MeridianLink, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to Meridian Link's third quarter 2023 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 would now like to turn the conference over to your first speaker today, Gianna Rotellini. Gianna, please go ahead.

Good afternoon, and welcome to Meridian Link's third quarter fiscal year 2023 earnings call. We will be discussing the results announced in our press release issued after the market closed today. With me today 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 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 Nicholas.

Thank you, Gianna. Good afternoon, everyone. Thank you all for joining us for our third quarter 2023 earnings call. I am proud to report that Q3 was another solid quarter of execution. Through the MeridianLink One platform, we continue to provide an end-to-end digital lending solution to our customers to best serve their clients. Our leading position in the market is all thanks to the dedication and expertise of the entire MeridianLink team. While we are continuing to monitor the impact of macro conditions, there are a few key drivers of our business that have not changed and help us deliver consistent performance quarter after quarter. We have a talented go-to-market team capturing strong new logo and cross-sell demand for a seamless digital lending solution that is designed to accelerate growth. We are also continuously improving the platform capabilities of MeridianLink One through product innovation, and value-added partner integrations. These drivers are evident in our results. In Q3, our GAAP revenue grew 7% year-over-year to $76.5 million at an adjusted EBITDA margin of 39%. This represents total revenue in line with our guidance range and a solid beat on profitability driven by successful cost discipline in the quarter. We consistently achieve profitable growth as we execute on a platform strategy that captures the entirety of the consumer's debt wallet for customers. As borrowing needs evolve, it remains our goal to help our customers win and retain consumers by providing a personalized, frictionless lending experience. On that note, let's move to our Q3 updates on the three areas of growth acceleration, focus on the platform strategy that field our performance. First, engaging more deeply with our customers. Second, expanding the capabilities of the platform. And third, empowering customers to grow more quickly and better serve their communities. Starting with customer engagement, our go-to-market team achieved another strong booking scorer and won an impressive roster of new logos. we continue to see the top financial institutions in our sweet spot turning to Meridian Link to reach their digital transformation goals. Q3 was a solid bookings quarter in total mortgage lending. This is a fantastic achievement by the team that demonstrates the success in cross-selling Meridian Link One at a time when mortgage rates are at the highest they've been in a generation. we continue to see our most innovative customers investing to transform their mortgage lending processes as they anticipate a recovery in volumes. On that note, I'd like to highlight a platform sale win in the quarter from a $2 billion AUM bank that signed on both MeridianLink Consumer and Mortgage to replace their existing disparate systems. Through MeridianLink One, the customer is now using our patented debt optimization tool that empowers loan officers to maximize acceptance rates, boosts cross-sell opportunities, and deepen their relationships with clients. We continue to engage with both banks and credit unions that see the value in choosing our consumer and mortgage modules together to accelerate their digital lending strategy. Another impressive win in the quarter resulted from our engagement with a 500 million AOM credit union. We chose Meridian Link Consumer, Home Equity, and Account Opening to streamline the lending process. This was a key high-value win in Q3 that reinforces our leadership position in the industry. We provide a differentiated platform that transforms the entire lending and account opening process to be more automated and personalized for the consumer, which in turn creates more deposit and loan growth opportunities for the customer. Our customers remain the focal point of everything we do and our ongoing engagement through our go-to-market efforts reflect this commitment. As we serve more customers with greater efficiency, we accelerate growth for the business. Turning to our second area of growth acceleration, expanding the capabilities of the platform through product innovation. Critical to our sales motion, we are focused on improving the capabilities of Meridian Link One to drive our customers' digital lending strategy. To remain resilient today, we have seen our customers focusing on key strategic areas, such as providing personalized support for consumers and adopting real-time financial processes informed by data and analytics. We recently announced our new point-of-sale solution for account opening and loan origination. MeridianLink Access for the MeridianLink consumer and mortgage modules available through MeridianLink One. Driven by the demand for a more personalized consumer experience, MeridianLink Access provides enhanced configurability, enabling customers to quickly fine-tune their consumer-facing processes with better control. By leveraging a new POS that maximizes engagement, customers can capture more demand and accelerate growth. We've also been innovating in our data analytics solutions to provide our customers with actionable insights for optimizing their lending processes. For example, we announced a new data solution, MeridianLink Data Connect, which enables financial institutions to integrate their MeridianLink consumer and account opening data directly into their own business intelligence dashboards, allowing for more insightful reporting. In today's consumer-driven market, being able to gain greater insights from multiple data sources and easily access key learning in one place helps our customers serve more clients faster, driving the business forward. In Q3, we also expanded the connective capabilities of Meridian Link Insight, our interactive business intelligence solution to integrate with Meridian Link Engage and Meridian Link Collect. Through this integration, Engage customers are driving campaigns and developing stronger leads from more applicant data with an improved ability to track campaigns and progress. Collect customers have better visibility of their clients delinquencies to provide a clear path forward for maintaining client relationships. These examples of innovation demonstrate the team's dedication to expanding our platform capabilities to support our customers strategic initiatives. Finally, our third area of focus for growth acceleration is centered around our ability to empower customers to compete, grow, and succeed in the markets in which they participate. We've been very successful in empowering our customers to capture a greater share of the client's debt wallet through Meridian Link One. This highlights a critical component of our platform strategy, the capability to increase the adoption of modules among our current customer base, while fostering enhanced connections with numerous partners to amplify the value of our comprehensive lending platform. Starting with strong cross-sell wins in the quarter, one of our existing MeridianLink Collect Credit Union customers with AUM of $400 million added MeridianLink Consumer, Opening, and Indirect Lending to offer a more diversified, connected lending experience for the consumer. Through these additional modules, Meridian Link will recognize over five times the amount of ARR from the customer. This is a perfect example of how the cross-sell motion that we've invested into date can multiply our revenue over time, accelerating growth as our platform strategy gains traction in the market. We were also excited to sign a multi-module deal with a 200 million AUM credit union who currently uses Meridian Link Consumer and added Meridian Link Mortgage, business lending, and business account opening in the quarter. In this example, the differentiated lending capabilities of Meridian Link One enable the customer to balance liquidity and achieve strategic growth initiatives while also winning shares from larger players in the market. Moving to our new partner integrations, we are hyper-focused on teaming up with the most innovative players in the digital lending space to empower customer growth. First, we expanded our capabilities with Experian, the world's leading global information services company that we've had the pleasure of working with over a decade. Meridian Link customers can now integrate with Experian Verify, which provide lenders with real-time access to verified income and employment information. We also enhanced our Meridian consumer and decision lender integration with Experian Powercurve Regeneration Essentials, the company's automated decisioning engine. From the initial verification process to approving the loan, we have leveraged the power of our partner network to streamline the lending process for customers. Another partner announcement in the quarter was with Socure, a provider of digital identity verification and fraud solutions. Meridian Link One customers can now securely verify and onboard more consumers in real time, eliminating friction at signup while blocking fraudulent applicants. This is a great example of how we are merging Meridian Link One, which was built to generate AI and automation across solutions with innovative AI technology from partners. We have a mutual goal with our partner network to empower the digital transformation of our customers, further improving their ability to quickly process volume. I'd like to end on an exciting enhancement to a long-standing partner integration with Cox Automotive's dealer track, a comprehensive suite of indirect lending solutions for the industry's larger dealer lending network. This enhancement takes our existing integration which expedites credit applications and decisions between dealers and lenders and delivers a comparable level of speed to the contracting process. With digital contracting, lenders can speed up funding by increasing accuracy and compliance, resulting in accelerated growth. I want to close where I began and thank the team. Their focus on empowering our customer success is the driving reason that Meridian Link continues to deliver consistent growth and healthy profitability levels. While there are macro factors out of our hands, we have strengthened our position as the leader in an extensive consumer lending market, and we still have a long runway to take share. We will continue executing on our strategic initiatives that are designed to serve more customers with greater efficiency and which we expect will help accelerate growth for the business and increase value for stockholders. With that, I will now turn the call over to Sean to talk about our financial results and guidance.

