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

[Audio Gap] Bank of America. And this is the 2022 Leveraged Finance Conference. We are thrilled to be back in person in Boca Raton, and we're also thrilled to have MeridianLink with us. We have Sean Blitchok, the company's Chief Financial Officer. So Sean, thanks so much for being with us.

Yes, thanks for having me.

Great. Okay. So just to start off, I know you joined the company as CFO in June of this year. So I think it'd be interesting for all of us if you could recap your background and then provide sort of initial thoughts, impressions and your goals to-date at MeridianLink.

Yes, yes. So as you can see from the gray, 30 years in the industry, mostly in large-cap public companies, the last 20 years or so I have been with HP. I spent 10 years at Salesforce in various finance roles. And then I finished at BlackLine before becoming the CFO of MeridianLink. MeridianLink drew me in for multiple reasons that we can talk about, but primarily I wanted a smaller company. I wanted a lot of growth opportunities. I wanted to have -- I'm not good at keeping my hands in my remit. So I play a lot in the strategy. I play a lot in where we go next as a company. And so a very intriguing opportunity for me at the end of the day.

Okay, great. And then still staying on the, kind of introductory comments. So MeridianLink, if I was to read this, is a cloud-based software vendor. So that doesn't really tell us a lot.

What was it right now?

But its sales applications enable financial institutions and credit reporting agencies to manage consumer and mortgage loan origination workflows. So if we could go deeper into some of the various components of this. So what products and problems do you solve for the credit reporting indices?

Sure, yes, sure. So 3 prime -- we kind of think of our company in 3 ways: One is the mortgage business, 2 is consumer, the rest of consumer lending, and 3 is data verification. So if you think about our products, we make it -- you have to go back to kind of the traditional banking model, which is largely manual processes, largely paper. I mean if you go back away it's largely paper or even manual entry on loan processing. We provide automated solutions for everything from personal loans to credit cards to obviously mortgages to auto loans, HELOCs, et cetera. So data verification, a little bit different, but data verification services to our CRAs. So providing the data sets they need to make credit decisions on a day-to-day basis.

Okay. How are your contracts structured in terms of subscription minimums versus the volume?

Yes. So we are -- most of our contracts, I will start by saying, do have contractual minimums, and we consider that to be ACV. And so, we sell a contract, let's take a customer. We will have an annual charge to use our product or platform. We are moving much more heavily into a platform play, which we can talk about. But we'll serve that, and then they will pay by volume. They are -- they will have a minimum threshold for their volumes and then they pay a fee on top of that minimum threshold as they go. Now the mortgage and consumer business work a little bit different. Mortgage actually will make more over the minimum than we do, whereas in consumable, well there's a tiered pricing structure where we'll make a little bit less given the volumes.

Okay. What is the sweet spot for you on customer size?

Yes so, it's changing, but our -- since the onset of the company, our sweet spot is between $100 million and $10 billion of assets under management. So I think credit unions, midsized banks, financial institutions, that's really where we play. We have customers up to $15 billion, $20 billion of assets under management, but we don't market directly to them. They largely come to us for our functionality, for our product, and we've been very successful in managing those clients as well.

Okay. And then you said it's changing a bit. How is it changing in going like up or down with regard to customer size or scale?

Well, kind of related to what I said around -- we have customers upmarket. I'm aggressive, and I would love to see us move more upmarket over a period of time. I don't have any interest in playing with the largest players. I think we've got 7 to 10 years of runway left. If you think about our Sam, our TAM, we have roughly 5,000 institutions in the United States alone. We have 2,000 customers right now. If you think about moving even slightly upmarket, that SAM increases dramatically. And longer term, we have plans for international expansion. We have plans to increase kind of our product set. So our SAM is going to do nothing but increase over time.

Okay. So I think the company has said that the average customer has 4.5 modules. Is that…

We have 13 modules that we sell today.

And the average customer take -- has the take of about 4.5?

The take rate is about 4.5. And so the cross-sell, upsell is one of the huge opportunities for us in the market, and it represents a large portion of our growth rate.

So what are the most prevalent modules with regard to the 2 customer bases, the financial institutions and the CRAs?

