MeridianLink, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Meridian Link's second quarter 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I now would like to turn the conference over to your first speaker today, Eric Schneider.

Eric, please go ahead.

Good afternoon and welcome to MeridianLink's second quarter fiscal year 2022 earnings call. We will be discussing the results announced in our press release issued after the market closed today. With me are MeridianLink's Chief Executive Officer Nicholas Block, Chief Financial Officer Sean Blitchock, and President Go-To-Market Chris Maloof. Before we begin, I'd like to remind you that today's conference call will include forward-looking statements based on the company's current expectations. These forward-looking statements are subject to a number of significant risks and uncertainties, and our actual results may differ materially. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release and

to the other reports and filings we file from time to time with the Securities and Exchange Commission.

All of our statements are made based on information available to us as of today. And, except as required by law, we assume no obligation to update any such statements. During the call, we will also refer to both GAAP and non-GAAP financial measures. You can find the reconciliation of our GAAP to non-GAAP measures included in our press release, which is posted to the investor relations section of our website. With that, let me turn the call over to Nicolas.

Thank you, Eric. Good afternoon, and thank you all for joining us. We rang the opening bell today at the NYSE to mark the anniversary of our initial public offering last July. Over the last year and a half, we have acquired four businesses that strengthened and expanded our platform. Since going public, we have exceeded financial guidance every quarter and have made significant progress in our cloud transition. We also refinanced our debt and continue to generate significant cash flow, positioning us to embark on our next phase of growth. I want to recognize the entire MeridianLink team for helping us achieve another strong quarter and delivering the performance we will discuss today. Sean will walk through our Q2 financial performance in more detail, but I'd like to focus on the resilience of our business today and where we are investing for the future. The current macro environment highlights the benefits of our multifaceted business. First, our non-mortgage related lending businesses remain strong, growing 16% year-over-year in the quarter, led by particular strength in personal and other non-vehicle loan types. Diversification within our mortgage-related businesses benefits us as well, driving our outperformance versus the broader market. Although fewer mortgages are being originated, we are increasing wallet share as our customers leverage more of the Meridian Link platform. Meridian Link exceeded expectations in Q2, with GAAP revenue up 7% year-over-year to $73 million and 39% adjusted EBITDA margins. We are continuing to see strong demand from both new and existing customers who are investing in the digital transformation of their businesses in order to provide better and faster consumer lending and broader data verification experiences. There is significant market opportunity for us And we will continue to invest to capture a disproportionate share of our 10 billion TAM while maintaining best in class. In order to drive accelerated growth, we have outlined three key areas of continued focus. First, engaging more deeply with our customers. Second, expanding the capabilities of our platform. And third, Empowering our customers to grow more quickly and better serve their communities. Our top priority is engaging meaningfully and frequently with our customers. Understanding their goals and pain points provide us with a real-time view of market opportunities. Not only do these conversations give us a real-time view of market opportunities and inform our near and long-term product roadmap, but they also meaningfully drive our cross-sell motion. For example, in Q2, we engaged with nearly 1,000 customers and partners for three days at our in-person user forum. The event was so well attended that we will have to expand to a larger venue in 2023. This engagement led directly to an increased pipeline for both new logo and cross-sell opportunities. the launch of a product administrative certification program so that customers are able to optimize the use of our software and increase the efficiency of their organization's workflow. And customer excitement about future Meridian Link innovations that will help our customers and partners win in the market. We believe that continuous engagement with our customers ensures that Meridian Link is focused on the right investments to provide both immediate and long-term value to the market. Our next focus area is to continue expanding our platform's capabilities by delivering new innovative functionality. Meridian 1 is our cloud-based multi-product platform which uniquely spans the digital consumer lending journey from account opening through marketing, loan origination, and decisioning. Particular highlights in our cloud transition include the following. First, we are ahead of schedule to complete the full public cloud migration of MeridianLink 1, initiated in 2019 by the end of this year. Second, our patented debt optimization solution, which helps our customers look across their client's portfolio and identify where they can save money and improve their purchasing power, continues to gain traction with customers. And third, we have rolled out our modern experience for home equity so our customers can more efficiently serve the surging demand for home equity lending. We are focused on increasing the value of the platform by expanding its capabilities, which attracts new logos and fuels our cross-sell motion, in turn driving revenues. As our final focus area, Meridian Link empowers our customers to compete grow and succeed in any market. Our track record of providing best-in-class functionality, flexibility and automation as customers move to a digital environment has allowed our customers to win more clients, capture a greater share of their wallet and more fully meet their needs. This is why we are winning more customers and our existing customers are expanding their use of the platform. Like other companies exposed to the mortgage space, we have been adversely impacted by the historic turn in the mortgage market. Unlike others, however, we benefit from the resilience of our business model and product mix. We are seeing an accompanying increase in non-mortgage activity that more than offsets the headwinds in mortgage refinancing. I know I have said this before, but I want to emphasize this point. The diversity of our business and strong unit economics enable sustained investment in critical growth and scale initiatives across the economic cycle. Now let me discuss our key highlights of the second quarter. This quarter, we completed the migration of our mortgage lending module to the cloud. This milestone is critically important. As we migrate more of our products to a cloud-native environment, we are strengthening the Meridian Link One platform and are better serving our customers. Our enhanced security, flexibility, and new capability delivery speed increases cross-sell and up-sell demand. One credit union customer who has been leveraging MeridianLink opening and consumer since 2017 recently selected MeridianLink Mortgage to take advantage of the synergies of combining MeridianLink products. Their MeridianLink One footprint now includes mortgage, multiple consumer modules, and our unified point-of-sale solution. Additionally, our market-leading home equity lending capabilities were selected in a quarter by a top 15 national mortgage lender to facilitate their launch into this new category of lending. This selection was based on the combination of the unique depth and breadth of functionality we provide, and Meridian Link's ability to facilitate a swift market entry and provides another example of our ability to serve higher value customers. Finally, Meridian Link's success is tied to our strong team. As we prepare for the next rank of growth at Meridian Link, we strengthen our executive team by elevating Chris Malouf into a newly created president of go-to-market. where he now has direct ownership of all phases of the go-to-market engine. This will further increase the power of our go-to-market organization, leveraging Chris's deep expertise and operating experience, and increase our capacity for strategic initiatives. To conclude, Meridian Link is focused on engaging with customers to help prioritize investments that expand our platform capabilities and revenue opportunity, and empower customers to better serve their clients and communities. Meridian Link is a customer-focused business. As we improve customers' revenue generation, they improve ours, creating a powerful virtuous cycle. I will now turn the call over to Sean to talk a little bit about his background and then review our financial results and guidance. Sean and I are aligned on the values and vision of the future of MeridianLink, and I have appreciated Sean's early insights and his quick assimilation into the business.

