MeridianLink, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Meridian Link's third quarter 2024 earnings call. At this time, all participants are in 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, Giana Rogelini. Giana, please. Go ahead.

Good afternoon and welcome to MeridianLink's third quarter fiscal year 2024 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, President Larry Kass, and Chief Financial Officer Elias Olmeda. 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 discussion of the risks, uncertainties, and other factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release and the periodic 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. Please note that, other than revenue, all numbers and our remarks are on a non-GAAP basis, unless otherwise stated. A reconciliation to comparable GAAP metrics can be found in today's earnings presentation which is available on our investor relations website and as an exhibit to the form 8K, furnished with the SEC just before this call. Our earnings presentation is available for you to download and reference throughout our prepared remarks. With that, let me turn the call over to Nicholas.

Thank you, Gianna. Good afternoon, everyone. Our team executed well in the third quarter. We achieved revenue of $80.4 million, or 5% growth year-over-year, in line with the high end of our guidance. Adjusted EBITDA was 33.8 million, representing a 42% EBITDA margin, exceeding the high end of our guidance. I'm pleased that we returned 31.3 million of capital to shareholders via stock buybacks at attractive valuations. Our solid Q3 results were driven by the company's continued disciplined execution. Revenue growth accelerated in the quarter on the back of continued annual contract value or ACV release. Margins exceeded expectations as we proactively managed spend in an uncertain macro environment. Last quarter, we discussed the headwinds that our community bank and credit union customers face in this uncertain macro environment. This quarter, we saw a modest rebound in activity due to lower rates. but our view of recovery remains unchanged as we expect that headwinds will persist and the market will take time to normalize. First, community banks and credit unions continue to be deposit constrained as loan to deposit ratios remain at elevated levels. We expect that deposit growth will return to pre-pandemic levels, but it will take time for depositories to migrate deposits back from higher yielding alternatives. Second, affordability of used cars continue to be out of reach for many due to high prices and elevated financing rates. We expect lower used car prices as new cars work their way to used car lots, but it will likely take time to see meaningful impact on affordability. We also expect that affordability will improve with lower financing rates, but to date, financing rates remain persistently high. particularly in the used auto market. Third, although we are seeing an increase in mortgage originations, we are not expecting a robust originations market in the short or medium term. Mortgage rates have moved higher in recent weeks, which continues to moderate demand and reflects macro uncertainty. Most outstanding mortgages are priced well below current mortgage rates. and we expect it will take multiple rate cuts to stimulate a significant increase in activity. Moving to highlights in the quarter, I want to start with one of our strategic focus areas, developing our people and leadership team to scale our business. In Q3, we strengthened our management team with the promotion of Larry to president and the onboarding of Elias to CFO. These proven SaaS leaders have deep industry knowledge and have operated successfully at scale. We are already seeing the impact of their leadership in the business. We continue to have great success with our land and expand strategy as we deepen relationships with customers and generate solid demand from those continuing their digital transformation. Financial institutions are expressing more confidence in the midterm economic outlook and we are seeing increased buying signals from customers using both mortgage and consumer lending solutions to strategically retool for a market recovery and the evolving digital lending needs of consumers. Our innovative platform continues to be a differentiator on the market. I love getting feedback from customers that use MeridianLink One to serve clients, accelerate growth, and achieve operational efficiencies. We continue to invest in innovation that delivers differentiated outcomes for our customers. With that, I will turn it over to Larry to review our business highlights in more detail. Larry?

Thanks, Nicholas.