So the CRAs are pretty single threaded into data verification that we offer through our TazWorks solution and the related products. The concentration is really around the obvious ones, consumer is really 50% or so auto and the balance is really around personal loans and credit cards. We're seeing a lot more HELOC activity. HELOC is actually our fastest-growing product right now. And then mortgage, we can all -- we can talk for an hour about mortgage and what it's doing, but it's a large portion of our business as well.

Okay. Could you talk more about what the cross-selling opportunity is? Do you have a target for getting that 4.5 average module to a higher number? And then what's your sales marketing structure and is it where you need it to be?

So let me answer the second question first. One of our primary strategies going into FY '23 and since I've gotten here really is go-to-market strategy. We have traditionally been a company that lets the business come to us. We didn't have an aggressive selling motion. We just hired a Chief Sales Officer, Richard Scheig who is amazing and has been a great partner in increasing kind of our account executive army of call it, 40 to 50 people. It's really going to be focused on cross-sell, upsell in the short term because I would like to see that double. Ultimately, I would like to see our customers on the platform using all 13 of our products. So in kind of parallel, our product strategy is to take all of our products to platform and to have those available in a platform economics cycle, if you will. But the first step in that is cross-sell upsell in the unique SKUs of our products themselves. The second step is what does the monetization of the platform look like.

Okay. Can I ask you to follow up on that last point. So, what does the monetization of the platform look like?

So if you think about -- go back to your very first question, a customer signs a contract for mortgage and we establish a mortgage minimum, that's 15,000 transactions per year, whatever that -- the details of that contract look like. What I'd like to see is a customer signing up for a platform that includes all loan types, mortgage, consumer, personal that includes all the consumer loan types as well as products that we're looking at acquiring in the market today, including credit cards and have them consolidated, have a complete view of the debt wallet of the consumer and be able to optimize, offer marketing opportunities, et cetera, and pay a single price for that entire platform.

Okay. If you look at your key solution set, so consumer loan, mortgage loan, data verification, where you have -- how do you rank them with regard to growth outlooks?

Yes so consumer is very interesting. Consumer, in our market, which is largely high-quality credit rating consumers, it has not grown once, 1 quarter in 25 years, and that was during the great financial crisis, and it dipped by 0.7%. So from a growth perspective, we rely very heavily on our consumer lending, especially in a market like this for mortgage. I would say second is mortgage. I believe in mortgage as represented by our recent acquisition of OpenClose, that is a very complementary business for us. They have a very strong point-of-sale solution that we lacked. Our pricing packaging engine is stronger than theirs. And so, I think collectively, that will position us very, very well, that's in the kind of Ellie stack of competitors, whether you believe Ellie and Black Knight is going to go through or not, that positions MeridianLink as either the #2 or #3 competitor in the market. And so, I love that opportunity because our customers are typically not the same customers as Ellie. We package our products differently and offer a lot more variability in our products than Ellie does. And so I think just from an RFP perspective, that will be a growth engine that will pick up pace over time, especially with the normalization of the market. My view is that this -- the last couple of years is -- was a peak for -- in refi, in particular. We are modeling the business based on a baseline that don't -- tries to exclude as much as possible peaks and valleys. It's difficult to do.

So we've moved on from a peak to valley?

We've gone from a peak to valley, but mortgages are not going anywhere. And for those of us who are old enough to remember a time when money was not free, a mortgage at 6% or 6.25% was normal. And so, I think it will -- the fear in the market will start to subside whatever normal looks like. We're all hoping mortgages come back down back to the 3.5%, 4% level. But even at 5%, 6%, people will still buy houses, it's just stick of shock at this point.

So I'm not sure if you're willing to provide this, but like -- so over a cycle, what should be the growth rate of the mortgage business, like a 5-year CAGR?

