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

Good morning, everyone. Thank you for joining us for day 2 of Citi's FinTech Conference. My name is Andrew Schmidt, analyst on Citi's research team with the focus on FinTech software. It's my pleasure this morning to have with us MeridianLink. With us from MeridianLink, we have Chris Maloof, who is the President of Go-To-Market. Thanks, Chris. Appreciate you're with us.

Thanks for having me here.

I think it's always good these sessions, just sort of brief to level set. Within cloud-based software for FIs, where do you focus?

We focus on connecting mid-market -- predominantly mid-market financial institutions with their consumers. So essentially taking -- helping them bring a consumer through all their channels into interaction, whether it's digital, in-person or call center, from the beginning of entering their information all the way to ultimately closing a loan and booking into their financial report.

Which asset class [indiscernible].

Yes. So we cover the breadth of consumer asset classes, except for student loans so that you think about your auto personal loans, your credit cards. We do home equity. We do small business loans under $1 million. Savings accounts, checking accounts, IRA, CDs. And we -- about half -- a little less than half of our volume is around auto. So a combination about the dealership level as well.

Very good. And then if we think about the TAM, just think about where you're focused from that perspective, kind of where your footprint is now and kind of where you're going.

Sure. So we focus on the cost, let's say, there's approximately 10,000 financial institutions. And our core market is the bottom 9,900, right? And from a TAM perspective, it's all the elements around the consumer origination process that all the software elements that facilitate the consumer origination process for those FIs.

Got it. And then when you think about just your ability to move up market or withdraw, I think you've been a little bit more opportunistic about the markets recently. It's not for part of a -- maybe talk a little bit about that FIs.

Yes. And you asked that question within your last session is we really focus outbound target market is between around $100 million in AUM to around $10 billion. We have been very successful this year. So pretax solutions under $100 million. But talking about that above $10 billion. We have many customers about that. It's usually more of an inbound approach, and there's a few ways we're working to accelerate that. So one is giving them -- is working with our existing customers and extending -- learning their needs on how they like a more configurable solution, and then investing in those specific areas. So those specific areas are also very central to where the market is going, and even within our core base. So it's around automation at the consumer level for instant decisioning. And then the back office automation that ultimately supports that instant decisioning. It allows them to do it profitably. Like a great recent example is we're powering loan depots, home equity is not they just watch -- that was an impact -- and we got them live, and it was about quarter, maybe a little over quarter, and that's part of that the customer promise you can bring to them is a high level of automation and the ability to grow and getting live on a relative scale.

Got it. And then I guess switching gears to sort of the sales cycle and demand environment. Maybe just talk about what you've seen recently from the sales side, you're in a great position to talk about this. Just what you're hearing from FIs in terms of demand solutions. Let's start off there in terms of just the new demand, then maybe we're [indiscernible].

It's been largely unchanged, at least over the -- since I've joined MeridianLink. I joined MeridianLink about 3 years ago. And one of the things that struck me about the company at the time was about 1/3 of applications started a digital channel going up 1% to 2% per year, I mean, consumer behavior changes slowed. That's naturally accelerated during the COVID process, giving us about 50%, still a lot of runway to grow, healthy patience before, but certainly not as fast as it did during COVID. And what you're seeing, and I think you could see a lot of earnings releases and filings from some of the bigger banks is -- well, in some areas, they may be being a little more hesitant on major CapEx spend. But when it comes to their IT budget, particularly focused on the digital and the digital computing for consumers, it's largely [approved] and that's reflected in our base in terms of sales cycles. The only area of our market where you see some hesitation, it's around independent workspace, which is a relatively small percentage of our customers. And the rapid interest rate jumps created a level of shock. Now fortunately, many of those organizations anticipated that many of those individuals or leadership were around during the last step back in late 2009, and their organizations are more set up again and that was pretty successful. So now we're seeing them start to, hey, volumes are through the roof now. Now I can take a step back and focus on my costs and my automation in the back office. But on the depository side, for mortgage, it's still, they just keep investing and they have their 5-year technology plan and their capital layout.

That's great. And then where do we see the most demand? If you look across kind of [broad spectrum] where do we see kind of the investment? I know you talked about 2 lots before versus [indiscernible].

From a depository perspective, on the net, it's broad-based. Home equity, maybe some of the larger depository is focused on having a mortgage portfolio of seeing home equity as a way to keep that division very active. So it is a slight leaning there, but by and large, it's more about the broader digital transformation efforts and a specific loan [portfolio].

