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

Thank you, everyone, for joining us. My name is Tim Chiodo. I'm the lead payments processors and fintech analyst here at Credit Suisse. Thank you for joining our 25th Annual Tech Conference. We're very happy and lucky to have with us today the CEO of MeridianLink, Nicolaas Vlok. Nicolaas, thank you so much for coming out to Arizona to join us today.

Thank you, Tim. Thank you for the invite, and thank you for joining us. We appreciate your time here.

Absolutely. So we got started a few minutes late, so we're going to jump right in. So we'll start with -- since MeridianLink is a newly public company, and there's certainly a set of investors out there that are looking to learn more about the basics and the intro to the business. Maybe we could go over sort of the core offering and a business overview for MeridianLink.

Yes, happy to tell you more about MeridianLink. So MeridianLink has been a company that's been around for more than 2 decades. Started when the founder or the co-founder, really, had a hard time as an immigrant going through his first vehicle purchase back in the, call it, the early 2000s. And he looked at the consumer lending journey and the landscape. And saw an opportunity to automate the processes tied into that for a first entrant or a new entrant into the market. And that really led to MeridianLink's technology, the platform, the growth and the success. And today, we cover loan origination for the consumer landscape across pretty much all consumer lending channels, excluding student loans, which is kind of a separate process in the world today and typically more on the front end of a consumer's debt wallet journey. Our platform -- we have a platform that spans over 2,000 clients, of which 1,500 are depository taking institutions. We're very much focused on the mid-market and we define our market as $100 million to about $10 billion in assets under management. We win at a very high rate in that defined market segment. We win anywhere between 60% and 70% of the new deals that we engage in. And it's one of the areas that we've invested in over the last 2, 3 years, especially since Thoma Bravo acquired the business in mid of 2018, where the journey started with upgrade the tech platforms, upgrade the systems in the business, bring on board a leadership team and then started investing in go-to market. Believe it or not, a $100 million business back in the day when Thoma acquired it, had 5 people in sales and marketing, 1 in marketing, 4 in sales. And only responded to inbound, and we've built that out. We've created a go-to-market structure and a playbook with new logo focus, with cross-sell, upsell, with channels as well as our partner marketplace that drives about $40 million of our overall revenue. And the story of MeridianLink is as we've turned an inbound word-of-mouth organization to an outbound organization, which is highly focused on our target market and winning new business. And we've seen our new business and our cross-sell upsell playbook would be very successful. We've built up a great backlog in the business that we're taking into 2022 with us, and we're in the process of scaling our delivery capabilities to continue to expand and deliver on product for customers. So what do we do? Think of it as we enable mid-market financial institutions to really compete upmarket. They -- we enable their digital journey. We enable the consumer engaging for the first time with an institution with account opening. And then all the types of consumer loans that would be available to the consumer through their financial institution, auto, credit card, personal, HELOC. A lot of these mid-market institutions are starting to join the mortgage journey as well. We offer mortgage as an offering through our MeridianLink One platform. And we're really the market leader today in that mid-market space with our loan origination product. We have our mortgage product available as a stand-alone too, but it's a much smaller part of our business. We think of the opportunity being integrated across the consumer debt wallet. And then we have a data verification business as well, which historically focused on mortgage verification through CRAs as well as an acquisition that we've completed in early -- or actually late last year, integrated early this year, that also enables employment tenant and background verification as part of a data service to CRAs.

All right. That was a great intro. We really appreciate that, Nicolaas. I want to dig into one piece that was inherent in that in terms of your customers. So maybe just educate the audience or remind the audience a little bit around the difference between banks and credit unions and your focus on credit unions and why that is a slightly more attractive area of the overall banking market.

