of investment in non-marketable equity securities, a loss on extinguishment of debt, and a loss on transfer of our subsidiary in India.
Interest Expense
Interest expense relates primarily to debt financing used to fund our acquisition of Title365 and includes interest payable under the terms of the Credit Agreement entered into in connection with the closing of the acquisition of Title365 and amortization of debt discounts and debt issuance costs. In connection with the full repayment of the Term Loan and termination of the Credit Agreement, the final interest payment under the Credit Agreement was fully paid in the quarter ended June 30, 2024.
Provision for Income Taxes
Provision for income taxes consists primarily of U.S. state and foreign income taxes. We maintain a full valuation allowance on our net federal and state deferred tax assets as we have concluded that it is not more likely than not that such net deferred tax assets will be realized.
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Results of Operations
The following tables set forth our results of operations for the periods presented in dollars and as a percentage of our revenue:
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||
| (In thousands) | ||||||||||
| Revenue | ||||||||||
| Software platform | $ | 106,914 | $ | 101,204 | $ | 113,589 | ||||
| Professional services | 8,848 | 8,345 | 7,835 | |||||||
| Title | 46,257 | 47,297 | 113,777 | |||||||
| Total revenue | 162,019 | 156,846 | 235,201 | |||||||
| Cost of revenue(1) | ||||||||||
| Software platform | 23,107 | 22,025 | 30,706 | |||||||
| Professional services | 9,434 | 11,065 | 15,504 | |||||||
| Title | 38,934 | 42,621 | 99,340 | |||||||
| Total cost of revenue | 71,475 | 75,711 | 145,550 | |||||||
| Gross profit | 90,544 | 81,135 | 89,651 | |||||||
| Operating expenses: | ||||||||||
| Research and development(1) | 46,087 | 81,591 | 138,094 | |||||||
| Sales and marketing(1) | 36,049 | 60,130 | 85,248 | |||||||
| General and administrative(1) | 50,557 | 70,688 | 139,120 | |||||||
| Amortization of acquired intangible assets | — | — | 8,411 | |||||||
| Impairment of intangible assets and goodwill | — | — | 449,680 | |||||||
| Restructuring | 7,471 | 24,948 | 15,275 | |||||||
| Total operating expenses | 140,164 | 237,357 | 835,828 | |||||||
| Loss from operations | (49,620) | (156,222) | (746,177) | |||||||
| Interest expense | (6,747) | (30,811) | (24,790) | |||||||
| Other income (expense), net | 13,057 | 7,248 | 4,916 | |||||||
| Loss before income taxes | (43,310) | (179,785) | (766,051) | |||||||
| Income tax (expense) benefit | (109) | (94) | 2,241 | |||||||
| Net loss | $ | (43,419) | $ | (179,879) | $ | (763,810) |
| (1)Includes stock-based compensation as follows: | Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||
| (In thousands) | ||||||||||
| Cost of revenue | $ | 527 | $ | 1,132 | $ | 2,069 | ||||
| Research and development(2) | 9,870 | 19,046 | 47,280 | |||||||
| Sales and marketing | 3,546 | 7,137 | 11,725 | |||||||
| General and administrative | 14,134 | 18,706 | 48,628 | |||||||
| Total stock-based compensation | $ | 28,077 | $ | 46,021 | $ | 109,702 |
____________
(2) Net of $2.5 million of additions to capitalized internal-use software for the year ended December 31, 2024, and none for the years ended December 31, 2023 and 2022.