Thanks, Nicholas, and good afternoon to everyone. Before I dive in, I'd also like to take a quick moment to highlight the phenomenal teamwork and execution demonstrated this quarter. We anticipated the market headwinds, that our customers would face through the year. And the team has remained steadfast in serving customers with best-in-class services and support to position their businesses for growth. Not only are we focused on customer success, but we believe we also have significantly invested in the future success of MeridianLink. We continue to put the talent and processes in place to fuel our next phase of profitable growth and scale. It's now a matter of executing on these strategic initiatives while maintaining our cost structure. That's exactly what we did in Q3. Meridian Link performed in line with our revenue guidance at 76.5 million, growing 7% year over year. Additionally, we achieved an adjusted EBITDA margin of 39%, well above the top end of our guidance range due to the combination of cost discipline and the initial payoff of our strategic investments. Turning to financials, to begin, let's look at revenue. First, specifically breaking down software solutions. Our total lending software revenue accounted for nearly 77% of total revenue and grew at 12% year over year. As the primary driver of our lending software solutions, Non-mortgage lending revenue contributed 88% and grew 6% year-over-year. Mortgage-related revenue within lending software solutions, inclusive of open-close, accounted for the remaining 12% of the total. Turning to data verification software solutions, revenue accounted for nearly 23% of total revenue and declined 9% year-over-year. This was driven by a 17% decrease in mortgage-related revenue, which represents 57% of total data verification software solutions. In Q3, total mortgage-related revenue was up 11% from last year and generated 22% of overall Meridian Link revenue. Last quarter, we adjusted our expectations for mortgage volumes to recover at a slower pace in the second half of the year as indicated by industry sources. While this gradual recovery played out in Q3, we stayed focused on what we can control. Our platform strategy of cross-selling mortgage lending to our consumer lending depository customers was successful, as demonstrated by the go-to-market wins in the quarter. The other 78% of our business continues to grow which is primarily led by the demand from our installed base for a suite of end-to-end consumer lending capabilities. This brings me back to the power of the platform. Meridian Link One caters to the evolving lending needs of the consumer. As customers add on modules, they're primed to grow even in the most challenging lending environments, which in turn increases the revenue opportunity for Meridian Link. Moving to profitability, accounting for stock-based compensation gap gross margin was 65%. Adjusted gross margin in Q3 was 72%, representing a 300 basis point improvement year-over-year driven by increased productivity of our services team and technology stack. Before turning to operating performance in the quarter, I'd like to break down the year-over-year change in our operating expenses. Compared to the third quarter of last year, G&A increased 8% on a gap basis and was flat on a non-gap basis. R&D declined 2% on a gap basis and increased 1% on a non-gap basis compared to the third quarter of last year. And on a gap basis, sales and marketing increased 50% While on a non-GAAP basis, sales and marketing increased 44% compared to the third quarter of last year. The growth across our non-GAAP operating expenses was primarily driven by additional headcount and increased compensation costs to fuel our go-to-market efforts. We continue to selectively invest in talent and technology that supports our next phase of growth.