We had a solid third quarter with a mix of new logos, cross-sell, and upsells. Booking's momentum continued as customers turned to MeridianLink as a trusted partner to accelerate their digital transformation. I've been on the road over the past 60 days with customers, prospects, and partners, and I continue to see firsthand the unique value proposition of our platform for mid-market financial institutions. No other solution offers the breadth or depth of MeridianLink One's end-to-end modern digital lending capabilities, including its ability to automate processes, enable data-driven decision-making, improve close rates, and improve risk management. Chief lending officers and digital transformation officers embrace our platform because it enables them to compete in an increasingly digital world with a solution set that accelerates speed, expands reach, and generates demand. Our existing customer base continues to be one of MeridianLink's most strategic assets. As a leading vertical SaaS company with a successful land and expand strategy, our bookings are mostly driven by expansion opportunities within our existing customer base. I'd like to highlight that mortgage cross-sell momentum remains strong as we continue to take market share with our integrated mortgage lending platform. Once again this quarter, we signed multiple high-value cross-sell deals across consumer and mortgage. This includes both consumer customers adding mortgage and mortgage customers adding consumer. highlighting the bidirectional cross-sell momentum enabled through our MeridianLink One platform. As an example, an existing MeridianLink One credit union customer with more than $750 million in assets added MeridianLink Mortgage, Mortgage Access, and our patented debt optimization solution to their existing consumer solution. This customer consolidated five disparate mortgage systems into our single platform that they had already deployed for personal, credit card, vehicle, and account opening capabilities. This expanded footprint further enables this customer to develop a holistic view of their member's wallet and helps them best serve their member's borrowing needs through personalized offers. As another example, we announced that Broadway Bank, one of the largest privately owned banks in Texas with more than $5.5 billion in assets, recently expanded its use of MeridianLink One with its go-live on MeridianLink Mortgage. This customer's implementation enabled centralization of loan operations under one system and reduced its loan processing time by up to six days. With time saved and greater visibility across the entire consumer debt wallet, Broadway Bank staff are delivering more personalized customer experiences and building stronger customer loyalty. Turning to new logos, the power of MeridianLink One continues to resonate with chief lending officers and digital transformation officers due to its integrated platform offering, configurability, and breadth of marketplace partners. This quarter, we won a $370 million AUM new logo credit union that is embracing its digital transformation by selecting MeridianLink One for its digital lending capabilities, including account opening, personal lending, credit card, direct auto lending, and indirect lending. This customer replaced its existing providers due to our ability to drive speed of decisioning, create a cohesive digital customer experience, and provide an integrated view of the consumer. I want to now turn to share some observations from my time in the market over the past couple months. As I mentioned earlier, I prioritize meeting with customers, prospects, and partners. Through these discussions, I've gained a stronger appreciation for our unique value proposition and the depth of our customer relationships. Meridian Link's integrated platform is viewed by customers as highly differentiated from point solutions and central to the design of their business processes. Our high-performing, dedicated sales, services, and success teams are partners to our customers and relied upon to help them advance on their digital journey. We feel confident that we have a strong foundation to scale upon. I've also gained an appreciation for our opportunity to consistently deliver exceptional customer experiences. Over the past two years, we've invested in our go-to-market services and customer success teams, which has further positioned us to scale. Now for the first time, We've internally aligned all customer-facing functions, marketing, demand generation, sales, implementation services, consulting, and customer success under common leadership to drive speed, consistency, and scalability. This focus and alignment is really important at this stage of our journey and will set us up for the next stage of growth with both new customers and existing customers. Having one team that embraces the customer journey end to end enables us to further deliver on the promise of our platform. I would like to end by reiterating my excitement to help lead the next leg of MeridianLink's journey. I'm honored to partner with Nicholas and our colleagues to lead this exceptional team. With that, I'll turn the call over to Elias to take us through the financial performance and guidance. I'm excited to work again with Elias after all these years. I have no doubt about the value that he will bring to our team. Elias is a proven CFO, having served as CFO of Mitchell International, a provider of SaaS solutions to the automotive and insurance industry, and most recently at Vistage, a subscription-based professional services business. Elias currently serves on the board of Auto Canada, Canada's largest automotive dealer group and a public company. I'm confident that you will find continuity in our philosophies to the CFO role and approaches to value creation. Elias?

