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

Okay. Well, hey, good morning, everyone. Welcome to day 1 of the Barclays TMT Conference. My name is Saket Kalia. I cover software here at Barclays. Very happy to have with us the team from MeridianLink. We've got Nicolaas Vlok, Chief Executive Officer. We've got Chad Martin, Chief Financial Officer, joining here momentarily, but we'll have him as well. We've got about 25 to 30 minutes together. Maybe what we could do is we could take the first 15 or 20 minutes for some fireside chat together. And then I would love to open it up to any e-mail questions from the audience. All you have to do is just e-mail me at [email protected]. I'll do my best to get to as many questions as we can. So with maybe all of that as a preamble, Nicolaas, thank you so much for being with us here today.

And Saket, thank you for having us. This is our first Barclays conference, and we're excited to be here and have the partnership with Barclays as well. So I really appreciate the opportunity.

Same here. Same here, Nicolaas, and hopefully the first of many. Nicolaas, maybe a place that we can start is MeridianLink completed its IPO very successfully this past July. Maybe for those of us on the webcast that maybe are a little less familiar with the business, can you just spend a couple of minutes giving us a little bit of an introduction? And then if Chad joins here at some point, maybe we'll give it over to him to give us a little bit of the financial highlights as well. But maybe you can start us off, Nicolaas, just on a little bit of an intro to the business to level set everybody?

Sounds good. Thank you for kind of giving us the opportunity to give you a view into the world of MeridianLink and where we came from and where we're going. MeridianLink has been around for about 2 decades, grew very successfully to about $100 million or so business with Thoma Bravo's acquisition in mid-2018. And Thoma Bravo really saw an opportunity to go and accelerate a business that had 5 people in sales and marketing, kind of needed investment in the technology platform. And in the market, if you move from inbound to an outbound go-to-market playbook and you really prioritize your capital allocation between build, buy and partner, we felt there was a great opportunity to spin up the flywheel and move MeridianLink along. Because we found a great product, very loyal customer base and a company that's been making an impact in that mid-market very successfully. And our focus has always been mid-market. We've stayed in the mid-market financial institutions space, mostly depository. And out of our 2,000 clients, about 1,500 or so are depository-taking institutions, which we define as $100 million to $10 billion of assets under management, and that really pivots you to focus on credit unions, regional and small community banks. And then alongside the depository-taking side, there's about 500 clients that's either specialty financing or CRA clients. And MeridianLink has helped those financial institutions historically to punch well above their weight. With the acceleration in business models and digital tailwinds that drive transformation in the mid-market, what we found 2, 3 years ago and certainly had some acceleration from the pandemic, these mid-market institutions have not invested at the same pace as large banks and larger FIs at scale in digitalization. And MeridianLink is at that point, that place where these mid-market folks need to really up their game and need to be much more digitally aware, digitally focused given the historic investments that went into back-office automation and branch solutions. And what we do, we enable a very large part of their day-to-day revenue stream, which is basically loan origination, loan growth with what our platform does, from account opening to a very broad set of consumer loan channels. Pretty much the one we don't touch is student lending. Outside of that, we're very broad. We assist with auto decisioning. We assist with analytics. We have a heavy focus on automation and that whole customer experience. And our belief today is that's what the consumer wants. That's what the consumer is focused on getting from their financial institution. And our clients who've been successful in deploying and using our platform typically see faster pace on loan growth. MeridianLink is an enabler of growth for these mid-market financial institutions and positions them to kind of do well in a rising tide of kind of new fintechs when the competition is increasing. And if you ask me, that's MeridianLink's differentiator for those financial institutions in the marketplace, that enablement, that positioning, that ability to do things simpler, better, faster.

Absolutely. That's very helpful. I think we had Chad Martin join. Of course, Chief Financial Officer here at MeridianLink. Chad, you all set?

All good.

Excellent, excellent. Well, perfect timing, Chad. So the question that we led off with Nicolaas was just on sort of an introduction to the business, right, from sort of a high kind of market and company level. Maybe you can help us -- again, just to sort of level set for everyone. Just maybe talk about some of the financial highlights, particularly that you were proud -- most proud of this past quarter you just reported.

