MeridianLink, Inc. (MLNK) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you for joining me. Welcome to day 3. We're in the afternoon session of day 3 of Citi's 11th Annual FinTech Conference. I'm Andrew Schmidt at Citi's Fintech Research team. My focus is on fintech software. Before we get into the next session, just a brief reminder. [Operator Instructions]. With that, it's my pleasure to host MeridianLink this afternoon. With us, we have Nicolaas Vlok, who is the CEO of MeridianLink. Nicolaas, thank you so much for joining us.

Thank you for having us, Andrew. It's an honor being with you guys.

Yes. I'm looking forward to a good discussion. It's into the space, digitization of FIs, particularly on the lending side is of keen interest. So look forward to having a good discussion.

Right.

I think it's helpful just in the context of the environment. There's so many -- we were kind of talking about this before -- but there are so many ways to slice and dice the cloud-based software environment for FIs. Maybe you could talk a little bit about where MeridianLink focuses today in terms of end market and solution sets? And then we can get a little bit deeper after that.

Yes, I would love to. And I think it's a really good starting point for us. MeridianLink has over the last 2 decades really focused on empowering the middle market, the mid-market financial institutions. And by definition, that is credit unions, community banks, regional banks. We've added some to that in specialty financing as well and then also through our data verification solutions, the CRA space. But our focus is in that $100 million to $10 billion of assets under management. It's a pretty large market for us here in the U.S. And in that space, we've become pretty much a leader in that space for loan origination or consumer loan origination with our MeridianLink platform.

Great. And specifically within loan -- dig into these pieces a little bit separately. So within loan origination, maybe peel that back a little bit in terms of what you do. Obviously, there's a differentiation between POS and loan origination and different capabilities. And then separately, on the CRA and the data verification side, we can talk about that. But starting with loan origination, maybe talk about your capabilities? Is it end to end? Are you focusing on particular part? And maybe kind of what differentiates the platform?

Yes. And we think of ourselves as a platform that depository taking institutions and nondepository taking now, but mostly depository taking can run a very large part of their business on. Our relationship in that journey of the consumer starts with account opening, and then that progresses to all different types of consumer loan channels. And we are very broad in that we -- the one consumer loan channel we don't touch today, and it's basically there's little demand in our customer base of student loans. But outside of that, auto, credit card, personal, pretty broad space, including mortgage. And our platform enables that whole process. There's a lot of automation in it. There's a lot of auto decisioning being built into it. It's an omnichannel experience for our clients, consumers out there, where they can interact with their financial institution in multiples of ways, whether it's our technology in the platform or through our partner market place that's integrated into the platform. It really provides a much broader experience than what you would think are either available in point solutions, just an LOS or just an account opening solution, or more on the legacy side, more basic solutions. So from a MeridianLink standpoint, we view ourselves as that digital enabler for depository taking institutions in the mid-market. And that mid-market, we've just defined as $100 million to $10 billion.

That's helpful. And then the data verification side?

Sure. We have 2 leading franchises in that space. Our mortgage credit verification, which is focused on mortgage CRAs, and we really enable them to run their business on our MCL platform. And then we've acquired TazWorks, which is our employment, tenant and background screening verification offering. And having the verification technology as part of the MeridianLink umbrella, the focus is really on understanding the consumer better, deeper understanding of the consumer as you ultimately start driving more automated decisioning and having access to that knowledge to that data outside of the function that we're performing is an incredible playbook for us to play out. And the data verification business is very focused in doing that. But across the MeridianLink umbrella, it just enhances the bigger consumer story and really enabling the consumer to get better answers faster for their credit needs that they have, whether we're processing the loan or whether we're enabling others to do so through credit verification or employment background, tenant screening and verification.

So supporting this notion of everyone wants something realtime, and in loan origination, decisioning is there is no -- is not immune to that kind of supporting a sort of realtime dynamic when it comes to loan offerings, it sounds like, on that side.