Thanks, Larry. It's great to be here on my first earnings call, and good afternoon, everyone. I'm excited to join MeridianLink to partner with Nicholas, Larry, and the team to help lead the company through its next phase of growth and expansion. As Larry mentioned, I've worked with a number of SaaS companies over the course of my career, helping them scale their operations and create long-term value. I've also helped organizations unlock growth potential to more effective financial operations and greater focus on metrics. I'm excited to bring my experience to Meridian Link and to work alongside this outstanding leadership team. With the company's solid foundation, I see tremendous opportunities ahead. First, Meridian Link is a remarkable company with a unique value proposition as the leading lending platform of choice for credit unions and community banks. I know the power, value, stickiness of vertical enterprise platforms from my time at Solera and Mitchell. Platforms like Meridian Link are the heart of our customers' enterprise, helping them achieve their goals, empowering their businesses. We are the leading platform in a growing, resilient market segment where Meridian Link's digital capabilities enable our customers to compete and grow. Second, the fundamentals of this business are strong. We have solid margins and robust cash generation capabilities. We also benefit from a secular trend towards digitalization, in particular by bin market banks and credit unions looking to cater to their clients' lending needs. This is a durable business with recurring revenue insulated by contractual minimums with upsides as those minimums are achieved. It is led by a management team that is executed with discipline through market cycles. Third, I believe we are well positioned to accelerate growth. With the power of Meridian Link One, we have significant expansion prospects with our current customer base and partner relationships, as well as new logo opportunities. With our solid pipeline, bookings, and activations, we believe that over time there is substantial upside as volumes gradually recover, driving accelerated revenue growth. As CFO of Meridian Link, I plan to focus on three key areas and continue the work that Larry started. One, I will deliver against our operating priorities. bringing continued rigor, discipline, data, and analytics to measure progress and inform decisions. And I'll hone our short and medium-term investment priorities to articulate a long-term growth plan, including milestones over a three-plus-year period. Two, in line with our prior framework, I will take a disciplined capital allocation approach. To reiterate, our order of priorities is, first, investing in organic growth in areas such as product, go-to-market, and services, especially when these investments deliver repeatability and scale to the organization with a high ROI. Second, disciplined, accretive M&A that provides us with a high ROI both strategically and financially. We have a strong track record of undertaking and integrating M&A successfully, and we remain ready to execute on the right opportunities, and we continue to actively explore them. And third, repurchasing our shares when those traded at discount to intrinsic value and when we believe the returns on those shares are attractive. We expect that we will be able to do all three with our recurring revenue, free cash flow generation, and balance sheet capacity. Finally, I will seek to help our investors better understand the performance of our business and the levers of our growth, including our revenue algorithm. As I settle into the seat, we will work on delivering information with greater transparency, helping investors better understand our performance, and setting appropriate expectations. Now, moving to our results. Meridian Link demonstrated solid performance in the face of continued, though slightly diminished, macro headwinds in Q3. We generated GAAP revenue of 80.4 million, or 5% growth year over year, in line with the high end of our guidance range, led by lending solutions revenue growth of 7%. Adjusted EBITDA was 33.8 million, representing a 42% EBITDA margin and exceeding the high end of our guidance range. We generated $18.7 million of free cash flow and ended Q3 with $82.3 million in cash and cash equivalents. Total debt was $473.9 million, and excluding debt issuance costs and cash, net debt was $387.6 million, representing net debt to LTM adjusted EBITDA of approximately three times. turning back to our revenue performance and starting with revenue by source. Total gap revenue grew 5% year over year, driven by 4% growth in subscription revenue, 17% growth in services revenue, and a 9% decline in other revenue. Subscription revenue, which accounts for 84% of total revenue, grew from the levers that are in our control, primarily ACV release. Further breaking down our 5% revenue growth Price and churn were in the low single digits each and mostly offset each other. ACV release contributed high single digits, and volumes and one-time customer down sales combined were a low single digit drag. Now, looking at total revenue by solution type. Total lending software revenue growth was 7% year over year and accounted for nearly 78% of revenue. Non-mortgage lending revenue growth was 9% year over year and accounted for 90% of lending software revenue. This growth rate was largely attributable to ACV release from existing and new customers, which highlights the continued solid performance from our professional services team. Mortgage-related revenue within lending software solutions declined 7% year over year and accounted for the remaining 10% of lending software revenue. The decline was attributable to customer churn. Mortgage volumes in the quarter were strong year over year, but the majority of our contracts are at or below their committed minimums, and it will take time for volumes to push more customers above their committed minimums to drive revenue. Turning to data verification software solutions, revenue declined 1% year over year and accounted for 22% of total revenue. This decline was attributable to a 2% decrease in mortgage-related revenue which represented 56% of total data verification software revenue in Q3. This decline in mortgage-related data verification revenue was driven by the one-time downsell of a single large customer, which is now operating at their minimum for the remainder of the year. Moving on to