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| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||
| (as a % of revenue)* | ||||||||
| Revenue | ||||||||
| Software platform | 66 | % | 65 | % | 48 | % | ||
| Professional services | 5 | 5 | 4 | |||||
| Title | 29 | 30 | 48 | |||||
| Total revenue | 100 | 100 | 100 | |||||
| Cost of revenue | ||||||||
| Software platform | 14 | 14 | 13 | |||||
| Professional services | 6 | 7 | 7 | |||||
| Title | 24 | 27 | 42 | |||||
| Total cost of revenue | 44 | 48 | 62 | |||||
| Gross margin | 56 | 52 | 38 | |||||
| Operating expenses: | ||||||||
| Research and development | 28 | 52 | 59 | |||||
| Sales and marketing | 22 | 38 | 36 | |||||
| General and administrative | 32 | 45 | 59 | |||||
| Amortization of acquired intangible assets | — | — | 4 | |||||
| Impairment of intangible assets and goodwill | — | — | 191 | |||||
| Restructuring | 5 | 16 | 6 | |||||
| Total operating expenses | 87 | 151 | 355 | |||||
| Loss from operations | (31) | (100) | (317) | |||||
| Interest expense | (4) | (20) | (11) | |||||
| Other income (expense), net | 8 | 5 | 2 | |||||
| Loss before income taxes | (27) | (115) | (326) | |||||
| Income tax (expense) benefit | — | — | 1 | |||||
| Net loss | (27) | % | (115) | % | (325) | % |
____________
*Certain percentages may not foot due to rounding.
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Comparison of the Years Ended December 31, 2024 and 2023
Revenue and Cost of Revenue
| Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Segment revenue: | ||||||||||||||||
| Blend Platform: | ||||||||||||||||
| Mortgage Suite | $ | 73,257 | $ | 77,574 | $ | (4,317) | (6 | %) | ||||||||
| Consumer Banking Suite | 33,657 | 23,630 | 10,027 | 42 | % | |||||||||||
| Professional Services | 8,848 | 8,345 | 503 | 6 | % | |||||||||||
| Total Blend Platform | 115,762 | 109,549 | 6,213 | 6 | % | |||||||||||
| Title | 46,257 | 47,297 | (1,040) | (2 | %) | |||||||||||
| Total revenue | $ | 162,019 | $ | 156,846 | $ | 5,173 | 3 | % | ||||||||
| Segment cost of revenue: | ||||||||||||||||
| Blend Platform | $ | 32,541 | $ | 33,090 | $ | (549) | (2 | %) | ||||||||
| Title | 38,934 | 42,621 | (3,687) | (9 | %) | |||||||||||
| Total cost of revenue | $ | 71,475 | $ | 75,711 | $ | (4,236) | (6 | %) | ||||||||
| Segment gross profit and gross margin: | ||||||||||||||||
| Blend Platform | $ | 83,221 | 72 | % | $ | 76,459 | 70 | % | $ | 6,762 | 9 | % | ||||
| Title | 7,323 | 16 | % | 4,676 | 10 | % | 2,647 | 57 | % | |||||||
| Total gross profit | $ | 90,544 | 56 | % | $ | 81,135 | 52 | % | $ | 9,409 | 12 | % |
Revenue increased $5.2 million, or 3%, for the year ended December 31, 2024 compared to the year ended December 31, 2023, driven by an increase in Blend Platform revenue of $6.2 million, or 6%, offset by a decrease in Title segment revenue of $1.0 million, or 2%, which was primarily due to the lower volume of title orders. Within Blend Platform revenue, Mortgage Suite revenue decreased $4.3 million, or 6%, primarily due to the lower volume of mortgage banking transactions with our customers, the Consumer Banking Suite revenue increased $10.0 million, or 42%, primarily due to an increase in home equity transactions and incremental platform fees, an increase in attach rates of our digital closing solution, higher volume of deposit account openings, offset by lower consumer lending transactions with our customers. Professional Services revenue increased by $0.5 million, or 6%, primarily due to an increase in professional services associated with the support of our platform.
Cost of revenue decreased $4.2 million, or 6%, for the year ended December 31, 2024 compared to the year ended December 31, 2023, driven by a decrease of $3.7 million, or 9% within the Title segment, primarily due to a decrease in personnel related expenses, attributable to a decrease in headcount related to our restructuring actions, as well as the lower volume of title orders, and a decrease in Blend Platform cost of revenue of $0.5 million, or 2%, primarily due to the lower volume of mortgage banking transactions.
Gross profit increased $9.4 million, or 12% for the year ended December 31, 2024 compared to the year ended December 31, 2023.