Thank you, Nicholas, and thank you again to everyone for joining us on the call today. Being seven weeks in the chair, Let me start with a brief introduction, including why I joined Meridian Link. Then I'll review our results for the quarter and provide guidance for the third quarter and full year 2022. I've spent more than 25 years in senior leadership roles that span a diverse set of markets, functions, and business models. Throughout my career, I've relied on four key pillars with a specific mission. To increase the velocity of growth and innovation in a business. Those pillars are one, a laser focus on customer success. Two, driving strategic clarity to create value for our customers. Three, creating operating scale and leverage in the business model. And four, and perhaps most importantly, an intentional focus on having a positive impact on people and relationships, the result of which is high-performing, highly engaged teams, customers, and partners. These pillars are in my DNA and are exactly why I chose Meridian Link. a strong alignment with Nicholas, the management team, and the board on our mission and values. With a vast, largely untapped market opportunity ahead and a clear focus on our customer journey and experience, we have an incredible opportunity for market expansion and acceleration of growth to drive this company to a billion and beyond. As for results, as Nicholas mentioned in the second question, quarter, we generated total revenue of $73 million, up 7% year over year. Meridian Link's ability to grow in both a rapidly expanding and rapidly contracting mortgage market speaks to the balanced strength of the business, which is part of what attracted me to this company. In the second quarter, Lending Software Solutions revenue accounted for nearly 71% of our total revenue and grew 14% year-over-year. Excluding the impact from the anticipated slowdown in mortgage-related revenues, our lending software solutions revenue grew 16% year-over-year.