Sure. So we're a SaaS software company. We sign customers to long-term contracts, typically 3-plus years. 88% of our revenue is SaaS recurring revenue, the balance being services and other. And just one unique thing about us is that we basically sell and get paid on a per transaction basis for the transactions that are processed through our system. And so the way that we price is customers commit to a minimum volume of transactions. And based on that volume, if they exceed or pierce their minimum, they're paying us for each additional transaction that they processed on the system over that amount. So we have the ability -- Nicolaas talked about how our solution enables growth in these institutions. So as they grow and they grow by actually attracting more applications and lending more credit, as they're processing those applications on our systems, that growth translates into revenue growth for MeridianLink. Last quarter, I'd say it was a quarter that we actually completed the IPO, which was fantastic. So we were glad to do that. We were able to take the proceeds and pay down our outstanding credit facility. We then got rerated, improved our rating and then actually refinanced our outstanding credit facility into a new, longer-maturity, lower-cost credit facility for us. So that was an improvement on the balance sheet. Obviously, it will improve our cash flow since we're paying a lower interest rate and frankly gives us flexibility if we need to access capital to fund acquisitions in the future, acquisitions being a core component of our growth strategy. So I'll stop there, and if there's other questions, let me know.

Yes. No, that's a really helpful foundation. And you touched on some of the other questions that I wanted to ask as well. So maybe we'll -- I'd love to -- maybe, Nicolaas, just with you, I'd love to zoom into really the core business here, which is the lending side, right, majority of total revenue. Can you maybe just give folks on the call a sense of sort of what -- you touched on this a little bit earlier, but what types of consumer debt is your LOS primarily used for? And maybe touch on what sort of competitors you come across here.

We focus on, as I said, nearly the full debt wallet of the consumer. Think auto, think credit cards, think personal loans, think HELOC, it just spans the whole spectrum. We love to think that we can be part of the consumers' journey from a very early stage with a financial institution. Now from a competitive landscape, we compete with either point solutions, which tend to be focused on either a specific loan channel or a specific offering. But what you lack in most of these point solutions is the ability to do broad analytics, to do auto decisioning, to integrate automation, for example. Market automation is something that we're pretty excited about because -- and maybe this statement is key in terms of our future vision. We believe the future in lending is going to be driven by personalized data and personalized data decisions more and more. And having that ability to participate in the lending ecosystem, the consumer ecosystem, through our partner marketplace, through the ability to access various data sources and have a better view and, at times, an ultimate view of the consumer is going to be key for these financial institutions making decisions. And point solutions just don't have that breadth to go do that. And if you run multiple point solutions, you end up with a higher level of integration into your core and other systems, other point solution systems. And our strong belief is point solutions won't transition that efficiently into a digital world where speed across the platform and decisioning, speed and efficiency in digital and digital integrations into partnerships is going to drive outcomes on lending. Then we compete on the other side with legacy solutions. We call it legacy, which are traditionally more coming from the core, which have been good in the past. But our experience in competing is they lack the ability to compete on breadth. They lack the ability to kind of compete with the auto decisioning and all the integrations and the partner enablements we offer. And in a simplistic way, I would describe them more as an electronic workflow approval cycle, where a lot of the information gets attached into the loan application, gets touched on by human hands and a decision gets made along the way. Now that may be good enough in today's world for some financial institutions. But the way the world is moving to digital, where consumers are expecting, once they've entered, say, a vehicle loan and the information is known to a financial institution, they don't want to wait a day or 2 for approval. They want it immediately based on the integrations that's made available. And that can be done, and MeridianLink's platform does that. And to me, that is the differentiator between kind of point solutions and legacy solutions. And believe it or not, you can still find some on the smaller scale, some institutions who have some very manual processes or kind of custom systems, and we would also compete and replace those. Our biggest reason for loss on a deal -- and remember, we win somewhere between 60% and 70% of our deals on the lending platform that we compete in. Number 1 reason for loss is price. We're not a price leader. We are a value leader. Our platform is the differentiator. And we believe if we've lost a customer on price, we're going to have another discussion in a year or 2 or 3 when they evaluate and see their peers outperforming them from a loan growth standpoint. Because MeridianLink is an enabler of growth, not just processing a loan. And that's how we view competitive landscape and -- maybe one other comment is our platform is very configurable. And we have hundreds of partner enablement integrations into it, where if you compete -- starting to compete in the high end, we would run into Temenos, which is much more of a customizable platform. And we don't open up the lens past the $10 billion in assets under management purely because there's so much opportunity. We're highly focused on winning business there. But if we get dragged into kind of larger deals, we're happy to go there if the customer understands we have a configurable platform, not a customizable platform that is a much heavier implementation and maintenance post go-live. So I would say if you want to kind of look at the higher end, I would include a single tech stack like Temenos that we compete against, but it's mostly outside of our market segment when we do that.