Gross margin was 56% for the year ended December 31, 2024 compared to 52% for the year ended December 31, 2023. Within Blend Platform segment, gross profit increased by $6.8 million, while gross margin increased to 72% for the year ended December 31, 2024 as compared to 70% for the year ended December 31, 2023. The increase in gross profit was primarily due to expanding Consumer Banking Suite revenue and lower cost of revenue as the Company continues to focus on operational efficiency. Within the Title segment, gross profit increased by $2.6 million while gross margin increased to 16% for the year ended December 31, 2024 as compared to 10% for the year ended December 31, 2023 due to ongoing cost optimizations, such as rationalization of headcount and facilities footprint.
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Operating Expenses
| Year Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | |||||||||||
| (In thousands) | ||||||||||||||
| Operating expenses: | ||||||||||||||
| Research and development | $ | 46,087 | $ | 81,591 | $ | (35,504) | (44 | %) | ||||||
| Sales and marketing | 36,049 | 60,130 | (24,081) | (40 | %) | |||||||||
| General and administrative | 50,557 | 70,688 | (20,131) | (28 | %) | |||||||||
| Restructuring | 7,471 | 24,948 | (17,477) | (70 | %) | |||||||||
| Total operating expenses | $ | 140,164 | $ | 237,357 | $ | (97,193) | (41 | %) |
Research and Development
Research and development expenses decreased $35.5 million, or 44%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. The decrease was primarily due to a $14.9 million decrease in personnel related expenses and a $6.7 million decrease in stock-based compensation expense attributable to a decrease in headcount, in each case, related to our restructuring actions, a $12.0 million decrease due to the capitalization of internal-use software development costs, a $1.3 million decrease in software and hosting costs and a $0.4 million decrease in facilities costs.
Sales and Marketing
Sales and marketing expenses decreased $24.1 million, or 40%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. The decrease was primarily due to a $11.7 million decrease in personnel related expenses and a $3.6 million decrease in stock-based compensation expense attributable to a decrease in headcount, in each case, related to our restructuring actions, a $4.4 million decrease in commissions, a $1.4 million decrease in advertising and promotion expenses, a $1.3 million decrease in software and hosting costs, a $0.9 million decrease in trade shows and conference costs and a $0.6 million decrease in facilities costs.
General and Administrative
General and administrative expenses decreased $20.1 million, or 28%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. The decrease was primarily due to a $7.0 million decrease in personnel related expenses, a $4.6 million decrease in stock-based compensation expense, primarily attributable to vesting of the second tranche of Head of Blend options in 2023 and a decrease in headcount related to our restructuring actions, a $2.1 million decrease in external consulting expenses, a $1.9 million decrease in insurance expenses, a $1.7 million decrease in professional and outside services costs, a $1.7 million decrease in software and hosting costs and a $0.3 million decrease in facilities costs.
Restructuring
Restructuring expenses decreased $17.5 million, or 70%, for the year ended December 31, 2024 compared to the year ended December 31, 2023 due to the 2023 workforce reduction plans being larger than the 2024 workforce reduction plans. This decrease in workforce-related restructuring expenses was partially offset by an increase in facilities-related restructuring charges incurred for the year ended December 31, 2024. The costs related to each workforce reduction plan included cash expenditures for compensation and severance payments, executive transition costs, employee benefits, payroll taxes and related facilitation costs.
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Interest Expense
| Year Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | |||||||||||
| (In thousands) | ||||||||||||||
| Interest expense | $ | (6,747) | $ | (30,811) | $ | 24,064 | (78 | %) |
Interest expense decreased $24.1 million, or 78%, for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to the optional prepayment of the outstanding Term Loan under the Credit Agreement in an aggregate principal amount of $85.0 million on November 27, 2023 and repayment of all remaining amounts outstanding and payable under the Credit Agreement in an aggregate amount of $146.1 million on April 29, 2024. The borrowings under the Credit Agreement accrued interest at a floating rate which could be, at our option, either (i) an adjusted Term SOFR rate for a specified interest period plus an applicable margin of 7.50% or (ii) a base rate plus an applicable margin of 6.50%. The effective interest rate on our Term Loan was approximately 14.55% as of April 29, 2024, the date of its termination.