For the mortgage loan market, second quarter revenue generated 25%.

of overall revenues, roughly in line with our expectations, but down from 30% in the prior year. More specifically, 7% of our lending software solutions revenue and 64% of our data verification software solutions revenue were tied to our mortgage-focused products. While the majority of our data verification software solutions is tied to mortgage, this part of our business continues to meaningfully outperform the market. The seven points of year-over-year revenue growth in the quarter came primarily from increased transaction volumes and product go-lives at both new and existing customers. We expect to continue to drive accelerated growth as we bring additional capabilities to our customers. Moving to profitability, adjusted gross margin in Q2 was 70% in line with expectations. Accounting for stock-based compensation, GAAP gross margin was 63%. Our non-GAAP operating income was 14.4 million, and our GAAP operating income was $8.9 million. Adjusted EBITDA for the quarter was $28.2 million, representing an EBITDA margin of 39%. This reflects ongoing cost discipline. But more importantly, the significant value our solutions provide in the market. Our EBITDA margins are near 1%. level of the largest banking technology providers and clearly distinguish us from most of the smaller providers who have yet to achieve the positive EBITDA. In response to market demand, we spent 21% more in sales and marketing and 28% more in R&D adjusted for stock-based compensation. Compared to the second quarter of last year, Importantly, we will continue to invest in our sales and marketing and R&D efforts across the balance of the year as we have enormous potential for further market penetration of our existing solutions and have clear line of sight to expand our offering. Now turning to the balance sheet and cash flow statement. We ended the second quarter with $100.3 million in unrestricted

cash and cash equivalents.

Down 46 million from the end of the first quarter, but primarily driven by the closing of the street shares acquisition at the start of the quarter. Operating cash flow in the second quarter was 12.8 million, and free cash flow was 10.2 million, or a 14% free cash flow margin. In the trailing 12-month period ending in the second quarter, operating cash flow was $87.6 million and free cash flow was $80.1 million, or 29% free cash flow margin. Meridian Link's current cash position and ongoing cash generation provides a wealth of allocation opportunities for us to most efficiently build value for our customers and shareholders. We did initiate stock repurchase activity in the quarter, but at low volumes, as we see a number of strategic opportunities potentially being unlocked by the current capital raising environment. I am personally very excited to be part of MeridianLink at this point in its development. Non-mortgage revenues comprise more than three quarters of total revenue in the second quarter. the highest level since at least the start of 2019 and grew in the mid-teens. With a restructured management team focused on accelerating growth and a number of high return investment initiatives both in place and in queue, it is a great time to be part of this company. I'll now pivot to guidance for Q3 and an update for full year 2022. Despite the rapid rise in mortgage interest rates since the start of the year and the associated decrease in expected market volumes, we continue to see strong demand momentum overall, and our pipeline remains robust. For the third quarter, estimated total revenue is expected to be between $73 million and $75 million. compared to 67.4 million for the same period in 2021. This represents an estimated increase of 8% to 11% year-over-year and is above market expectations. For the full year 2022, we are reaffirming guidance for total revenue between $289 million and $293 million compared to $267.7 million for the same period in 2021. This represents an estimated increase of 8% to 9% year over year. I want to emphasize this point. Irrespective of economic uncertainties, we are confident that we will continue to add new customers and increase module penetration among our existing customers across the remainder of the year. we remain committed to our previously stated guidance. For a bit more context on our expectation of mortgage-related revenues, we've reflected the incremental decline of the market in our guidance. In the third quarter of 2021, the mortgage market contributed $19.6 million of revenue to MeridianLink, or nearly 30% of our revenue. Comparatively, We expect the mortgage market to contribute less than 20% for the third quarter of 2022 as rates continue to rise across the second quarter. Overall, the mortgage-related percentage of our revenue in 2022 is still expected to decrease to the low 20s, down from 30% in 2021. With our current mortgage revenue forecast, we anticipate ending the year

with our potential exposure in the high teens as a share of our overall revenue.

On a non-GAAP basis, our third quarter estimated adjusted EBITDA is expected to be between $25 million and $27 million, representing EBITDA margins of approximately 35% at the midpoint. Our reported Q2 adjusted EBITDA came in above our guidance, which is a great result. This is while partially catching up on hiring plans to facilitate our investment initiatives during the quarter. Our expectation is for those plans to be fully funded through the remainder of 2022. As we've discussed on prior calls, this also includes in Q2 and for the remainder of the year, Approximately $1 million dilution per quarter to bring the street share solution fully to market as part of Meridian Link 1. For full year 2022, our estimated adjusted EBITDA is expected to be between $112 million and $116 million, representing EBITDA margins of approximately 39% at the midpoint. Again, holding to our committed guidance, our investment priorities this year include services capacity to convert existing bookings to revenue, and development capacity to complete the movement to the cloud and enhancements to our platform. In summary, we are successfully managing a turbulent macroeconomic environment. We will continue investing in our business, adding new clients, driving incremental revenues to our customers.