Got it. Got it. Very helpful, Nicolaas, just on that landscape. I want to come back to that, particularly on sort of the higher end of the market in a second. But I mean, maybe just to double-click into this core part of the business with lending, maybe for you, Chad. I was wondering if you could just speak to -- first of all, how fast is the consumer -- or how fast is the LOS -- that sort of the lending business growing? And maybe just as importantly, how do you think about the growth equation there sort of anecdotally? There was a great sort of method that you had in terms of loan growth and customer growth and share gains and such. I'd love if you could just touch on that and kind of how -- put that into context for how the business has grown so far. Sorry, there's a lot there. But does that make sense?

No, absolutely. Thank you. And yes, I mean one thing I'll just touch on, you mentioned sort of the growth in the marketplace. And interesting, if you look back through the cycle, really on all points in the cycle, on average over the last 20 years, looking at kind of our target market, consumer loan growth in these institutions has grown in the mid-single digits. So there is a trend of underlying growth of consumers taking on additional credit in the marketplace. But again, going back to my previous comment on how we price per application, that as that application and as that volume accrues to those institutions who are, frankly, enabling themselves with systems like MeridianLink's to capture that growth, we see that growth in our existing customer base. And then obviously, from when we bring on a new customer, we have that ability to grow with that new customer as well. So we really think about growth in the consumer LOS space broken into 2 pieces. One is the growth that we get from that existing customer base that I was just talking about, right? And we break out our ARR and our ARR growth on an annual basis. And we're looking for, frankly, double-digit growth from that existing customer based on their growth in transactions. So just the natural growth in the market for the use of our technology for consumers applying for credit. Selling more of our solutions into our customers. Nicolaas talked about the investment in go-to-market, the investment in additional solutions to make our software be of more value to our customers and stickier. We have the ability to sell more of our partner marketplace connections that we monetize into our existing customer base, and we have the ability through time to pass increase -- to pass price increases along to our customers. So those vectors of growth kind of drive growth in existing customers. And then on top of that, we have the ability to add new customers. So we break down kind of our net new customer growth on an annual basis. Last year, the net new customer logo growth was 3.8%. We're targeting mid-single digits. So the combination of kind of that double-digit growth in existing customers, plus mid-single digits in our growth of new customers leads us to kind of our belief that this is a mid-teens grower through time and through the cycles for a consumer.

Got it. Got it. Very helpful, very helpful framework. Nicolaas, I want to go back to your framework just around the competitive landscape. And you touched on the upper end of the market there briefly, right, and talked about really how the bread and butter here is sort of that mid-market and below, right? The credit unions, the smaller community banks, the places where you can help them compete and drive revenue. But actually, last quarter, you touched on getting a top 100 bank as well on the last call. Can you just give us maybe some perspective on how much of the tool can be used by larger banks, again, versus compared to that kind of core mid-market, if you will, and sort of how you see that opportunity?

Sure. We certainly have customers well above $10 billion today, whether they were combinations of multiple financial institutions or like the example we've announced where we've won a larger client and brought them into the MeridianLink family. So the product and the platform is capable of processing high-volume loan environments. What we have decided to do is just to focus our lens on that $1 billion to $10 billion, and that's where our marketing efforts are going. That's where our sales teams are structured to go and win business. But we do have inbounds and also through some partner arrangements, see deal flow. And in this particular instance, it came to us, and we've been very specific that we are a configurable platform, that you can enable a significant number of integrations through our partner marketplace. And if that fits their business model, we're very happy to continue to stay engaged in the deal and compete for the business. But at the moment, this is starting to look like a customization play. That's not what we are building. That's not our platform. That's not the market we want to compete and win business in. So do I believe our platform can go above $10 billion? Yes. We have multiples of clients that's larger than $10 billion. But I think as a company, it's also good for us to have focus and define where our win rates are high and go and compete very effectively in that space. And that's the discipline that I would like for our go-to-market organization to have is stay within the swim lanes, be great at winning business there. There's so much opportunity. And if we do find the occasional opportunity to go upmarket and our product resonates, we'll compete. But it's not an expansion of the lens today. We very much say our target segment is $100 million to $10 billion. And we may expand that over time. But I believe we have so much runway left. There's so much new logos we can go win. There's quite a cross-sell, up-sell opportunity in that space. So be great at what you do and where you're at and continue and repeatedly go win business. And I think that's reflected in our win rates there. 60% to 70% of the deals we compete, we win.

