Blend Labs Inc (BLND)

(Q4 2024 Letter)

Blend Labs operates an expanding ecosystem of technology, data, and service providers that power financial service firms’ consumer finance and mortgage applications. After recognizing the platform opportunity created by financial institutions spending inordinate amounts of time and money on antiquated, inflexible, and siloed technology stacks that stifled product quality and innovation, key Palantir employees founded Blend Labs to flip financial services technology stacks from vertically to horizontally integrated. After a thirteen-year journey, a collapse in its historical end markets, and a transitioned business model, Blend Labs is near an inflection point in revenues and earnings. We see five main paths to value creation.

First, under the cover of fourteen straight quarters of contracting mortgage origination volumes, Blend Labs has transitioned its business model from a point solution covering mortgage applications to a platform company powering infrastructure for the banking industry. Leading this transition is Blend Builder, a development platform with modular components and integrations that enable financial institutions to create and deploy white label product offerings without having to manage back-end processes. In giving financial institutions a rich application ecosystem that frees them from design, engineering, implementation, and maintenance, Blend removes customers’ internal product based silos and creates a standardized system of record that aids transparency, lowers operating costs, increases customer acquisition and conversion, and

minimizes risk across their businesses. As more financial services firms use the platform, more consumers use the platform, and more service providers join the platform to serve those customers. This self-fulfilling flywheel then feeds greater scale and diversity of the customer base, accruing benefits to Blend Labs on the cost side as transaction volumes support cost advantages in technology and data services, and on the product side as greater scale supports greater product complexity and deeper industry expertise. Blend Lab’s partner ecosystem and expanding horizontal integration across the financial services industry have occurred under the cover of a heavily depressed mortgage market, and we believe the benefits of the transitioned

business model will be significant upon market normalization.

Second, after cutting over $100 million in annualized costs, Blend Labs is free cash flow positive at trough mortgage and refinance volumes and as a platform with minimal variable costs, Blend Labs has meaningful operating leverage in a market recovery. Blend Labs has doubled its revenue mix (to 60%) in usage-based agreements where revenue growth is aligned with customer success (funded loans, new account opening, API calls, etc). This 60% revenue mix in usage based agreements coincides with a near doubling in mortgage origination market share (to 20.2% in 2024), which, when considering that Blend’s customer base consists predominantly of scale players who have been investing through the downturn, represents a meaningful opportunity for market share gains in a recovery and requisite high incremental margins on pass through earnings from growing penetration of usage based agreements.

Third, Blend Labs’ revenue mix is shifting to less cyclical end markets that merit a higher market multiple. Today, a majority of Blend Labs’ revenue mix is attributable to cyclical mortgage revenue. With the release of the Blend Builder development platform, pass through platform fees tied to consumer banking products become an outsized driver of revenue growth. The repeatable nature of constantly changing consumer banking demand profiles represent a far larger addressable market than the one or two mortgages a person gets in their lifetime. As the revenue mix shifts from mortgage to consumer banking applications, a more resilient revenue profile stands to be revalued.

Fourth, Blend Labs has a significant opportunity to use its scale and captive customer demand advantages to increase average revenue per customer at high incremental margins. Today, Blend Labs charges bank customers success-based fees of roughly 7% of the value created per approved loan. The size of the market opportunity has dictated the pricing strategy with the intent of expanding product penetration across the industry before flexing any pricing power. Moving to value-based pricing would multiply revenues and earnings from core mortgage products alone. When one factors in product attachment from the growing list of products available today, there is meaningful upside as Blend Builder monetizes its platform as a development tool for customers. The historical fact pattern of Salesforce’s go-to-market strategy provides an illustrative example of how this white space is developing for Blend Labs. When Salesforce went from selling to business line leaders to selling to IT departments, the business transitioned from a series of point solutions to a platform business. Blend Labs go to market strategy began with selling point solutions to business line leaders in the mortgage space, but IT departments began to realize that they could work with Blend and slim out their tech stacks as they consolidated with one vendor that can support many business lines. As usage proliferates across business lines, Blend Lab’s average revenue per user has a long runway to grow both from increasing product attachment rates, and, eventually, pricing power.

Fifth, we see meaningful optionality inherent in Blend Builder as a development platform with vast white space to drive horizontal integration beyond the domestic financial services industry. When Blend started rebuilding its platform four years ago, a goal was to enable scalable international growth on the rails of its domestic platform. With an initial focus on Europe and Canada, Blend has a long runway to use its playbook of proving out use cases on the largest, most demanding customers and then working across the industry to gain market share. In addition to geographic expansion, Blend has a long runway for expansion in the unautomated, undigitized financial services market for the thirty-three million small and medium sized businesses in the US. We see additional upside as Blend Labs follows Apple’s App Store playbook and opens the Blend Builder platform to Independent Software Vendors to add further depth to the application ecosystem.

In Blend Labs, we see an emerging platform that is horizontally integrating financial services technology stacks, and with free cash flow profitability at trough volumes and meaningful operating leverage, we see multiple long runways of earnings growth.