Sounds good. As I've said, 2,000 customers, about 1,500 are depository. Taking to Tim's definition banks, which are in our world regional and community banks and then credit unions. We've historically focused on credit unions more. That's where kind of the founders focus the business on -- understood the credit union market very well. And we've very successfully expanded over the years into credit unions. We've started focusing on banks, maybe kind of 5, 6 years ago, seen some great traction in the banking space, too, specifically as we've said, mid-market regional. And then also through an acquisition of CRIF, which were predominantly banking, we also inherited a number of banking customers, of which were about half moved over from the legacy CRIF products to the MeridianLink products. So we view banking as kind of a growing player, a market that's accessible to us, our platform and our technology, and we're excited about pursuing it further. But maybe one point to add, Tim, is the neat thing about credit unions is they have some of the lowest cost of capital in the industry. And enabling credit unions to be more competitive in the marketplace has seen credit union, loan growth and volume growth significantly pick up after they've moved on to a MeridianLink platform, given how we've enabled them with low cost of capital to be more competitive in the marketplace.

Great. Thank you. Nicolaas, we appreciate that. Why don't we move to another topic that is of interest to investors. So your enhanced go-to-market effort. So sales team, you've been increasing the number of salespeople, also putting some additional support around them. Maybe just talk about those enhanced go-to-market efforts.

I've started mentioning it as kind of a real big investment for us. We've realized MeridianLink's product set is very unique given our offerings breadth, the depth of the offering, the partner marketplace with all the integrations. And we've won business without really trying. It was more word of mouth. And the investments focus on winning new logos, winning existing customers over to use more of our platform, and that's been very successful and then continue to build out our channel strategy. And we've invested in all 4 areas, new logo, which makes up about 1/3 of the headcount in our sales group. Our new logo or our cross-sell, upsell 2/3 and then a channel team, which continues to build our channel partnerships similar to our partnership with Jack Henry and a few others. And then also our partner marketplace, which spans about close to 600 partner integrations into the platform, which is mostly done through APIs. And that's been a very big investment for us over the last 2 years, is building out that muscle and that capacity to really go after new logo and expand footprint with an existing customer.

Perfect. And just to put a few numbers on it to the extent you can in terms of the headcount of that sales force, where it came from, where it is now and where it's going with this continued investment?

Sure. It started at 5 in kind of late '18. And we've built it up kind of tripled it in the '19 time frame. Today, our sales force is about 60 folks, and we expect that to continue to expand I think across that group, we'll probably be on a run rate to go and build it in 12, 18 months to about 100 folks out there.

Okay. Well, thank you for those numbers. I think we should move on to another initiative at the company associated with MeridianLink One. So maybe you could talk about some of the benefits there, the shift from private cloud to public cloud, the updated user experience, et cetera.

Yes. That really defines our MeridianLink One strategy is where we combine our 3 lines of business into a single platform. And you have the ability to log in and use single sign-on, single interface. But underpinning all of that was our transition from a private cloud environment that MeridianLink hosted in its own data center to a public cloud environment. And why public cloud? It gives us the ability to scale much faster with the success we had with go-to-market over the last 18 months, we're going to need to continue to scale and it's not just the new logo scaling, its existing customers expanding footprint as well as scaling the business to other markets. It's much easier in time to come to take a public cloud environment and create instances in international markets than really go and redeploy data centers and build our data center infrastructure. And there's all the benefits over time that you get kind of running at more efficiently, you get, in my opinion, a security environment that is second -- is world-class and second to none. So from our perspective, we've made quite a bit of investment over the last 2.5 years, maybe 3 years if you kind of define it now in the road map in building out a single platform transitioning our customers to a single-user interface with single sign-on, the ability to add modules into the platform very easily and then also be public cloud and not private cloud. The last thing to add to that was as we look for acquisitions, we're pretty active group looking at potential acquisition targets. The art in good acquisitions isn't saying, no, not yes. And part of the evaluation criteria that we have is, we really are focused on acquiring companies or businesses that's already cloud native, cloud ready. And to then integrate their technology into our cloud stack is much easier done when you're in a public cloud environment than a private cloud environment. So from our perspective, great question, Tim, it's -- my view is we're future-proofing the tech stack of this company for the next decade. -- if not longer, by transitioning over to a public cloud?