Yes. Absolutely. That's helpful. Nicolaas, maybe just to stay with you. It's hard to talk about banks as a market -- as a target market without talking about interest rates, right? And we're definitely talking about sort of the impact of rates on the data verification business. But actually, one of the questions that I have been asked kind of through the due diligence process, what I'm kind of curious about is, how do you think about the consumer lending business in a rising rate environment? Are banks more inclined to invest in a tool like MeridianLink because they arguably have a healthier top line? Or do rising rates also impact other types of consumer debt as well?

Yes. We certainly live in some unchartered territory in terms of how a pandemic impacts the economy in the short term and maybe even somewhat medium term. But what I will tell you is if you look over time, when rates started rising, you tend to see an economic growth period or recovery alongside that, which would then spur higher levels of consumer activity, consumer lending activity in, call it, the financial system. MeridianLink is well positioned for that. We continue to expand our footprint. I believe the company has continued to perform well even with some of the headwinds that you tend to find right now and you -- we're all reading about some of the supply chain issues on new autos and new homebuilding material shortages. So from that perspective, my sense is there's going to be a time when we're going to start emerging from that, and things are going to ease off. I'm not an economist. I don't have a crystal ball. I don't know when that will happen. But from a business standpoint, business model standpoint, I believe MeridianLink is as well positioned to benefit from a higher level of consumer spend that you would typically find in periods of economic expansion. The rising interest rates will probably signal more confidence in the growth of the economy. And the reality is, if you look at the last 20 years or so, barring maybe I think 1 year, we've seen consistent growth from the consumer that has been fueled by the consumers' desire and need for debt to fund their lifestyle. And I don't see that changing. It may have been impacted by some higher-level headwinds, as I've said, supply chain and things like that. But to me, the road map that I'm looking at would be high levels of activity when rates start rising. And the business is well positioned with a larger footprint, more customers. I think the good news from kind of a supply chain standpoint, the demand isn't disappearing. This isn't like an airline seat that once the plane took off, that seat revenue is gone. I think when new autos start coming more readily available or building materials what -- gets into the market, I think consumers will continue to absorb that in their debt profile and continue to benefit the financial institutions and benefit MeridianLink.

Got it. Got it. Chad, maybe just to stay on the topic of rising rates, maybe we could sort of use that as a dovetail into the minority of the business, which is the data verification business. Can you just remind us how much of that business is driven by mortgage volume? And how you thought about that business over the coming quarters and years, of course, as the mix of that business changes and volume changes? Just open-ended question, kind of just level set the data verification business for us a little bit and how you think about that going forward.

Yes. Absolutely. Thank you. So the mortgage business is roughly 1/3 of -- sorry, the data verification business, data verification software business is roughly 1/3 of our business, and 2/3 is the loan origination system, consumer and mortgage. In the data verification business, we do disclose kind of the impact of mortgage revenue on both lending and data verification. It's around 70% in the data verification piece. And overall, mortgage exposure for our total business was 29% in the third quarter. Nicolaas mentioned, we're not a team of economists. We leverage what we think we're going to do based on what we see the industry prognosticators telling us will be volumes in the future. So that's Mortgage Bankers Association, Fannie, Freddie, and their forecasts. We take those, we adjust it and we tweak them to basically kind of map our view of what the market does. But based on that, we then kind of give guidance as to where we think that percent of mortgage is going to go. And our guidance for Q4 was that mortgage would be in the low 20% of our overall business. And so declining from where it's been year-to-date, as mortgages just kind of remain stronger, longer, with rates not rising as rapidly as anticipated or predicted earlier in the year. So as Nicolaas said, there's kind of cross currents there, right? Rates will rise when the economy is -- there's a belief that the economy is on the right footing. So that will have an impact on, we believe, home refinancings. But as you said on the other side, right, if the consumer is feeling more confident about the economy, we potentially may see some offsetting volume in other areas of our lending portfolio. But the mortgage piece is our Mortgage Credit Link business. It is tied to the providing credit reports to consumer reporting agencies who focus on the mortgage space. And there's always going to be an underlying amount of volume on the new home sale side as well. So while it may decline, we think there will be a baseline amount and then, obviously, we'll grow with the market from there.