Turning now to our overall operating performance.

Gap operating income was 5.6 billion, and non-gap operating income was 14 million. On a gap basis, net loss was 2.1 million, or a negative 3% margin, and on a non-gap basis, adjusted EBITDA was 29.8 million, representing a margin of 39%. This represents an improvement of approximately 300 basis points on a sequential and year-over-year basis driven by cost savings initiatives and ramping down non-critical spend. Now, turning to the balance sheet and cash flow statement. We ended the third quarter with $97.6 million in cash and cash equivalents, a decrease of $11.3 million from the end of the second quarter but driven by 30.7 million worth of share buybacks. Cash flow from operations was 21.3 million, or 28% of revenue, and free cash flow was 18.8 million, or 25% of revenue for the third quarter. We continue to generate cash levels and provide protection in this period of uncertainty while enabling capital allocation opportunities for us to build value for our stockholders. as seen by the strategic buybacks executed in Q3.

I'll now pivot to guidance for Q4 and for the full year 2023.

We've been guiding to a second-half recovery in volumes, which is a key driver of our transaction-based business model. As a reminder, we expect same-store volume growth to contribute mid-single digits to our overall mid-teens growth algorithm in a normalized environment. In the current lending environment, with the delayed recovery in mortgage and coming off of highs last year in consumer, we're experiencing a drag in same-store volumes as a result of credit tightening. Aside from volumes, there are additional performance drivers in our control that we have been hyper-focused on to support current and future growth. As we finish out the year, we will continue capturing new logos and cross-sell opportunities, accelerating ACV release, and enhancing Meridian Link 1 to sharpen our customers' competitive edge in the market.

On that note, we are reaffirming revenue guidance for the full year 2023.