Excellent. That's a good summary. Why don't we move on to the consumer LOS business, specifically in the growth algorithm. So this is -- the portion of the business that gets the most attention from investors, it is sort of guided or at least the either persistent growth outlook is sort of in the mid-teens for the revenue growth. Maybe you could talk through some of the components that help you to achieve that growth, whether it be the loan market, new customers, pricing, share gain, et cetera.

Sure. Looking at it from a new client perspective, we kind of view it as there's a net growth between adding and subtracting clients about a mid-teens growth from a customer standpoint. There is the natural tailwind in our industry, where we see roughly 6% loan growth over the last decade. Sometimes that natural loan growth jumps up to high single digits. We've seen it as high as 9. And in past years, we've kind of seen it as low as 2. And I think over the last decade, there was 1 year where it was like negative 0.25 or 0.5, so that natural rising tide is a growth play for us. And then also seeing customers land and expand on our platform with continued loan channels, continued expansion, our customers also tend to outperform their peers with our product versus single point solutions or more legacy solutions. And adding that into the mix, you get to a roughly mid-teens 15-or-so percent growth business. And if we continue to execute better than that, we can certainly see more new logo growth. And if we get some tailwinds on loan growth in the industry as a whole, that can also be another tailwind in the business.

Okay. Excellent. So I think you really nailed the loan market growth. So you kind of gave some good ranges there. It could be sort of as low as low single digits, sometimes it's hit up to as high as 9%, and that's a great end-market growth to be exposed to. And then you talked about adding new logos. Part of that is kind of the gross adds and of course, there's a churn component. Is it fair to say that some of that churn is associated with just bank consolidation in general?

Yes, that's probably the #1 reason why we would see customers get off our platform. Are they getting acquired or they consolidate. And sometimes it's into bigger organizations that we not focus on as such. But yes, that would be the best way to look at it.

Okay. Great. Great. So we talked about this mid-teens number as sort of a sustainable growth number. It's been faster than that. more recently. Could you maybe talk about how investors could think about that in 2022? I'm not asking for a specific guide to it, but are there any either comps or components that we should at least be thinking about?

Yes. We're steering away from really commenting on '22 specifically. We'll come out with guidance when we bring out our Q4 results. But think about we've -- in the growth that you've seen, the percentages you're referencing at them, there's acquisitions laid in. We're very comfortable with the growth model that we've just discussed that mid-teens on consumer loan origination. I would say, if you think about the puts and takes in kind of the bigger market that you can think about how to model, we've been growing with some of the challenges around the auto market, the new home build market, where supply chain constraints persist. I have no idea when that's going to ease up. You guys probably have a better view on that as researchers and smart folks. But my view is as we, as a management team, can focus and control the levers and dials in front of us, and that's better execution, that's faster implementation, that's higher levels of cross-sell. And that's what we focus on, and that's underpinning our organic growth at this point in time, and we've layered in the acquisitive growth. And the companies we've acquired, if you think about it, we've acquired in the last 1.5 years, TCI, which we acquired for the indirect order lending capabilities and specialty financing. In the auto market right now, I would say, on the new side is impacted more than the preowned side, but it's hard to kind of tell you when that spring will kind of release again. If you look at specialty financing, that's a pretty active market. If there's -- like think of it as RVs and jet skis and anything that's kind of specialty financing out there. That's been very active. If you look at the acquisition of TazWorks, it's a CRA business, but that's focused on employment, data and background verification. That has been in a somewhat contracted state given the pandemic, but we expect employment verification to pick up over the course of the next 2, 3 years as employment kind of starts rising again. And these open headcount and positions are getting full where on the CRA side, on the mortgage side, we expect a contraction there with rates rising. So I think that's going to be a bit of a give and take. But I think it's a great acquisition, we've layered in, focused on again, the CRA market. And then Saylent was a technology acquisition we did. It's not a customer-based acquisition. It's an enabler of data and analytics and automation, specifically marketing automation, on our platform, and we're pretty excited about that. The plan is -- right now, they have products in the market. We're not focused on taking the existing products to market. Our efforts are going in and integrating and building the capabilities into our platform to be released in first half next year. And we are running in beta environments with great results. At this point, my take would be we're going to kind of led a little bit more into the market in Q1 and really go after market opportunity with Saylent's engage and explore products in Q2. And the way to think about that is it ultimately drives loan volume to the platform via the financial institutions. And the way I would think about your question, kind of '22 longer term, hard to tell when the market is starting to shift away from some of the headwinds we're seeing in kind of general terms. My view is we've been very successful in building a backlog. Right now, we're carrying about a 6- to 8-month backlog in the business for implementations. We're going to enable those implementations in 2022, and that will bring customers online. I think if we successfully -- successful at executing well on the things that's within our control, it sets us up through 2022 for probably faster or more expansion in 2023, assuming market conditions start improving.