Other Income (Expense), net
| Year Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | |||||||||||
| (In thousands) | ||||||||||||||
| Other income (expense), net | $ | 13,057 | $ | 7,248 | $ | 5,809 | 80 | % |
Other income (expense), net increased $5.8 million, or 80%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase was primarily due to an $9.2 million gain on sale of insurance business in connection with the strategic partnership, a $4.4 million gain on investment on non-marketable equity securities due to an observable price change, offset by a $5.5 million loss on extinguishment of debt recognized in the year ended December 31, 2024 compared to a $4.0 million loss on the partial extinguishment of debt recognized in the year ended December 31, 2023, a $5.9 million decrease in interest income on our investment portfolio due to a smaller investment balance in 2024 as compared to 2023, and a $0.6 million loss on transfer of our subsidiary in India.
Income Tax Expense
| Year Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | |||||||||||
| (In thousands) | ||||||||||||||
| Income tax expense | $ | (109) | $ | (94) | $ | (15) | 16 | % |
The decrease in income tax expense for the year ended December 31, 2024 compared to the year ended December 31, 2023 was immaterial.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through proceeds from the issuance of our stock and warrants and cash generated from the sale of our product offerings, as well as debt financing. As of December 31, 2024, our principal sources of liquidity were cash, cash equivalents, and marketable securities of $98.5 million. Cash and cash equivalents are comprised of bank deposits and money market funds. Marketable securities are comprised of U.S. treasury and agency securities, commercial paper, and corporate debt securities. Most of our cash and cash equivalents are held in the United States.
We have generated significant losses from operations and negative cash flows from operating activities in the past as reflected in our accumulated deficit of $1,385.0 million as of December 31, 2024. We may incur operating losses in the future due to the investments that we intend to make in our business and pressures on revenue growth due to the recent macroeconomic environment, and as a result, we may require additional capital resources to grow our business.
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Share Repurchase Program
In August 2024, we announced the authorization of a share repurchase program for the repurchase of shares of our Class A common stock, in an aggregate amount up to $25 million. Repurchases may be made at out discretion from time to time through open market purchases or through privately negotiated transactions subject to market conditions, applicable legal requirements, and other relevant factors. Open market repurchases may be structured to occur in accordance with the requirements of Rule 10b-18 of the Exchange Act. We may also, from time to time, enter into Rule 10b5-1 plans to facilitate repurchases of our Class A common stock under this authorization. The share repurchase program does not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares of our Class A common stock. The timing and actual number of shares repurchased may depend on a variety of factors, including price, general business and market conditions, and alternative investment opportunities. During the year ended December 31, 2024, we did not repurchase any of our Class A common stock under our share repurchase program. As of December 31, 2024, approximately $25 million remained authorized and available under our share repurchase program for future share repurchases. Refer to Note 11, Stockholder’s Equity, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, for additional information.
Preferred Stock Investment
On April 29, 2024, we entered into the Investment Agreement with Haveli and issued 150,000 shares of the Company’s Series A Preferred Stock for an aggregate purchase price of $150.0 million. In connection with the issuance of the Series A Preferred Stock, we issued the Haveli Warrant to purchase up to 11,111,112 shares of Class A common stock, at a purchase price of $4.50 per share of Class A common stock. The Haveli Warrant is exercisable for a period of 24 months from issuance.
Credit Agreement Termination
In connection with our acquisition of Title365, on June 30, 2021, we entered into a credit agreement (as amended from time to time, the “Credit Agreement”) that provided for a $225.0 million term facility and a $25.0 million revolving facility. The term facility was funded on July 1, 2021 and was fully drawn upon to provide, in part, the acquisition consideration being paid in connection with the purchase of a 90.1% interest in Title365. On November 27, 2023, we entered into the Second Amendment to the Credit Agreement (the “Second Amendment”), which, among other things, terminated the revolving facility and amended the maturity date of the term facility to provide for a springing maturity extension to June 30, 2027, in the event that certain conditions are satisfied. These conditions were not met as of the termination date of the Credit Agreement. In connection with the Second Amendment, we opted to prepay the outstanding term facility under the Credit Agreement in an aggregate principal amount of $85.0 million. In connection with the issuance of the Series A Preferred Stock, on April 29, 2024, we paid approximately $146.1 million to repay all amounts outstanding and payable under the Credit Agreement in full, and terminated the Credit Agreement.