We are constantly

we will continue to outperform the market in both our mortgage-related revenue and in our non-mortgage solutions. That concludes my prepared remarks. With that, Nicholas, Chris, and I are happy to take any of your questions, and I'll turn it over to the operator.

Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please slowly press star followed by 1 on your touchtone phone. you will hear a three-tone prompt acknowledging your request. And if you would like to withdraw from the question queue, simply press star followed by two. And if you're using a speakerphone, we do ask that you please lift the handset before pressing any keys. Please go ahead and press star one now if you have a question. And your first question will be from Koji Akeda at Bank of America. Please go ahead.

Hey, guys. Thanks for taking the questions, Nicholas. Sean, congrats on the new seat. Looking forward to working with you in the future. First question here, just thinking about the guide, you know, with the guide being reiterated out there, I actually think that's pretty good considering the mortgage side of the business is really turning out to be a bigger headwind than maybe previously thought entering this year. But the non-mortgage side, it is growing mid-teens. I think that's really great. And it sounds like that growth is coming in, even with auto loans. So what's driving that consumer strength, even when consumer sentiment is not that great out there?

Thank you for the question. This is Chris Maloof. One thing to... I think everyone on the call would benefit from looking at how mid-market institutions, credit unions, and banks have fared across the economic cycles over the last 10 to 20 years. In both up cycles and down cycles, consumers have demonstrated a strong interest in credit. And which particular aspects of credit go up and down depending on their specific needs, whether it was the liquidity crisis or more recently the supply chain challenges, But despite any of those elements, it's remained strong. And that's something we're seeing in our volumes now. We're seeing it in vehicle despite the supply chain challenges. And I have yet to see anything that would change my view on that, which is also reflected in economic forecasts from organizations such as CUNA. Thank you again for the question.

Thanks, Chris. And I forgot to mention congrats on your new seat, too. Congrats on that. And just one follow-up for me. I noticed in the press release, you guys wanted to talk about the 15 national mortgage lenders with the home equity lending product. That's pretty huge in our view, and it shows the scalability of the product. So I guess could you talk a little bit about how that deal came about, and does this imply or maybe mean that you might be leaning into that part of the market more in the future?

Yeah, thank you. Again, I think first of all, answer the question of are we going further upmarket? We continue to see success drifting upmarket, but it's typically when customers come to us and we meet their needs and they look at our product and our platform and see the scalability of our platform across volume environments and their needs. What From my perspective, really stand out about our platform is its ability to be configured as a highly configurable platform through integrations in our partner marketplace. And that benefits go-to-market for these folks who want to roll out our solution at a pretty fast clip and speed, specifically as it relates to HELOC. So from my perspective, Exciting times. We've seen traction when folks come to us, but it hasn't changed our go-to-market motion where we are still highly focused on that $100 million to $10 billion of assets under management.

Thanks, Nicholas. Thanks, guys. Thanks for taking the questions. Thanks, Gaudi.

Next question will be from Saket Kalia at Barclays. Please go ahead.

Okay, great. Hey, guys, thanks for taking my questions here. Echo my congrats for Sean and Chris. Nicholas, maybe I'll start with you. You know, coming into this year, it sounded like we needed to build out the services organization a little bit to really implement the strong bookings that you were seeing. Maybe the question is how is that process going, and what are you seeing on – on sort of the implementation or drawdown or whatever the best word is for that backlog that you've built up.

Does that make sense?

Yeah, it does. Thank you for the question. And I think I'm going to break it up in two parts and first speak to, yes, we entered Q2 a little bit behind in hiring, but we largely – caught up in Q2 by the end of Q2 in hiring services, resources that we were budgeting and planning for in the Q2 timeframe. We're now in that ramping phase, so there's a fair bit of training and mentoring taking place. These folks can really engage on implementations on their own. Pretty excited. Feel we found some great talent in the market in the second quarter that we would bring online as folks who will be out of the field here late this year into next year. Remember, we kind of guided you. It takes us four to five, six months to get folks onto projects. Then in terms of backlog, we continue to build backlog through Q2. Our goal is still to kind of crest late in the second half of the year and to start driving backlog down. But at this point in time, we've seen a sequential increase of backlog from Q1 to Q2.