No, it's not. And we've really seen institutions that run on the MeridianLink platform outperform peers in the marketplace given their ability to do a faster onboarding of a client. Then whatever the loan -- consumer loan channel is used, they have a much broader debt wallet view of the consumer given the loan channels that exist that the consumer interact with at the financial institution. You can do better analytics. You can do much more personalized lending decisions through your automated decisioning that's set up for you as an institution. And if the -- our clients certainly gets the benefit of efficiency gains, but it's really the loan growth that benefits our clients given the volume of loans that they can now process is faster and you rather through the decisioning 3 want to handle and hand-off exceptions to a loan officer than kind of send every loan that's out there. And part of what we are implementing in automation and analytics is exciting stuff, and it's really going to drive what we're looking at in '22 and '23. And it ties in with our Saylent acquisition, where we've acquired Saylent as a technology enabler on data and analytics and marketing automation, where from a client standpoint -- I've used the term here personalized landing decisions, it's going to come down to that here in the not-too-distant future where the better you know your client, the better you understand the debt wallet of the consumer and the more access points you have to data that drives decisioning, the better and faster and probably better risk on the decisions you will be making down the line.

That makes a lot of sense. I appreciate that. It's important to understand from a competitive perspective what you're bringing to the client base. It's interesting because you brought up demand -- driving demand. And it's important to process these loans efficiently, but also important to move up towards the top of the funnel to bring in more business and things like that. And whether it's cross-selling to the existing base or whether it's acquiring sort of net new customers, how does the MeridianLink help from that point of view in terms of going out and actually like helping to drive that level of demand in terms of top of funnel?

And I'm assuming we're talking about client top of funnel, not MeridianLink go-to-market top of funnel?

Correct. You still see with client top of funnel in terms of the demand engine. Yes.

Great. So one of the areas of high interest for our clients is automated marketing. And automated marketing isn't just sending that mailer out to a client about better rates. It's understanding when a client becomes eligible for his next car loan. It's understanding the debt profile of a client and being able to get in front of that from a communication and lending standpoint. It's the analytics that's tied into the consumer. And part of what we're building with the platform is really that level of interaction between financial institutions where the shift in the mid-market is starting to happen and the pandemic kind of field some of that, where the consumer is not putting their feet as often in the branch as they used to. And the branch is shifting to much more of a knowledge center, advisory hub than a transactional hub, And that's moving to the interfaces. That's moving to the interaction that we are having today is digital. It's on the laptop. It's on the phone. It's on the tablet. It's even on a call center interface. But then better understanding the interactions and what you present to a customer, we're moving to a world where you're 2 months out or 3 months out from a car loan and you're getting pinged by your financial institution that you are preapproved and you can walk into a dealership with your phone in hand and being preapproved for that car purchase where you don't need to deal with back office. And the financial institution retains you as a client, have better visibility to your debt wallet and can optimize your debt wallet to your lifestyle, your needs and your purchasing requirements and trends?

Yes. That's super helpful. The reason why -- the reason I asked is there's a lot of opportunity, obviously, in just automating the loan origination process. But for these mid-market banks, demand gen, being able to drive that and help them with that is very, very significant in terms of what I mentioned in terms of helping top of funnel versus maybe mid-funnel, in terms of automating the loans. So that's interesting to understand a little bit more. Okay. Maybe we could switch gears a little bit to just client conversations. And coming out of the pandemic, obviously, you mentioned a couple of factors in terms of people not stepping foot in branches, people wanting to do things more digitally. But how conversations in demand from clients trended, meaning are you seeing a step-up in terms of demand? And then when you think about the sales cycle, the -- I guess these are kind of 2 separate questions, separate but related questions. When we think about the sales cycle, at least what we've seen from others, there was a little bit of a pause, a little bit of an air pocket during COVID, and they're certainly normalized a little bit more. Are you seeing that sales cycle normalization when you look across the business? So kind of a 2-part question in terms of demand trends and then just the sales cycle.