For the fourth quarter, estimated total revenue is expected to be between $73 million and $77 million, compared to $70.6 million for the same period 2022. This represents an estimated year-over-year increase of 3% to 9%. For the full year 2023, we expect total revenue to be between $302 million and $306 million compared to $288 million for the same period in 2022. This represents an estimated increase of 5% to 6% year over year. For the mortgage-related revenue, we expect the mortgage market to contribute approximately 23% of revenue for the full year 2023 compared to 23% for the full year 2022. To provide more color around the growth drivers in our total revenue, The mortgage-related revenue guide implies a continued decline in data verification revenue given the impact of tough comparables in 2022. With the inclusion of open-close, we expect our lending revenue will more than offset the data verification drag in 2023, ending the year with low single-digit growth in total mortgage revenue. On the non-mortgage side, we continue to expect data verification revenue to be flat year over year as a result of headwinds in the employment screening market coming off of post-pandemic hiring. Understanding these dynamics, we expect consumer lending will continue momentum in 2023, just at a slower pace compared to last year. As used car prices appear to be softening and our customers are weighted towards used auto lending, we expect a slight uplift in volumes in Q4 that will continue in the next year. Now turning to the adjusted EBITDA guide. On a non-GAAP basis, fourth quarter estimated adjusted EBITDA is expected to be between 22 million and 26 million, representing adjusted EBITDA margins of approximately 32% at the midpoint. For the full year 2023, We expect our adjusted EBITDA range to be between 104 million and 108 million, representing adjusted EBITDA margins of approximately 35% at the midpoint. Our adjusted EBITDA guide reflects the continued operating discipline in areas that do not contribute meaningfully to growth acceleration. Over the last couple of years, we have made strategic investments to build the foundation for future scale. We are now at the point of continuously optimizing our cost structure to support incremental growth, which will in turn drive margin expansion as volumes impact the bottom line. I'd like to end on what we believe is consistently proven out quarter after quarter. Meridian Link has a team that can execute well through market volatility. We also have a resilient customer base who's focused on investing in the lending capabilities needed to best serve their clients. This resilience of our customers was evident in the global financial crisis, throughout the COVID-related downturn, and has proven to be true in the recent unprecedented market dynamics. With the investments we have made in place, Meridian Link is well positioned to strongly finish out the year and sustain profitable growth in years to come. 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.

And ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the number one on your telephone keypad. You will hear a three-tone prompt acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the number two. And just a reminder to please limit yourself from asking one question. If you have a follow-up question, please press star one again.

One moment, please, for your first question. Your first question comes from the lineup. Parker Lane from Steeple, your line is open.

This is Matthew Picker for Parker. Thanks for taking my question. To start off, could you provide a little extra commentary around your mortgage solutions? Are you seeing any new customers in that segment contributing to volumes at all? And what impact are you seeing on volumes from higher interest rates through this past month?

Thank you. We continue to see new logo wins as well as cross-sell wins within our mortgage business.

on a year-over-year basis, outside of one large deal in the first three-quarters of last year, we're ahead of last year in terms of bringing on new clients, positioning us for the future. It's been a really good year in that regard, and I think it speaks to us executing on the thesis we had with acquiring OpenClose.

Yeah, and I would just add, this is Sean, I would echo Chris's comments that... The cross-sell motion with mortgage has been very successful. So we're seeing consumer to cross-sell wins, which is kind of a major building block of the platform strategy going forward. Specifically on the volume question, we're outperforming MBA, we're outperforming the broader market, but our mortgage volumes have been a headwind and continue to be a headwind for sure. I think our pricing model with the minimums give insulation to some of that volume downside But certainly it's starting to pick up, but it's still a headwind nonetheless. So Q2, Q3 has come off the floor, or we've seen the trough, I think, has been behind us. Q2, Q3 has been better in terms of volume results, and we expect that to continue into Q4 and into FY24.

Okay, fantastic. Thank you very much.

And your next question comes from the line of William McNamara from BTIG. Your line is open.

Hi, thanks for taking my question. This is Bill on for Matt. I wanted to know how significant is the friction reduction with the recently announced Experian Verify partnership kind of compared to what was available before?

The new integrations discussed, including the one that you highlighted, represent our efforts to expand our clients' abilities to profitably lend down market. So as you think about our client base, one of the things that makes us resilient is the fact that our customers tend to lend to AAA consumers. That said, our customers also want to serve the broadest base of their community as possible. And our new advanced decisioning solution that we announced earlier in the year allows our clients to layer in these different verification services so that we can enable our clients to reach these audiences profitably and with confidence. We have a number of solutions of that category that enable that type of capability.