our profitability. Adjusted gross profit was $58.9 million, representing a 73% margin. This represents a 145 basis point of improvement in operating leverage year-over-year driven by continued productivity of our services team. Turning to operating expenses. R&D expense was 7.3 million, or 9% of revenue, and declined 23% year-over-year, reflecting continued cost discipline, including lower staffing due to our previously announced restructuring. Sales and marketing expense was 8.6 million, or 11% of revenue, up 5% year-over-year. This increase is due to investment in go-to-market. G&A expense increased 18% year-over-year to 10.4 million, or 13% of revenue, reflecting select discretionary investments made to position the company to scale in 2025 and beyond. Adjusted EBITDA was 33.8 million, representing a 42% margin. This represents over 300 basis points of improvement in operating leverage year over year. We made some purposeful discretionary investments in Q3 while maintaining disciplined cost management in an uncertain macro environment. We do not expect margins to remain at these elevated levels, and we expect them to normalize in 2025 and beyond as we undertake further discretionary investments to accelerate future growth. Finishing with our capital position. We ended the third quarter with cash and cash equivalents of 82.3 million, a decrease of 10.7 million from Q2, driven by share buybacks. Total debt was 473.9 million, and excluding debt issuing costs and cash, net debt was 387.6 million. Cash flow from operations was 20.6 million, or 26% of revenue, and free cash flow was 18.7 million, or 23% of revenue. The company executed several significant capital market activities in the quarter. On September 30th, we completed another secondary public offering of 6 million shares of common stock by funds managed by Tomo Bravo, providing greater liquidity for the stock and attracting new investors. We also returned 31.3 million of capital to stockholders via stock repurchases in Q3 and have returned a total of 105.6 million on a year-to-date basis. These share buybacks are consistent with our capital allocation framework I discussed previously. Now I'll turn to guidance for Q4 and update guidance for the full year of 2024. We are encouraged by our year-to-date performance in Q3 in particular, which was driven by ACV release and disciplined execution. While Q3 was solid, we are holding our guide for the full year at the midpoint of our revenue range and tempering our Q4 expectations primarily because of the recent increases in mortgage and treasury interest rates. In addition, liquidity at financial institutions remains constrained and auto affordability remains low. As the macro environment improves, we believe the headwinds impacting our customer base will moderate over the medium term. But this is likely to take quarters and will happen at different speeds. Nonetheless, we are focused on the things within our control investing for our future success while maintaining disciplined cost management. In addition, we continue to prioritize winning new logos and cross-sell mandates, releasing ACV to revenue, and innovating Meridian Link One to meet the evolving digital lending needs of customers. With that, I'll share our updated guidance for 2024. For the fourth quarter, we expect total GAAP revenue guidance to be between 76 and 80 million, compared to 74.6 million for the same period 2023. This represents an estimated year over year change of two to 7%. For the full year 2024, we expect total gap revenue to be between 313 million and 317 million compared to 303.6 million for the full year 2023. This represents an estimated increase of three to 4% year over year. we expect the mortgage market to contribute approximately 20% of GAAP revenue for the fourth quarter and for the full year of 2024. I will now provide more color on the drivers of our 2024 total revenue. For non-mortgage lending revenue, we expect mid to high single-digit growth year-over-year, driven primarily by ACV release. Our mortgage-related revenue guidance includes declining year-over-year revenue, it will take time for recovery and volumes to push a significant portion of our customers above their committed minimums as the majority are currently below them. Additionally, we continue to realize the impact of downsell and customer churn. For our non-mortgage-related data verification software solutions, we expect broadly flat growth year over year as hiring has taken more time to recover. Now, focusing on our adjusted EBITDA guidance, Fourth quarter estimated adjusted EBITDA is expected to be between $29.5 million and $32.5 million, representing adjusted EBITDA margins of approximately 40% at the midpoints. For the full year 2024, we expect our adjusted EBITDA range to be between $127 million and $130 million, representing adjusted EBITDA margins of approximately 41% at the midpoints. to provide more color around the non-GAAP expense drivers of our adjusted EBITDA guidance for 2024. Gross margin is expected to be in the low 70s. R&D is expected to be significantly lower year over year due to our restructuring earlier in the year. Sales and marketing as a percentage of total revenue is expected to be higher year over year as we have invested in our go-to-market team. T&A is expected to be higher as a percentage of revenue year over year reflecting select discretionary investments made to position the company for scale in 2025 and beyond. Our adjusted EBITDA guidance reflects the same cost discipline that we demonstrated in Q3. Until we have greater conviction around the recovery in volumes from the macro and political environment becoming more certain, we will remain focused on managing our costs and releasing ACD to drive performance. I will end where I began today. I believe we have the foundation for scale and a strong leadership team in place to take the company to the next level. I look forward to finishing the year strongly and capitalizing on the growth opportunities that lie ahead. With that, Nicholas, Larry and I are happy to take any of your questions and I'll turn it over to the operator.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question Please press the star button followed by the number 1 on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star button followed by the number 2. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Parker Lin from CFO. Your line is now open. Please go ahead.