Well, I think demand trend should be first answered. We've seen in the early parts of the pandemic a pause, and I think everybody kind of really tried to figure out what the world is going to look like a month, 2 months, 3 months, 6 months out. And that first 90 days to 120 days, existing client engagements was still solid. And the conversation was very much focused on digital enablement of the existing environment. Since then, we've started seeing a lot more activity around new outreaches, new clients as well. And a little harder to speak to is it fully normalized or not? Because we've been investing in building out a sales team and a go-to-market organization, and we're kind of in that scaling phase, where we're still driving into the demand curve that we're seeing out there. We've been very successful over the last 4-plus quarters, especially the last 4 quarters or so in building out and scaling and exceeding our own bookings targets and the business to the point where we've actually built up a very healthy backlog in the business, where we kind of have to go bank the checks now, but it's revenue visibility for us going into 2022. And the driver for a lot of these discussions with clients are they are rethinking their business and their business processes to a large extent. And they're realizing investing in back-office solutions, in branch solutions isn't going to further their business strategy and how they play it out for the next decade or so. And there's a lot of conversation, and we typically find, I would say, 2 types of outcomes. Clients who really wants to embrace what we can do as a platform where it's integrated from account openings through kind of the loan channels, the decisioning, the AI, the analytics, the automation to clients who is more price sensitive, which we're not a price leader. We are a value leader. We bring you a platform, and you can continue to add and benefit from the investments in the platform. And those clients, we tend to not battle it out on price. We believe we have a superior product [indiscernible] if you buy IBM, you don't get fired, if you buy a MeridianLink there is a loan offer, so you don't get fired [indiscernible] through. So we think of the clients who's not engaging today or choose to from a pricing standpoint hold back to -- we're going to have a conversation in the future because more and more depository taking institutions are modernizing and there's going to be peer pressure. And then also the larger Tier 1 banks and FIs at scale are going to start eating more of kind of those who is not modernizing at a pace, eat their lunch. And then leaning into the space are the new banks and kind of the rocket mortgages and others who's also modernizing the digital experience. In my opinion, it's a rising tide, and it's still very much going to be a rising tide for the foreseeable future, as I think the pressures to modernize and digitize and at such a cliche using digital transformation, but financial institutions today have to invest for relevance and the customer experience. And we are as well positioned as anybody else for the mid-market on the consumer lending side.

That makes a lot of sense. And has over the past couple of years, has where your landing changed, meaning were you landing in a certain module? And this probably ties into some of the -- maybe I'm jumping ahead because this might tie into some of the product changes that you're making. But are you landing with -- say, 2 years ago, landing with a credit card module, today you're landing with a personal loan module? Or maybe even more than that, are you landing with multiple modules versus a single module previously? Maybe just a question about just buying behavior in terms of the client base.

Yes. We certainly are landing with a bigger footprint than in the past, but we also don't encourage customers to go and do too much too fast. We would like to think we can go in with 2 or 3 modules, really enable it and become successful in, say, auto or credit card, whatever is kind of the priority and focus and then keep expanding. We've been very successful over the last 12 -- well, probably more 18 months or so with our cross-sell, up-sell initiative. We've structured our sales team between a focus on new logo and then a cross-sell, up-sell team and a channel team and a partner marketplace organization. And we're definitely seeing more take-up in the new logo side versus, say, 3 years ago. MeridianLink wasn't very good at doing targeted cross-sell, up-sell into the customers historically. We've vastly improved that, but I think there's still a lot of opportunity left where at this -- in today's world, we kind of go in and speak to the benefits of each of our modules. But I think we need to also analyze the data and our customers better to show them the benefit and the improvement. And there's folks internally that kind of cause it really, really becoming smart about the customer data set and showing them the benefit and be more targeted and be more account-based focused. And that's an evolution that we're going to go through. And part of that evolution in '22, going into '23 is also starting to include more of our partner marketplace integrations in a more meaningful way to help customers accelerate the use of platform and also digitalization because we don't build everything. We kind of build what we believe is strategic and then we partner or invite partners in or have partners come to us. And it's that whole offering that what I believe what makes MeridianLink pretty unique and special in our space.

That's helpful. And I want to get back to the marketplace opportunity perhaps a little bit, but you -- in terms of the, I feel like the distribution opportunity is a pretty significant one based on what MeridianLink has done historically versus over the past couple of years. And you touched on it, you covered the question in terms of building out dedicated -- more investment in that new and dedicated cross-sell team and a platform team too, which is really good. But as we look out over the next year, what are other investments you want to make in the sales force? Are there other areas to optimize? I think you mentioned one, which is understanding where you can optimize on an account basis in terms of showing customers the benefit of adopting a certain module of the platform. But is it increased headcount? Is it organizing the sales force differently? If we think about over the next year, are there incremental investment to sales that need to be made?