Okay, great. Thanks for taking my question.

Thanks, Bill. Thank you. Your next question comes from the line of Nick Cremel from UBS. Your line is open.

Hey, good afternoon, guys. Thanks for taking my question. I just wanted to get an update on how the backlog has trended since Q2 between new logo and cross-sell, and if you could provide any update on lending volumes that you've seen in October. Thank you.

Hi, good afternoon.

It's Nicholas.

Since the beginning of the year when we've restructured our sales or our services organization and created practice areas, We've seen a continued increase in productivity and ability to deliver. We have come off a really strong bookings quarter again, which contributed to building backlog, but we're making pretty good progress and will continue to make progress in the back half of the year. I think we're going to exit the year probably lower than last year from a backlog standpoint. But we will carry some backlog, and there will be some healthy backlog we're carrying into 2024. But the team has been fighting on all cylinders and pretty successful in delivering implementations today.

Yeah, Nick, this is Sean. You asked, I believe, about volumes as well. In general, trending at the slight recovery that we thought, in particular for mortgage and for auto. Auto is a little bit slower than hoped. I think the dynamic is, you know, of... pricing coming down in the used auto market, supply recovering in the new auto market. It's definitely happening. It's just a little bit slow, but that will continue in Q4. The rest of consumer, you know, is at forecast. And so... You know, our Q4 total guide, you know, will yield approximately mid-single-digit growth. And so I don't think we're in a bad position from a volume perspective all in, but we'll definitely have a launching pad for, you know, a lot of future volumes.

Got it. Thanks for all the color. It's very helpful.

Yep. Thanks, Nick.

Thank you. Your next question comes from the line of Oji Koji Ikeda from Bank of America. Your line is open.

Hey, this is Natalie Howell on for Koji. So you guys executed in terms of mortgage lending, and you talked about cross-selling really helping drive that there. Could you dig a little deeper into the automotive segment? I know you said it's slower than you hope, but you're taking the reacceleration into account for next quarter. So I wanted to see how that was tracking compared to expectations, and along with that, what are re-acceleration expectations for account openings and personal loans playing out? Thanks.

We continue to see an uptick in new vehicle sales as inventories recover.

And the incentives that are following that as automakers are looking to offload those lenders is putting pressure on used auto, which continues to lag. All that being said, we're starting to see early indications of a recovery, specifically around the wholesale used prices are starting to decline month over month. which is an indication of future success in the coming quarters. And then the other element, just keep in mind, new vehicle sales represent about 25% of our lending volumes and also represent an opportunity in the future as all those vehicles come off lease and enter the used auto market. That's another opportunity for the business in the future and our customers.

Got it.

Thank you. And once again, if you would like to ask a question, please press the star one again. Your next question comes from the line of Alex Escalar from Raymond James. Your line is open.

Hi, this is Jessica on for Alex. Thanks for taking my question. I just wanted to, as we're entering 2024, what's on the product roadmap for next year and beyond? Like, what areas are you most excited to invest in and that customers are interested in? And as you're thinking about these investments, is there any changes or up to your headcount that you're expecting for next year? Thanks.

Our investment strategy remains unchanged. So it's all about automation, speed, and personalized decisioning. So all of our roadmap items align to those three categories, all designed to help our customers out compete for consumers. And it can be a little different by loan type. We'll have more announcements to come in the coming year on what our new release schedule looks like. But more recently, we did announce the launch of our Meridian Link Access product. which enables our customers to have more flexibility in how they streamline their process for consumers as they enter the digital channel.

Yeah, just quickly on the headcount, we're tracking to our headcount number in FY23, and we'll talk more about FY24 headcount in our guide upcoming.

Thank you, and there are no further questions at this time. I would like to turn it back to the Meridian Link team for further remarks.

Well, thank you for attending the call today.

As we close, I want to extend a final thank you to our team. Their consistent, strong performance distinguishes Meridian Link from the competition. In fact, I'm proud to share that in Q3, IDC included Meridian Link in the top 50 of its 2023 Global FinTech 100 list. This achievement would not be possible without the strength and innovative spirit of our team.

I'm proud of their solid performance, and thanks again for joining us today.

Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.