Got it. Got it. That's very helpful. Maybe from my follow-up for you, understanding this question, It's still only seven weeks in. And maybe Chris touched on this a little bit, but I'm curious how you think about the growth algorithm for the lending software business excluding mortgage, you know, and whatever that lend is, whether that's total growth rate, you know, components of customers and volume, open-ended. I'm curious how you kind of think about that growth framework.

Yeah, good question. I... So the balance of the portfolio, I guess, is diverse, number one. But I do think of it in separate components. I think there is a component that's new logo, and I want to drive new logo as much as I can. There's a component of it that is just pure volume-based growth. And then there's a component that's cross-sell. And in that cross-sell, by the way, is price increase as well. And so really there are four components that we're driving. We're looking at all of them. I want to drive healthy growth in all of them, but that's kind of the outline or the framework of the algorithm, if you will, and then we get into kind of the details of the specific product line.

Got it. Very helpful. Thanks, guys.

Yep.

The next question will be from Nick Cremo at Credit Suisse. Please go ahead.

Hey, thanks for taking my question. I was hoping that you could talk about what sort of protection your contract minimums provide if consumer loan applications were to slow at some point down the line in a recessionary scenario with higher interest rates, just given weakness in mortgage originations and auto loans.

Yeah, this is Sean. I'll take it. So, you know, part of what we call resiliency or part of the insulation is baked into our contracts. Most of our contracts have a tiering system where as volume decreases, the prices increase. And so we're able to deflect... A lot of that, you know, the volume decreases based on the contracts that we have with our customers. So hopefully that answers your question.

Yes, thank you.

Any further questions, Nick? No, that's it. Thank you. Next question will be from Chris Kennedy at William Blair. Please go ahead.

Good afternoon, and thanks for taking the question and echo the congrats there. Can you talk a little bit more about Meridian Link One and how you think that could help accelerate growth of the business over the next couple of years?

Thank you for the question. This is Chris. I'll take this one. So Nicholas already highlighted that we're ahead of schedule on Meridian Link 1, which is very exciting for the business, and laying that out into a few components. The first and foremost is we've inserted multi-year investment to set up our platform for the next decade. So what that means to me is that we have a software platform that's on the latest infrastructure leveraging the latest tools from a cloud vendor on the latest architecture. So the way that benefits us is we can focus on what we do best. We are not going to be a data center provider. We will not be building data center tools. We will leverage what's best in class out there. And then most exciting for me personally is as all of those development resources free up as we finish the last stage of this project, we can focus the remaining on extending our position in the marketplace and on future innovations.

Thank you for the question. Got it. And then I guess, Chris, just a follow-up. Meridian Link has made a lot of changes to go to market over the last couple of years. I guess, what's your key focus going forward? from here. Thanks a lot.

My key focus for going from here is helping. We've added a lot of people to the organization, which is very exciting. That's the foundation of how we grow our business faster. To be able to maintain that pace, we need to educate every new person as well as the last 10 were educated on how our solutions help our customers succeed, and ultimately win in their respective markets. So that training, coaching, and organizational infrastructure to make that possible is my central focus.

Got it. Thank you.

Next question will be from Alex Scalar at Raymond James. Please go ahead.

Hi. This is Scalar. for Alex.

I've got a quick question about Meridian Link 1 for the follow-up on it. I just want to double-click on the progress of Meridian Link 1's rollout, and specifically, how is cross-selling manifesting for some of the early adopters?

Thanks. This is Chris again. So from a progress perspective, all of our mortgage clients are in the cloud. Again, we are routinely and monthly moving more and more of our customers, so we're doing a staged approach to minimize the interruption. And what I want to call out here is it's really a tremendous effort by the team in transitioning so many clients with minimal interruptions, especially given the breadth the integrations that our customers are using from our third-party marketplace, that's a tremendous achievement. Now, when you think about from a cross-sell perspective, where you're seeing the enablement and the acceleration of the cross-sell is in areas such as where Nicholas called out about the debt optimization. By having all of our solutions in the cloud on a common stack, we're able to create that – various solutions or loan types create more value together than apart by having them in one place in a highly responsive location.