Okay. Got it. And then when we think about just -- one aspect is the new client [indiscernible] it sounds like it's still pretty robust in the pipeline that as [indiscernible] and then the other aspect is sort of loan volume. Maybe you need to kind of talk about that. And obviously, the one sort of offset that. Let me talk about what you're seeing from the market, so this is obvious the market correction, you're well aware of that. But maybe just talk about some of the more [indiscernible] underlying volume market [indiscernible].

Yes. This is some that can return earnings as well. As for the non-mortgage loan volume, it's -- on a same-store sales basis, the strongest spending a lot of time. So if you look at from outside of comments looking at like the [indiscernible] that really takes a look at the macro view on individual customer AUM growth, it's really strong. I mean, their net average overall is -- I think, they're calling it to be over 10%, and that's just underlying growth. Our customers beat the market on average, which is great for us. And then within that, we are seeing a push towards personal loans and credit cards. On the margin, overall volumes on a year-over-year basis on every vertical are up. But on the margin, personal loans and credit cards are becoming a little more popular perhaps as customers look to -- or consumers look to handle inflation. But it's hard to say.

Got it. That's helpful. Maybe we'll come back to that a little bit later, but I want to switch gears to sort of the [product platform]. You made a lot of additions to platform over time and if I think about -- or just actually over the last 1 or 2 years, you think about StreetShares, there's open close, there's market one. Maybe just talk about over the last couple of years, just give us just an overview of how the platform product has performed, you're doing a lot of work there.

Yes. The first, I think, is how we're thinking about when we come across when we approach our build by partner strategy is we try to be very pragmatic in the approach. If we acquire something, how does it add more value together apart for our customers. That's where we started. Then, I can talk about each one of those and where they're at. And our -- and when I talk about value together than apart, it's the same when it comes to our build strategy and that our customer promises, and we help them out compete for consumers and thus drive their AUM growth on a year-over-year basis faster than their competitors. So that's just underlying spectrum. So when we're looking out in the market from an acquisition perspective, we're patient. And we have a long list of areas that we would invest in that fit that criteria. So on -- I'll talk about StreetShares. So this is an IP backed. We -- during the pandemic, our customers through PPP recognized that they had a lot of relationships with small businesses in their communities, and they wanted to serve them more promptly. And while we had a small business lending solution that underwrote to the owner, we didn't have something more comprehensive that could underwrite to the business itself. That's where StreetShares. So for loans under $1 million, it gives us that capability and it allows us to extend our position into commercial lending and differential in there. And that business has done well to date within our plans. Again, IP back, so their first business loan was done in Q2, their first business credit card engagement was done in Q3. So we're starting to get some momentum there. And then on the Saylent side, it's all about marketing automation in personalization. So data-driven personalization to allow our customers to target consumers in their community and that brings us to the lending profit. So I would expect us to continue that approach. And then from a road map perspective, internally, is how are we stitching these things together to be seamless and that value to make simple for our customers.

Got it. If you can just drill down on the same because I think that's interesting is form of other discussions as well. I think loan automation is good and it's necessary obviously, from a cost perspective maintenance and decision, but the other side is the ability to drive revenue, right, for the FIs. So talk about just for FI aside from the cost, what we can do on the revenue side in terms of helping to drive additional FIs.

Yes, right on. So when we acquired the Saylent business, it had -- it was focused on 2 core areas, one around driving interchange revenue on the credit card side, and then one around driving depository for our savings volume. And we took that solution, we extended it to cover loans as well. So the idea of being -- giving our customers one tool, so they have automation -- outbound automation to manage their P&L and grow responsibly. So we spent I guess, about 9 months post acquisition, building out the loan side, which we launched earlier this year, and our early customers have seen great ROI on that. So it's essentially pulling external data, or internal data and creating subsegments of the population and recommending back to the FI where they should target and through what channels and then that automation for the back to make that [leaner].

That's very helpful. I assume that I'll continue in terms of how FIs working.

That's our customer progress.

Got it. And switching gears to just some of the [inflation mark] for a second. I think there's a lot of benefits here from sort of single sign-on, having a unified interface across. I mean this makes sense for an FI to be able to adopt different modules much easier. Maybe just talk us through kind of where you're at with that process. I think you mentioned sort of being -- the back half being sort of fully [indiscernible] spend. But maybe walk us through sort of where you are at right now, and what problems you faced in the course of the journey.