For Parker, thank you for taking my questions. To start, you mentioned the ACV release contributing high single digits to revenue growth. Can you just provide a little bit on what you're doing to accelerate the release of that and going forward? Thank you.

Hey, it's Larry. Thanks for joining. We have a strong quarter on ACV release. I wouldn't say that it's accelerating. ACV release is driven by bookings and then services delivery. And the growth in ACV release is really driven by bookings growth over prior periods. In the past, we had accelerated delivery due to some changes in our services delivery team and that had accelerated, but the growth in this period was not driven by that process change, so to speak. We're kind of, we're at stable delivery times. It's really driven by bookings and bookings release.

Okay, got it. And then secondly, you mentioned mortgage headwinds still continuing. Do you have any update on when you would think that that would kind of flip around and would the election results from this week have any impact on that?

Hi there. This is Nicholas. We still are in the phase of generational lows in mortgage volume. We don't anticipate a fast return to normal. If you take a look at where rates are and where mortgages have been issued over the COVID and uh more recent times mortgage rates will need to drop below five for it to have a meaningful impact on the business and volumes for us so we anticipate this to uh to be quarters um and not near term okay that's all thank you for the question uh for the help

The next question comes from Chris Kennedy from William Dare. Your line is now open. Please go ahead.

Good afternoon. Thanks for all the information. When you think about your business in a normalized environment, can you just talk about what you think the revenue can grow at going forward?

Hi, this is Elias.