Great. And a follow-up question. With the recent changes in your management, what are you expecting around your strategy to go to market? And has there been any changes to your guidance policies?

Thanks. Well, this is Sean, and thank you for the question. I think from a go-to-market perspective, I don't think we're going to continue to build out the management team. I don't think that affects our guidance policies at all. I think our guidance is is strong, and we will continue to look at it, but I don't think go-to-market restructuring affects our guidance policy.

Any further questions?

No, that's it for me. Thank you.

Thank you. Once again, ladies and gentlemen, if you do have any questions, please press star followed by one on your touchstone phone. And your next question will be from Matt Bensley at BTIG. Please go ahead.

Good afternoon, you guys. Thanks for taking the question. Maybe Chris wanted to dig in a little bit more on one of the answers you gave before, and I'll also echo my congrats on sort of the new expanded role there. In terms of the four biggest drivers, you know, obviously price increase you're trying to implement through. So maybe any updates on just sort of how much of the install base continues to see price increases roll through? Is that consistently on an annual basis, or are we looking at just sort of certain tranches of the customer base for now? But maybe more importantly on the other three key areas there, What do you feel like is maybe the biggest drivers likely in the second half of the year? And then as you look out towards 23 and beyond, where do you expect to add, whether it's more resources or expect greater sales efficiency to win across new logos, expansionary deals, and some of the other components? Thanks.

Thank you for the question. I want to ask a clarifying question first, if you don't mind. When you talk about the levers, are you referring to Sean's illustration of consumer lending growth?

I think you outlined to one of the questions earlier the sort of four key areas of driving growth across the business. I think it was new logos, cross-selling modules, and all the other things.

Again, thank you for the question. So we'll look to answer this in two parts. I'm going to answer the pricing component, and then Sean's going to talk about the levers that were just outlined. So from a pricing perspective, we have an annual pricing cadence that we have where we pursue a willingness-to-pay model and what's happening in the marketplace, and we consistently drive that lever. In a high inflation environment, that's more important than ever and a central part to our operating model. On to you, Sean.

Yeah, and I think perhaps this is getting to the last question, maybe connecting the dots a little bit. But I did outline kind of the model and how I was thinking about the growth algorithm volume, new logo, cross-sell, and price. And so, you know, if I just talk to the balance of those, I do think it relates to kind of phase three of Meridian Link, right? We are turning a corner when it comes to go to market, what our focus areas are. We have a new chief sales officer who's starting, has already started actually, and is going to be focused more heavily on new logo. And so we'll be focused there more intently than we have been in the past. From a cross-sell perspective, the opportunities for Cross-L, they exist tremendously within our existing portfolio, so we're on average penetrated into four of our 13 modules, as an example. We have a lot of opportunity for Cross-L, and we're constantly looking for new opportunities, peripheral opportunities, to add to the portfolio, to add to the platform. So I think we're constantly looking at our customers, what our customers need to drive that cross-sell, up-sell motion. And then volumes, you know, we're – volumes, we are – you know, when you talk about mortgage volumes as an example, I think it's largely driven by – the market, as is a lot of the other products that we have. But we're seeing kind of offsetting, and we have seen, and I looked at five years of history, and the product volume is a piece that consistently grows. It just, and Chris talked about this a little bit earlier, but even if mortgage levels off and this is the new normal, I think we're very well prepared for that to be the new normal and to continue to put up our growth trajectory, which is mid-teens grower.

All right, very helpful. And then just following up on Nicholas's comments that you sort of entered second quarter a little behind on hiring, but it seems like you've caught up nicely and are sort of exiting the quarter back on plan. I'm curious, from a margin perspective, You know, should we expect to see a little bit of pressure and compression through the end of the year and maybe into next year as that hiring continues to pick up and you sort of have a full run rate of headcount expenses? Or, you know, is that already sort of contemplated and the expansionary and cross-sell components are offsetting those new headcount? Thank you.

I think, thank you for the question. I think it's a little bit of both. Even in Q2, you saw margin pressure from a number of things. One, the street shares acquisition. I want to point that out again. But also because of the hiring in services. That will continue, but I think it becomes, as we catch up with backlog, and that's one of my key focus areas, is to create velocity with the backlog and move implementations faster. I think we will catch up to that, and the margin pressure will relieve over a period of time.

All right, great. Thank you for taking the questions.

Thank you. Next question will be from Parker Lane at Stiefel. Please go ahead.