Yes. Yes. So first, from an opportunity perspective, on average, our customers have 4.5, let's say, 12, 13 modules, which is a great opportunity for us and a major focus from the go-to-market perspective. So as we evolve towards the platform cross-sell motion of the area, we're driving to accelerate, accelerate both from an adoption perspective, which is always a challenge as we continue to add about 100 customers a year but also add modules that take time, and really create that cross-sell motion. Now going back to -- going towards the product side of your question. The MeridianLink One and the move to the cloud is the way I view that is it's setting us up for the next decade. So it was a re-platforming exercise. It wasn't just a lift and shift. We rewrote the software to do that. And that was a major investment. So now all those investments are rolling up and because we'll all focus on the road map. And they're going to focus -- I mentioned it's going to focus on how we double it to come together and create more value together. We've talked in other presentations about our debt optimization process, which is the feature, but ultimately, someone coming in by a consumer coming into a apply for a mortgage. We like their nice credit report, we send it to our consumer underwriting engine or a mortgage underwriting engine, then we feed back to the loan officer consumer for a bespoke recommendation to optimize their debt and their cash flow to accomplish [indiscernible]. So those types of features that create more value and create bespoke solutions by bridging the functional silos have been high on behalf of the consumer, where we'll be investing over time, but top of the decisioning is the automation.

Got it. So that makes a lot of sense. When you think about just -- in terms of just -- we talked about product development for, in terms of the pipeline, inorganically developed products against organic products, talk about just, I guess, where should we see kind of the progress in terms of what could be [indiscernible].

Yes. I start -- 2 lenses I start with, to provide some context is. One is at the consumer, what are specific things that can allow us how to compete for their wallet or share of wallet? And then the second is connecting that to how our customers' P&L works. So if it's a revenue driver, and it connects to the consumer, that's an area we're going to be [evaluating].

And then I think if you think about just switching gears a little bit to sort of the go-to-market sales which you're very well suited. Maybe talk about how the distribution strategy has evolved? I mean I think we're talking before how kind of the [indiscernible] distribution very, very has scaled it up. Can you talk about just how the strategy has evolved over time to what our market share is.

Yes. On a year-over-year basis, we have increased our investment in over 20% sales market, right? And I go back to an old story, just give you a sense of the journey. A little before I joined the company 3 years ago, it was 3, 4 non-quota carriage sales people and over 1,000 customers. I love businesses like that. I've been a tremendous founder, to clearly found a strong attach on the product market fit. So Gen 1 was, well, we needed to hire -- we needed to expand our distribution. So we hired a new logo sales team, and we have hired an account manager. And we hired a whole bunch of people, and we are largely successful continuing that process and building out our services department to keep up to date. Now that we've done that for a few years, and we're looking at that next stage of growth to continue to drive us at an accelerated rate of growth. It's building more structure with it. So 2 areas, after you reach a certain scale, you can either start focusing more on enablement and product special. We have more products than we had 3, 4 years ago as well as you don't have people -- not everyone at the company has been [indiscernible]. So we'll have -- for our customer base, we'll have a set of -- or we do now is in process. We have customer sales teams that focus on our core products and then a number of product specialists to support them to ultimately accelerate their growth. So that's new. And then the other big area that we've been investing in is around demand inflation. We talked about there's been a big inbound word of mouth that we benefited from. And now we're reinvesting some of that capital to drive -- to complement with that to help the outcome.

Great. And then when we think about your approach, is it a turnout-based approach or maybe just a little more specificity on that sort of [indiscernible] new clients?

Yes. One thing I love about this space is in that it's regulated, you have high visibility to various customer strategies. So we look at how are performing with their capital from a loan perspective and that we infer their relative strategy, how are they growing versus that? And then we'll target based on that, so we can really think about what solutions will help them accomplish their goals and go in a little bit warmer to the conversation on the more value-added to the conversation that we could have applied for them.

Yes. And then in terms of cross-sell, you have the dedicated team associated with that. Can you talk about cross-sell.

So yes, we have new logo, fully standard, hundreds that are going out from the market, they're taking leads and they're sourcing their own. And then we have a customer sales team where company extra team would how you want to refer, who are responsible for selling into their base of customers. So that's where -- those are the people that are looking at, hey, I have 4.5 modules of about 12 or 13, I'm going to be able to expand that. And then the newer element to this year is -- for some of the -- they're going to be responsible for, say, half the set of modules. And then there's going to be product specialists supporting them to sell the others. So very much a platform-selling approach. And now that the platform is larger and more expansive [indiscernible].