Absolutely. And of course, that business has evolved as well. That 70% number was much higher in years past before...

Yes, we made an acquisition at the beginning of 2021 of a business called TazWorks, that we believe is the leading provider of employment verification and tenant screening, reporting into consumer reporting agencies focused on that segment of the market. So that was a diversification away from being kind of much more solely focused on mortgage. And again, as we talked about, we think it will be a nice counterbalance, right? We expect, as volumes may go down in mortgage when the economy picks up and interest rates rise, that when the economy is doing better, we're going to see more people potentially changing jobs, moving, taking -- renting a bigger apartment, moving geographies. So we should see, hopefully, a nice kind of counterbalancing effect on the TazWorks business relative to the Mortgage Credit Link piece.

Got it. Got it. Maybe in the time that we have left, I mean, I definitely want to talk about the margins here a little bit, just given the profitability of just such a young, kind of newly public company, if you will. Maybe it's a strategic finance question for both of you, Nicolaas and Chad. Again, uniquely profitable for a recent IPO, with EBITDA margins of over 40% today. Nicolaas, I guess, what are your broad expectations in terms of sort of balancing growth and profitability now that you're public? Makes sense?

It makes sense. And my background and having spent time in private equity, I would tell you, MeridianLink -- when Thoma Bravo acquired MeridianLink, started investing in this business from kind of a lower-growth business to the business we have today that's accelerating. And the initial investments were in leadership, people, systems, structure. And that proved out to be a very successful kind of phase 1 round of investments. We then started focusing on accelerating our go-to-market playbook. And what we did in late '19, early '20 was really spending time developing our next 5-plus years of strategy and sticking our hands in and stack it. And then on top of that, that strategy work that took us about 6 months to do, we've layered over an M&A playbook that we continue to execute, which if you think what we've done, is we've started creating a lens for capital allocation in the business between building, buying and partnering. And that's key for us with our partner marketplace, with our M&A playbook as well as what we're investing money in. And we believe we can accelerate the business by doing that. As we've invested in go to market, we've seen great success and real build-out in muscle there, to the point we have a healthy backlog that we've built up over the course of the last 4 or 5 quarters. And we will continue to take that with us into 2022. So the next phase in growth for us is really focused on building out our internal delivery capacity on -- with our services teams, and as we onboard clients, continue to build out support as well. And one of the things we're now starting to do alongside this is we're hiring folks as fast as we can in services to really help us work that backlog down. And our ability to work that backlog down will also drive future growth. And if we can pull it forward, we will be excited about lining up those customers sooner on the MeridianLink platform. But we've started building out our capacity with the partner model, too. And it's a recent initiative for us. It's something that we're going to kind of really focus on driving that build-out to help us scale the business in future years, is create a partner model that help us on the implementation side and be a partner in the business to enable additional clients on a go-forward basis. So I guess the answer to your question is just we've been fairly disciplined in how we've approached where to invest, and it's not a build it and they will come philosophy. We've built a strategy, we've built a playbook for capital allocation. We've invested in go to market. We've seen the success of that. We're starting to accelerate our flywheel on our internal operations with services and then support. And all those markers, I believe, are good markers for the business and will continue to serve us well into the future. And maybe we could have done some of that earlier faster. But the business is a high-performing business with great margins. And I feel we've made some good decisions along the journey, stacking hands, kind of accelerating the business. And we're at a point where I'm excited about kind of the next level of growth in creating scale here by growing and scaling internal resources as well as partner resources.

Got it. Got it. Very helpful. Well, gentlemen, as you know, always more questions as we continue learning about the business, but unfortunately limited time. So maybe we'll leave it there. Nicolaas, Chad, again, I can't thank you enough for making the time to be with us here today. And again, I hope it's going to be the first of many Barclays TMT conferences going forward.

You bet. Thank you so much, Saket.

Excellent. Thanks, folks.

Thank you for having us.

Thank you, everyone, for participating.