Well, it's going to be different is what I would say. I think frankly, if you look at kind of the timing of when Thoma bought the asset, the way we were looking at mortgage at the time, everybody knew it was a peak. Everybody knew refi was -- this wasn't going to last. And so the question was, is this a business we want to stay in for a while. I've doubled down on mortgage. I think mortgage is going to be an important piece of the business going forward. And if you think about our end customer, it makes a lot of sense. Mortgage is probably the #1 part of the debt wallet of our end consumer, right? And so to exclude that would be I think a detriment to the company. So to answer your question, I don't have a rate for you in terms of growth, but it has been a drag this year, for sure. It was a peak last year and probably for the last 2 years, I think it will be a contributor to growth going forward. I think single-digit growth for FY '23 would be a success to me, 5% to 8% would be a success to me, especially with consumer growing -- this year consumer grew 20-plus percent every quarter for MeridianLink.

Okay, great. So that actually brings us to macro. So with -- so how is the current macro environment impacting your, either bank IT budgets, sales cycles or anything else that you're seeing that's coming up as a headwind right now?

Yes, it's a great question. It's not is the answer. I think with -- if you think about our market being the financial institutions themselves, the spread being what it is, financial institutions are in a place right now where they're willing to spend money. And they're looking for deflationary products like our own that are about automation, about simplification of process, et cetera. And so, our demand environment has increased in this period. Our Q3 bookings extremely strong. Q4 pipeline looks to be the strongest Q4 we've ever had as a company. And so, from a demand perspective, it's extremely healthy. And it's not the demand and the bookings, that is my concern. I'm extremely pleased with where that is. It's -- I joke with Richard all the time, break my back with the backlog, I want as much backlog as I can. The challenge for us is how fast we can implement our customer and the time to revenue. So turning a booking on ACV into revenue is the challenge.

Okay. So that begs the question, what is it -- is that something specific to MeridianLink and how do you address that?

Yes, it's not specific to MeridianLink. I have no problem in saying that our average implementation time is somewhere between 5 and 6 months with tails on either end, right? And that's, to me, too long. I come from an environment where you provision the software and you turn it on and you start recognizing revenue the next day. We're never going to get there. Our customers are very complex. If you think about the third-party ecosystem of products. If you think about their cores, integration to those cores, they're -- it's difficult to get in and really do it the right way. So we have a parallel path on how we're approaching this. #1 is services optimization. So we had services people over deployed in certain products, under deployed in other products, utilization rates that weren't where they needed to be. And so fixing that was my first priority. In parallel, I think there is a -- call it an out-of-the-box model, right? Which is a standard deployment that satisfies 80% of our customers. We've spent a lot of time on integrations with third parties, with cores, et cetera. I would argue that our set of integrations is unparalleled in the market. And so, it's capitalizing on that. So for, call it, 70%, 80% of our customers, if we can get time to revenue down to 30 to 60 days in clearing that backlog in a healthy way, that just speeds up growth and it speeds up our revenue.

Okay. Can you talk about the competitive and pricing environment, and what your retention rates are?

Yes, so I'll start with competitive. Competitive is -- and this is a highly fragmented market. And so we have -- in kind of the ways I've laid it out in mortgage, we compete primarily with the cores who give the LOS away for free. The product is inferior to MeridianLink's product. And so we see a lot of customers who just are coming to MeridianLink as a better option, full stop. In the consumer market, you have LOS, PO -- point-of-sale solutions, et cetera, each one focused kind of a little -- in a little bit different piece of the market. So I think the key point is that I don't think anyone offers the breadth of solution that we offer. There are a lot of really good companies out there, whether it's Alchemy, Q2, Upstart. But they're of different ilk and of different design and focused on different areas of the market than we are. So we run into a lot of different competitors in different spaces, but I wouldn't say any direct competition or MeridianLink-like competition out there. The second piece of the question…

It was retention.

Retention. So 2 ways to look at retention. I think retention from an overall customer retention standpoint has been remarkably steady. We have largely happy customers, so low single digits in terms of turnover on the customer. Net retention rates, gross retention rates have remained -- what I would say, steady from a normalized perspective on mortgage. So as our mortgage volumes have dipped so has NRR. But if you normalize that out, I think it's remarkably consistent with past years. I will say, too, as in just opportunistically. Mortgage refi is down 80%, the overall mortgage market down depending on who you ask anywhere from 40% to 55%. Last quarter, our mortgage LOS was down 13%. And our MCL, the data verification component of that was down 24%. So our mortgage in total down 22% compared to the market is pretty remarkable. It's one of the reasons that I believe that we -- there's a lot of upside and opportunity in mortgage for us going forward.