A big question we get is how to kind of characterize the rates. So how do you think about the tax rate associated growth.

So well, that's the 4.5 out of the 12 or 13. So a lot of runway there. And typically, when we -- you sell -- when you sell one of these products, these financial institutions have different -- they, due to regulatory permits, they have different silo deals, right? So it's very much a land and expand. So with the initial sale, we'll start with something around auto, our direct lines of credit cards, personal loans. It could be just account opening. It could be just mortgage. And then usually within that first year, you pick up another module or another section. And then from there, it's been largely in [indiscernible]. And that's where we're looking to focus to drive the education and lead generation.

So a lot of it is the client is aware of you, they work with you, we want to get to look at business [indiscernible] and then staying in front of them.

Oh, I heard you did x, y, z as well. Can I learn more about that? And that's where we're investing to change the dialogue to instead of say, hey, I heard you do this too. I know you do that, the awareness stuff and this is the value created for other financial [transactions].

Got it. So when we think about just on the net side, how is the RFP process. Is it kind of solid source? Are you going against other vendors [indiscernible] in there as well that needs their solutions? So talk a little bit about the RFP across the competitive environment.

Yes. So not every kind of environment comes in our RFP. I don't know what the exact percentage is, but it's less impact than RFP. And then within that less than half, some of them, they'll hire an expert -- a market expert in driving an RFP process. And then others will do it on their own. And I found that there -- it's not -- if folks are familiar with government contract policy, it's nothing like that. It ranges the game of what's included and what's not included. So it's something that we can [measure] Yes, it's part of our business, and it's not all.

I see. So when you see when there is a competitive situation, is it before or other point solutions as well?

Right. The largest, call it, a competitor, it's a competitor and a partner would be the core solution, right? It's every core house of solution that delivers a level of functionality within this space. My experience is anyone -- the customer is in a position and free to make a position on which -- where they want to go, and we're happy to support. I mean we'll even have an RFP as the LOFs for multiple courses. Yes. We're truly agnostic and they are our partners.

Right. And then when we think about when rates can be defined a little different, like what are your -- like what you think about the win rates, how they trend in recent times around that.

So win rate is very segment-focused, right? It's consistently [heading] north of 50%. No real change there.

Maybe this is a larger sort of just switching gears a large organization M&A discussion, so you've added a lot of funds which is great. In terms of what the vision is, is it we will continue to be more sort of product level tuck-ins? Are there large more opportunities out there? Just curious on your [indiscernible].

I really like these types of macroeconomic time. I mean I view that it's probably our greatest opportunity for -- we envision ourselves as pragmatic operator to the profitable companies. We are always on the look for transformation. It just has to be the right deal at the right price and right for our customers. Will we constantly look there? We're not looking, hey, the company has to be below their side. So again, that's not how we think about it. It's about kind of the right asset [indiscernible].

Got it. I think one thing I get questions about a lot to is whether you push forward really for SME. If there is some overlap there of consumer stickiness, but there's an opportunity to push more into some mid-market [indiscernible]. There's some differences in market obviously so to be [held], but is that something [indiscernible].

Yes. So we obviously, with our investment structure, we're going smarter in that area, and how we add value to our customers. And if that became what our customers say is we definitely need help with that. That's an area we would certainly look at. I think it goes into the broader bucket of what are the key revenue drivers for an FI. And if we brought it to part of the platform, would it add more value together this [indiscernible]. And small business that is clearly, right, as you get into spreading on real estate and some of those other assets like that's something we would have to evaluate through.

Right. Right. Yes. That makes a lot of sense. And I think on that front, I think one thing I appreciate was the acquisition, just really interested in terms of expanding your presence in the mortgage market I think it's very opportunistic, obviously, in the mortgage volume back at some point in good scale is now [indiscernible]. Maybe you can talk about that in terms of what you acquire, how that [indiscernible].

Absolutely. We talked a little bit earlier, one of the things I'm very excited about is [indiscernible], right? If we are able to acquire a great profitable company at a time when mortgage -- mortgage volumes are particularly impacted. We see a lot of value with the asset itself, and now focusing to how does it add more value together with MeridianLink's existing mortgage product. So highly complementary in terms of end market. So OpenClose focus is a little bit more on depositories, which is core to our MeridianLink One segment and MeridianLink Mortgage is focused a little bit more on independent projects. So, out of the gate, we end up with an organization that has more scale and more capacity to drive innovation in the space. And for near-term deliverables to this combined customer set is the MeridianLink Mortgage customers will receive a point of sale, which is an area that we are looking to deliver quickly and OpenClose customers will receive a better pricing package, which is critical in that base connecting investors in pricing also. So really excited about the timing and the customer overlap in target area to really build solutions. And I guess one thins on that, it provides a player a bigger option that would otherwise exist for customers themselves.