We -- I don't think we're going to change the mix. We -- it feels like for who we are today, in the market we serve, we kind of found a good mix between new logo -- the ratio between new logo and cross-sell. We are scaling up to when we launch our analytics and automation products from the Saylent acquisition once ready on platform. We're going to scale up launching that into new and existing customers as well. So investments will be made there. We continue to add in, call it, the support of our sales organization and sales engineers. And it's -- I would say expect the ratio and the buildup to continue similar to what we've done over the last 12, 18 months. There's investments going into channel. As well, we continue to see new channel opportunities come forward. We've recently had an announcement come out around [indiscernible] as a core partner that helps us go further downstream in the market. And that will continue in '22, '23 and beyond. I'm pretty excited to continue to drive penetration. And part of our M&A strategy is also to bring building blocks to the platform that will continue to benefit the customer and the consumer out there. To me, if I can find 10 more Saylent acquisitions and 10 more TCIs, where we got a really market-leading indirect auto lending capability and a specialty financing capability, if I can find those acquisitions that add to the platform and benefit our customers and the consumer out there, those are the types of acquisitions I like to do and build out capacity in sales and marketing around specifically products we acquire and integrate that, that makes the platform more unique, more valuable, more sticky in the world.

Super helpful. I appreciate the context. Maybe we can just talk about kind of the competitive environment across the business lines. Any changes over the past year? I think there's probably the usual guys in terms of the core processors who have some products, and some of them you actually partner with depending on the situation. But has anything regarding competitive intensity change or any differences in terms of who you're seeing in the landscape?

No, not a whole lot has changed. Still seeing pretty much the same. We're getting asked a lot are we moving upmarket given our one of a large banking client here in Q3 -- or announced in Q3. I think we know where we're really good at, and that's in that mid-market space we've defined. We are seeing competitors that tend to drift on the higher end called -- what I would define as customizable solutions. You buy their product because it can be highly customized. That's not us. We are a configurable solution with significant enablement options through our partner marketplace. And as we kind of drift into the larger deals or clients consolidate or we get approached, we run into kind of folks like Temenos on the higher end a little more. On the lower end, we tend to run into price-sensitive deals more with point solutions. And our answer to that was pricing and packaging, where we took our platform and kind of put a circle around this is what you get pretemplatized, kind of configure and integrate it. And it can go in easy, fast, and the cost base isn't too sensitive to that. But if you want more, if you want to unwrap the whole gift, you kind of have to then jump on a parallel track to that where you can do more in configurability, more enablement out of the bottom marketplace, but obviously, the cost increase. And I would say in kind of that sense, maybe there's a little bit more competitive touch points on both sides. But in the middle, where we tend to find, where we replace point solutions a lot or legacy solutions a lot, that's not -- there hasn't been any major shifts out there.

And is it typically an RFP process? Or can you get kind of your foot in first where you kind of control that RFP, if you know what I mean? Like what sort of engagement is it when you start the process in terms of like the vendor selection?

Yes. They certainly -- I would say, a healthy component of RFP you're dealing with financial institutions with oversight and everything, so and...

True.

Quite frankly, I welcome an RFP process because that gives us the ability to really showcase what we do well and the differences that we have. Our sales cycle tend to be 6 to 9 months kind of from top of funnel until if there's a deal to be had. In some cases, where customers are not ready to purchase, but want to purchase, you would see deals kind of move into the next budget year. But given that you typically sign. And right now, our backlog tends to hover around 6-ish, 6, 8 months for an implementation, I think we hold through to that 6, 9 months sales cycle. And I did not see much change. We find that customers also rely on third-party consultants a little more, as they kind of go through their business modernization and kind of what should the future look like. That may add a little bit more time to a sales cycle. But quite frankly, on the go-to-market side, we're pretty darn busy. And it's not impacting the outcomes for us at this point in time in any different way now than it had 12 months or 18 months or 2 years ago. I would say maybe sales cycles lengthen out in the first half of the pandemic, but it feels like we found kind of a good equilibrium, and it's running well.

And if I interpret your comments correctly, it sounds like win rates have been -- stayed like pretty stable, if not maybe improving. Is that the right way to characterize it?