Material Cash Requirements
After the termination of the Credit Agreement, our material cash requirements arising from known contractual and other obligations primarily relate to lease obligations for our office locations and purchase commitments.
We believe that current cash, cash equivalents and marketable securities will be sufficient to fund our operations for at least the next 12 months. Our future capital requirements, however, will depend on continued growth in our customer base, the timing and extent of spending to support our research and development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products and features, the continuing market adoption of Blend’s software platform, and the effectiveness of our efforts to improve cost efficiency. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights; additionally, we may repurchase shares of our Class A common stock from time to time under our share repurchase program. In the event that additional financing is required from outside sources, we may seek to raise additional funds at any time through equity, equity-linked arrangements, and debt. If we are unable to raise additional capital when desired and at reasonable rates, our business, results of operations, and financial condition would be adversely affected. See the section titled “Risk Factors—Risks Related to Our Business—Our failure to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies in the future could reduce our ability to compete successfully and harm our results of operations.”
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Cash Flows
The following table summarizes our cash flows for the periods indicated:
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||
| (In thousands) | ||||||||||
| Net cash used in operating activities | $ | (13,044) | $ | (127,621) | $ | (190,418) | ||||
| Net cash provided by investing activities | 45,395 | 127,306 | 99,431 | |||||||
| Net cash (used in) provided by financing activities | (21,062) | (90,958) | 2,220 | |||||||
| Effect of exchange rates on cash, cash equivalents, and restricted cash | (5) | (31) | (116) | |||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | 11,284 | $ | (91,304) | $ | (88,883) |
Cash Used in Operating Activities
Our largest source of operating cash is cash collections from our customers, and our primary uses of cash in operations are for employee-related expenditures, sales and marketing expenses, and third-party hosting costs.
Net cash used in operating activities for the years ended December 31, 2024 and 2023 was $13.0 million and $127.6 million, respectively. The decrease in cash used in operations reflects our net loss adjusted for noncash items, such as charges associated with stock-based compensation, depreciation and amortization, gain on investment in equity securities, amortization of deferred contract costs, amortization of operating lease right-of-use assets, and amortization of debt discount and issuance costs on our long-term debt, loss on debt extinguishment, gain on sale of insurance business, and changes in operating assets and liabilities. Fluctuations in operating assets and liabilities are affected primarily by changes in trade and other receivables, prepaid expenses and other current assets, accrued compensation, deferred revenue, accounts payable and other liabilities.
Cash Provided by Investing Activities
Net cash provided by investing activities during the year ended December 31, 2024 was $45.4 million, which was primarily due to sales of marketable securities of $100.3 million and maturities of marketable securities of $53.2 million, $9.1 million proceeds from sale of insurance business, offset by $102.0 million used in the purchase of marketable securities, an investment via issuance of note receivable of $5.0 million and $9.8 million in additions of property and equipment, primarily related to capitalized internal-use software development costs.
Net cash provided by investing activities during the year ended December 31, 2023 was $127.3 million, which was primarily due to maturities of marketable securities of $310.5 million, sale of marketable securities of $56.0 million, partially offset by $236.1 million used in purchases of marketable securities, an investment via issuance of note receivable of $2.5 million, and property and equipment purchases of $0.6 million.
Cash Used in Financing Activities
Net cash used in financing activities for the year ended December 31, 2024 was $21.1 million, primarily consisting of $144.5 million repayment of long-term debt, $9.5 million payment of issuance costs related to the Series A Preferred Stock and the Haveli Warrant, payment of taxes related to net share settlement of equity awards of $18.1 million, offset by $149.4 million proceeds from the issuance of Series A Preferred Stock and the Haveli Warrant, and proceeds from the exercises of stock options of $1.7 million.