If I could sneak in a revenue question. Obviously, you answered a high-level terms, but I think obviously, we've seen some headwinds from mortgage more recently than we did before [indiscernible] revenue business. Is there a framework that we can use to think about kind of the longer-term revenue growth [indiscernible] business?

Yes. So I'll add a few things. So one is, I think about as a rule of 50 company. So mid-30s EBITDA, mid-teens growth. I'm personally very focused on extending the growth. Yes. And when I think about the growth side, I would think about it as mid-single digits on new logos, which is actually quite a bit of new customers every year. Mid-single digits on cross-sell and price increases and then mid-single digits on just organic loan growth of our customer.

Got it. Okay. Very helpful. And then if you think about just sort of other expansion opportunities, obviously, there's an actual market solutions -- and there are some regulatory differences, obviously, customers are different in different geographies. But can you export some of the solutions internationally? Or is that more of -- any different view organic or is that more inorganic?

Yes. So the first one I look at is how many decades of runway we have at our current growth rate that the U.S. market provides that. So that's fantastic and that certainly has low overhead. That said, we are always looking at ways to expand, and I'll ask -- on the international side, it's due to the regulatory differences between different countries. We'll typically be choosing a portion of the platform that's highly configurable to be associated in a prior [indiscernible] management opportunity, financial institutions abroad. And that's the difference of approaches for horizontal which are high pivotal solution and high configurability approach. Which lens we've for an M&A. Again, at the end of the day, we're looking at where can we grow the fastest to drive the most longer-term value.

Understood. And then back to sort of sales and distribution. And I think you guys have done tremendously to kind of somewhere [indiscernible] more or less. Maybe talk about just how the pipeline backlog trends, whether it's been pretty consistent and standard, maybe just the [indiscernible].

Sure. So pipeline generation in booking, right? It's consistent, we've expanded our sales resources. I kind of look at it that way as we're continuing to invest, those sales resources are ramping. I talked a little bit about some of the distribution investments we're making this year, and so we continue to realize results there. To answer the backlog question. We went from 4 or 5 to 50 quota carriers, right? So you have this, they're performing. I'm very much a believer of building a winning sales culture. So you add people they're winning, add people, that's the approach with [indiscernible]. And at the beginning of this year, we made a big investment in services. So they're delivering what we expect them to deliver in Q3. We're seeing a leveling off of backlog. And the backlog itself is not impacting our deals. So as those resources ramp, we expect those to continue to add value for the demand of our [indiscernible].

Maybe just to kind of close out and -- just thinking about mortgage conditions [indiscernible] improved revenue generation for FIs, sort of product [indiscernible] but maybe how do you think about just sort of longer-term vision.

Yes. We brought up the [indiscernible] to help us. So what are the paths that we can have to growing [indiscernible]. In some solutions, we won't know they exist if at all right within the world that I do, you can extend across all the rest, right, it is the commercial, it is top management, it is treasury, there's a whole bunch of solutions that we can go down that range if we see it adding value to our value together. Then the other, which is ever expanding, it's all the consumer touch points, more customer touch points you have or the access to those consumer touch points, the more areas you can provide a level of data-driven personalization to ultimately help the FIs, right?

And actually, you mentioned kind of distribution in [indiscernible]. Part of that is embedding seamless sort of instant contact. Is that something -- maybe you can talk a little bit of that is able to be sort of the platform within another platform.

Yes. That's been an interesting space over the last few years with ups and downs as well that our customers -- we support our customers. As an example, we support merchant. merchant lending has been around for a long time. It's generally higher ticket than we could see from some of the other [indiscernible]. But the concept is essentially the same, that's a marketing spend driven low to enable a consumer to make a purchase. So we [indiscernible] that to next. A bunch of our customers do it at relative volume on the credit card side generally, with community retailers like truckers, supplier and like that. And then we have some newer engagements where we're going smarter on the space within our [indiscernible] acquisition from [indiscernible]. So that's something that's become a bit more of a market trend. [indiscernible] we're participating and seeing a scenario with [indiscernible] double. I just want to thank everyone for having me in person as well as everyone who took the time to listen to our conversation, thank you for your time and attention.

Thank you, Chris. Appreciate it. Thank you everyone.