Okay. So especially given the environment, what is your ability to increase prices on renewal?

So we contractually have -- and I make sure of this, we have price uplift built in. When I first started, we've started to implement the greater of CPI or a baseline price increase of typically 4% to 6%. There are customers that I reliant on that just because they sign longer term deals. So I will trade off a 7-year deal for a lower price increase. But at its lowest, you're looking at 4% and I'm a strong believer in customer lifetime value. So I think those have worked very, very well for us. So even on mortgage, we don't see the price uplift. I don't see the price uplift coming to me as much as the minimums. So we do have customers coming back to me saying, I really need to renegotiate minimums. We, I, the company, are pro customer right, so I do believe that this is cyclical. And so, I'm willing to work with the customer for -- in short-term alleviation of pain that there -- to see them through and meet them in the middle, usually for a trade-off, which means we're going to add 2 more years to the contract. We're going to increase the minimums in year 3. We're going to do whatever to make sure that you stay in business through the cyclical environment and then we all come out stronger in the end.

Okay. So then on the topic of some of the financial items. So we talked about the growth outlook, EBITDA margin. Is that something that you manage to or the other thing that software companies -- software and services companies often are adherence of -- are sort of the Rule of 50. How do you manage that?

So I'm a big believer in the Rule of 50. I remember when it was Rule of 40.

Yes.

So I'm -- I believe in the Rule of 50. I also believe in managing with a lot of cost discipline. And so I think right now, we are doing more rebuilding the puzzle for our go-to-market as opposed to increasing our cost structure. So if you think about our sales and our services teams, positioning them to succeed is more important than adding more and more cost into the structure. So our guide is for FY '22, 36% earnings, it's spectacular. It's a great earnings number. And I fully expect to hold that, if not grow it, into FY '23, while investing in the things that we need to invest in. That's going to create trade-offs for us. We can't do everything at once. Prioritization, sequencing of these strategies is the of utmost importance for us right now, but I think we're focused on the right things to achieve both. A higher growth margin -- sorry, a higher growth trajectory as well as delivery on the earnings line.

Okay. So free cash flow has been largely stable and consistent but for the most part, used for acquisitions. Is that the plan going forward as well?

Yes we have the benefit of kicking off a healthy amount of free cash flow. If you look at our most recent acquisition, it allowed us to pay cash for OpenClose, and we will recover most -- roughly half of that in Q4. So to answer your question, yes, that still is the current strategy. If -- what I would say is, I am very active in the M&A market right now. There are definitely targets. And if a transformational deal comes along, then I have more appetite on my net leverage than I'm currently sitting right now. I'm currently sitting at 2.6 or so. I could see a scenario with a couple of companies in particular where that constructs to 4, but no more than 4.

Okay. So good, you're headed off that leverage. And any plans to repurchase stock or are you most focused on the M&A pipeline?

So we -- we've had a repurchase plan in place for a while. And so we do it at certain strike prices in the market. And so, we've been active in the market for the last 3 or 4 months in particular with -- I wouldn't say heavy but significant volume in the last month or so since earnings and guide. And so, I believe that it's one tool. I believe in the long term of the company, and we are buying back at certain prices that I think are a tremendous value right now. So it is in place.

Okay, great. I think we've got less than a minute left. Is there anything…

Wow, that did go fast.

It did go fast. Is there anything that we missed, any key points or takeaways you'd like to leave us with?

Not really. I think there's -- again, there's kind of the 3 parts to the story, right? There's the Tim Nguyen, Founder, start-up part of the MeridianLink story, there's the Thoma Bravo acquire CRIF, acquire Saylent, acquired TCI. And now we're into what does it mean to be a grown-up publicly traded, well-branded company. And I think we're well on our way. And so I fully expect MeridianLink next year to be up here talking about bigger numbers, a lot of -- a lot more strategic direction and more -- much more presence in the market.

Okay, great. Okay. I think we're perfectly out of time here. Great job.

Thank you.

Sean, thanks so much for being with us. All the best in 2023.

Thank you, and I appreciate it.

Look forward to seeing you again.

Absolutely. Thank you.

Take care.