Yeah, in a normalized environment, which we clearly aren't in, and as Nicholas and Larry alluded to, it's going to take us a while because we are facing some headwinds across different parts of our portfolio, both on the mortgage side, the auto side. All of that being said, as we do enter into a normalized environment and volumes pick up, what you'll see flowing through is Our revenue algorithm, you know, volumes will flip from a small drag across the company to, you know, it's, you know, I'm going to, you know, somewhere in the mid single digits. And if you think about that in the context of where consumer performed for the quarter, it's not hard to see us ultimately performing near where we have set long term guidance, which is in the mid single digits.

So mid-single digits for revenue growth.

I'm sorry. Excuse me. Mid-teens. Excuse me.

Double digits.

I misspoke. Mid-teens.

Yeah. Okay. So it's consistent with what you've said historically. Okay. Got it. Okay. Thank you for taking the question.

The next question comes from Alex Sklar from Raymond James. Your line is now open. Please go ahead.

Hi, this is Jessica on for Alex today. Thanks for taking my question. I just want to start off with, instead of clicking on cross-sell, what are some key factors that have been driving your success in cross-sell? Have there been any shifts in customer priorities that are elevating demand for certain capabilities over others? Thanks.

Hey, it's Larry. Thanks for the question. Cross-sell is a big part of our business. You know, as a vertical SaaS company with Lend and Expand, Motion, cross-sell is a big part of our bookings and our pipeline. I wouldn't say the priorities have shifted. I'll just highlight, you know, the number one is we're a platform play with, you know, the variety of solutions. And so on the consumer side, there's always the natural expand, the cross-sell from their initial buy to the extended module. So for example, know if they start with account opening and direct land direct auto lending for example adding indirect lending adding personal loans credit cards whatnot it it uh that is the that's that's the first primary motion for cross sell the second which i highlighted in my prepared remarks is is uh is mortgage and and that is a a real opportunity that we do see accelerating um both consumer customers with consumer solutions cross-selling into mortgage and mortgage cross-selling into consumer. That bi-directional cross-sell is a very strong motion, and we think there's opportunity there. And there's quite a bit of interest in the market there. And then three is the data and analytics. As a platform play, one of the differentiators is that we have data across the across the consumer debt wallet, and really that enables our customers to deliver personalized offers, things like debt optimization, for example, to a consumer. And so the data and analytics modules is an area of interest as well.

That is really great. A follow-up question. Do you see a potential for the macro environment being more friendly to M&A activity amongst financial institutions? And if this doesn't play out, do you see this having a potential impact on your customer base and performance due to M&A activity?

Thanks. Hi, this is Nicholas.

From a macro and M&A perspective, we expect with rates coming down to drive increased activity in M&A. We are also, over time, seeing valuation expectations adjusting more, so my perspective is that they would generally be speaking more M&A activity, and one of the catalysts would be macro and interest rates coming down.

Anything you want to add, Larry? Yeah, maybe I just add, you know, specifically, I think your question is around our end market, right, consolidation in our end market, if I heard that right. And, you know, clearly there's been a lot of discussion around consolidation and banking over the past 24 hours. I do think that there will be – look, we've been in a consolidation trend in banks, in community banks and in credit unions over a period of time. I think that will continue. I think we should expect it to continue. You know, our experience is that we tend to be a beneficiary there because we tend to serve – our clients tend, our customers tend to be those larger institutions that are using technology and have invested in technology and they're the winners in the market. And so they tend to be the consolidators. And so that gives us, you know, as consolidation happens, that's a, that's a win for us because our end customers are the, are the buyers. Digital forward banks.

Yeah.

That's right.

Thank you.

There are no further questions at this time. I will now give the call over to Nicolas Wolff. Please go ahead.

As we close out the call, I want to express my sincere gratitude to our outstanding team. Your dedication and commitment have been instrumental in achieving a solid Q3 and are the reason Meridian Link is differentiated in the market. In fact, I'm proud to share that in Q3, IDC included Meridian Link in the top 50 of its 2024 Global FinTech 100 list. This achievement would not be possible without the strength and innovation of our team. Thanks to everyone for listening in, and we look forward to speaking with you again soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.