Okay. Thank you, Nicolaas. With the little bit of time we have left, I really want to hit home on you touched on this a little bit in your opening remarks. So maybe it's a little bit of an expansion. But really, you're targeting $100 million to, call it, $10 billion in assets type of banks in terms of the sizing. Now obviously, there's some opportunity to go a little bit above, a little bit below, but that's sort of the core. Could you just talk about what you consider your share to be within that market -- that core kind of TAM, if you will?

And that $100 million to $10 billion, we believe we have about 1/4, 25%, 27% market share. We -- our marketing efforts are focused on that segment. We do win business outside of it. We've recently announced a pretty large bank win above it. It's not that our marketing engine is focused on going after $20 billion or $30 billion AUM banks, but they come to us and if they want a configurable platform with the partner enablements we offer into our platform, we can handle the volume and the transactions. But if they are after customization and a good example of a company that provides its tech stack that's highly customizable let's say, Temenos. We don't compete in that space. We don't want to become that customizable tech stack because we don't feel that's our market. That's not our heritage. If you get on the MeridianLink platform, it's configurable for your business, and we can do a lot for you with partner enablements. And that is what the mid-market resonates -- what resonates in the mid-market. And my view is we win 60% to 70% of the deals we're in, in our new logo part. So I feel the lens we have right now is very focused and right. As we grow, we may expand, but it's not on the table right now. There's so much runway left. And if you -- if you think about the quarter or so of that market that we've won and our existing customer base where we have 4 of our 12 modules roughly now on average sold, there's so much opportunity that I feel we're going to get distracted if we try and expand that lens at this point in time. We -- I'll rather be the leader in the space and the #1 where I'm playing than trying to go and boil the ocean.

Excellent. Well said, Nicolaas. We don't have a ton of time left, but I want -- actually, did we have a question from the audience?

What is your fastest [ consumer lending ] that you were talking about?

Consumer lending -- our consumer lending business is our fastest growth. And also the area we invest most into. It's our #1 playbook. It's -- we're #1 in that market by fair margin. Mortgage lending is a playbook, but we view it as a lending channel, ultimately, and it's not a single playbook that we're going to continue building to the extent we're focusing on consumer lending. And verification, data verification is a great business to be in. It gives us a unique perspective on the consumer. But it's not a business we're going to continue to invest in at the same pace we're seeing and investing in consumer lending. Consumer lending is really the Trojan horse for us to continue to expand and build the business.

Well, thank you for the question. So with that, unfortunately, it looks like we've run out of time. But I just wanted to take a minute to just say thank you to Nicolaas and also to Erik and the full team from MeridianLink for traveling out here to join us in Arizona. It's a pleasure to host you, and thank you for being up here on stage.

Thank you for having us. Thanks for the invite, and thanks for the support you've given us over the last year or so, Tim.

Welcome.