Hi, guys. It's Max Osmuton from Parker Lane. Just one for me, thinking about the transition of all of the solutions .

Can you kind of remind us what the cost benefits are of that and when we should really start to see those in the model?

I think in general the answer is a gross profit decreases by about 3% year over year and a large portion of that is data center. We, you know, it decreases to 2% for future years, but the offset really starts to build as we exit our existing data centers, which is end of next quarter. So I think the payoffs begin sometime next year. It's basically a wash for FY23, but has been a drag on gross margin for a while now.

Got it. Thanks.

So maybe to add something there, Parker, if you don't mind me saying that this isn't a margin story. This is a future-proof platform investment. And while we will be exiting a data center where Sean highlighted some savings, given the fact that we have a very decent backlog and seeing clients continuing to, existing clients continuing to expand, you should expect to see us spend, increase our spend on cloud year over year over year. And from my perspective, yes, the cost would disappear. But from a longer term standpoint, this is where we should be. This is how we drive cross-sell. This is how we're going to provide a higher level of security to our clients. This is also how we will be in a position to implement and install clients a lot faster than doing it in our own data center. And those are the benefits that I'm personally excited about. I get shown in the gross margin and everything, but I'm excited when I speak to clients and kind of connect with folks that these are the real benefits.

Any further questions? No, thanks.

Thank you. Next question will be from Andrew Smith at Citi. Please go ahead.

Thank you, guys. Thanks for taking my questions here. I wanted to dig in on a smaller part of the business, the non-mortgage data verification side, where you have employment verification and other aspects like that.

Talk about strategy there and, you know, potentially growing that as a piece of data verification.

And what else you could add to data verification, you know, to support the growth? I know you've had a few pickups there historically. So, you know, any comments on strategy there would be helpful. Thanks.

This is Chris. Thank you for the question. So I'm going to talk about it in two different lenses. So the first is what's the benefit to the consumer and mortgage aspects of the business? And the benefit there is increased integrations and scale for third-party verifications that are important. So that is part of the marketplace.

And it's a major contributor that the verification data business over

overall provides the lending portion of the business.

So we have at scale hundreds of partners that are running through these pipes and those same data pipes are used to cross all of our products.

Other aspect of our strategy is part of our customer promise is providing our clients with the software tools they need to run and grow their business. Our credit reporting agencies operate either one or multiple verticals.

So the verticals are multiple. mortgage, tenant, or employment.

And for them to maximize their success and run a business that has less volatility than just running on mortgage, they require all three. And we're now able to provide that within our solution set.

Thank you for the question. Thanks, Chris. I appreciate that perspective.

That's helpful. In apologies, this has probably been asked, but just if you talk about just the consumer LOS side of the business in terms of sort of compensating current rates of growth, and then with kind of the backlog that you're seeing,

as you put more resources into absorbing that backlog, if we can see sort of a step up into 2023 as we get all the implementation resources into place. Apologies if I missed that, but anything close would be helpful. Thanks a lot.

I think... Even with the declines elsewhere, guidance kind of proves out that we are seeing a step up. And so because we're holding guidance, I would look at that as a positive. I think the services – look, backlog is – We want more backlog. I've said this, but we want velocity in clearing the backlog, and so we're working on that. I don't know. There's another piece of this, which is we're not just in an environment of macroeconomic uncertainty. It's also a very interesting time, especially with the great you know, resignation, people back to work, a shift in markets. So we're seeing, you know, even customers' capacity to implement as an issue. And so we'll continue to work the services piece. We'll continue to work the velocity. But I will point out that the backlog itself You know, we have a long runway of backlog, and it is reasonable to specifically address your question. It is reasonable to think that, you know, we can sustain or even do better in terms of growth rates based on that backlog alone.

Helpful. Thank you very much.

Thank you. And at this time, it appears that we have no further questions. Please proceed.

Thank you.

I'd like to close by recognizing the great work of our team. What we accomplished together is truly remarkable.

In fact, we were recently selected as the winner of the Association for Corporate Orange County Spotlight Award. That spotlight on our performance inspires us to continue reaching high, and I'm confident in our continued success.

Thank you for joining us today, and we'll be in touch. Have a great day.

Thank you, sir. Ladies and gentlemen, this does conclude the conference call for today. Once again, thank you for attending. And at this time, we do ask that