Net cash used in financing activities for the year ended December 31, 2023 was $91.0 million, primarily consisting of partial repayment of long-term debt principal of $85.1 million and payment of taxes related to net share settlement of equity awards of $6.2 million.
Contingent Obligations
We administer escrow and trust deposits held at third-party financial institutions representing funds received under real estate contracts, escrowed funds received under escrow agreements, and/or undisbursed amounts received for settlement of mortgage and home equity loans. Cash held for these purposes was approximately $6.1 million, net of outstanding checks in transit of $33.8 million as of December 31, 2024. These funds are not considered assets of ours and, therefore, are not included in our consolidated balance sheet; however, we are contingently liable for the disposition of these funds on behalf of consumers.
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As of December 31, 2024, we did not have any other relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other purposes.
Critical Accounting Estimates
Our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K are prepared in accordance with the U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of our consolidated financial statements in accordance with U.S. GAAP requires us to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenue, costs, and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Our actual results may differ from these estimates under different assumptions or conditions. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows could be affected.
We believe that of our significant accounting policies, which are described further in Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K, the following accounting estimates involve a greater degree of judgment and complexity. Accordingly, these are the estimates we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Revenue Recognition
In our Blend Platform segment, we generate revenue from fees paid by our customers to access our platform, to complete mortgage and consumer banking transactions on our software platform, access Blend Builder, and, to a lesser extent, from professional services and premier support. In our Title segment, we generate revenue from digitally-enabled and traditional title insurance services, where we earn fees for placing and binding title insurance policies with third-party underwriters, and from escrow and other trustee services where we earn fees from managing the closing of real estate transactions.
In the Blend Platform segment, our customers have the ability to access our platform under subscription arrangements, consumption arrangements, or usage-based arrangements. We recognize fees for subscription arrangements ratably over the non-cancelable contract term and for consumption and usage-based arrangements as the completed transactions are processed using our platform.
In our subscription arrangements, the customers commit to a minimum number of completed transactions at specified prices over the contract term. We believe the area we apply the most critical judgment in our revenue recognition relates to determination of the transaction price, and specifically, the estimation of variable consideration in our subscription arrangements. The variable consideration relates to the estimated overage fees we expect to earn over the non-cancelable contract term, which is included in the transaction price at contract inception to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. In estimating overage fees in subscription arrangements, we consider our historical experience and other external factors that may impact the expectation of future completed transactions beyond a customer’s contracted minimum number of completed transactions.
The estimated variable consideration is sensitive to the inputs, judgements, and assumptions made by us. Although we believe that our approach to developing estimates of variable consideration is reasonable, actual results could differ, and we may be exposed to increases or decreases in revenue that could be material.
Stock-Based Compensation
We measure and recognize our stock-based compensation based on estimated fair values for all stock awards, which include stock options, RSUs and PSUs. We recognize stock-based compensation expense for stock options and RSUs that vest only based upon the satisfaction of a service condition on a straight-line basis over the requisite service period, which is generally the vesting period. We recognize stock-based compensation expense for PSUs that vest based upon the satisfaction of a market condition on a straight-line basis over the derived service period. We account for forfeitures as they occur.
We believe the area we apply the most critical judgment in recognition of our stock-based compensation relates to the valuation of stock option awards and PSUs. We use the Black-Scholes-Merton option pricing model to determine the grant date fair value of the stock options and the Monte Carlo simulation to determine the grant date fair value of the PSUs. The assumptions used to
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determine the fair value of these awards, such as the risk-free interest rate, expected volatility of our stock price, and expected life of the award, represent our estimates, which involve inherent uncertainties and the application of management’s judgment.
Certain stock options granted to our Co-Founder and Head of Blend vest upon the satisfaction of a service condition, liquidity event-related performance condition and performance-based market conditions. The first tranche of the award, which vested upon completion of the IPO, was valued using the Black-Scholes-Merton option pricing model. The remaining tranches were valued using a Monte Carlo simulation model, and will vest upon achievement of performance goals tied to our stock price hurdles with specified expiration dates for each tranche.
Recent Accounting Pronouncements
Refer to Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.