Yes. Depending kind of on how you measure number of deals or dollar-wise, we think that we are in that 60%, 70% range of deals we engaged in. So pretty high win rate and velocity there.

Okay. That's helpful. A lot of other questions on distribution, but I want to spend some time on the platform because we only have a few minutes left. Maybe you can walk us through how the product itself has evolved. And I think part of this is moving to MeridianLink One where everyone -- everything sits on a common platform, common framework, public cloud delivered and things like that, single sign, et cetera. But maybe you could just talk through kind of the evolution of the product over the past couple of years, and what remains to be done?

Yes, happy to. I don't know if you're going to yank me in 4 minutes, but I'll try and do as much in 4 minutes as I can.

Yes. I think I have a big question at you for 4 minutes left, we can go a little over.

But MeridianLink was really an umbrella for a consumer lending product LOS and mortgage LOS and then the MeridianLink MCL mortgage credit verification product. And when Thoma Bravo acquired the business, their strategy was to unify the product set into a single offering or made available as a platform, but you can still buy the separate offerings if you choose to be in a specific space. And that holds very true on the lending solutions side. Today, the business is structured as kind of a lending solutions and a verification solutions in terms of how we think about go-to-market and who we serve CRAs versus financial institutions, and the platform work that's being done is we've started 2.5 years ago investing and moving to a native cloud -- native public cloud solution away from our multi-tenant private cloud environment. And the benefits are scalability where as you layer in more modules and as you layer in acquisitions that's cloud native, the time shrink, and you can also activate customers faster in a public cloud environment than in a private setting where you are the data center hosting that and need to scale it. Several other benefits tied into it is if we want to go international, it's much easier to take a cloud environment to Europe than a data center environment to Europe. I also believe kind of the world of security is continuing to get more complex and having a partner that makes it their business to be highly secured is also going to benefit us over the long term. So that decision to go to the private cloud environment was made 2.5 years ago. Great success to date. We have some production environments running. We largely complete with most of the development work. The architecture work is way behind us. And we've started proving out our migration paths and how to best do it. Our public commitment is to be done by the end of 2022. I'm pretty confident in saying we will be, and we may, in fact, see some acceleration on that curve given the success we've seen in the work we've done to date and moving several dozen clients in production environments, and it went really well in the migration component. And I'm a big believer if it's a battle well planned, it can be a battle well executed. And a lot of time went into being ready and doing it right and planning well. On the product kind of MeridianLink One side is MeridianLink One is the single-user interface, the single sign-on, if you choose to run all the modules of MeridianLink, you're just integrating in more and more. But if you choose to say only around our mortgage solution, you can still run that as a stand-alone product out of the MeridianLink One portfolio. The benefits of Saylent will be made available to the platform, not in stand-alone mode. So you can kind of see the progression, and we really want our customers to be on the cloud to get the full benefit of that. So it's a journey that we've embarked 2.5 years ago on. We are through the twists and turns and the steep uphills, and it feels like we're now at that stage where most of the lift is going to be onboarding our clients, onboarding some of the acquired technologies, as we spoke about in the first half of next year. While today customers already benefit from that single-user interface, the single sign-on, the kind of that portal into MeridianLink as well. And we feel we've made a lot of progress. We're well positioned for that broader consumer lending experience with our platform and all the integrations with the partner marketplace. And my belief is it -- once we're fully in the cloud or the public cloud and with the acquisitions to date, and hopefully, some future acquisitions to roll in, we're going to continue to build that platform play out. And there are parts of the platform you will be able to run stand-alone and others that will only be available as part of the broader platform.

Got it. Thank you very much. You can go a little over too. I thought you were going to go like 5 minutes, so that wasn't bad. That's a record time [indiscernible].

I can always go back and add more.

Exactly. Well, this has been a great conversation. It's interesting, I mean a lot of opportunity between the sales force investment and the product investment. So look forward to following along and see what happens. But yes, thank you, Nicolaas. I appreciate the time today. It's always good to talk to you and get an update. Thanks for your insight.

Thank you for the invite. We really appreciate being hosted. So thanks a lot, Andrew. And thank you, everybody, for attending.

Absolutely. Thanks, everyone.