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

All right. Well, good afternoon, everyone. My name is Saket Kalia. Welcome to day 1 of the Barclays TMT Conference. I cover SMID Cap software here. Very happy to have the team from MeridianLink here. We've got Nicolaas Vlok, Chief Executive Officer. We've also got some folks from the IR team here with Erik and Gianna. So, we've got about 30 minutes together. Let's maybe take the first 20 or 25 minutes for some fireside chat with Nicolaas and then any questions that we've got in the room just pop up your hand and we can get a mic over to you. So, maybe all that as a framework, Nicolaas, thanks so much for being with us here today.

Thank you for the invite. Thank you for having us at your conference.

Yes, absolutely. It wouldn't be a conference without you. Maybe just to start off, I think this is MeridianLink's second appearance at the Barclays TMT Conference, but the first one in-person, of course, right? And so maybe just to level set for all of us, can you just spend a couple minutes giving us a little bit of an introduction to the business? And then maybe as part of that, fill in some of the financial details that you were most proud of coming out of the prior quarter.

Sounds good. Thank you. MeridianLink is a consumer lending focused business that serves the mid-market financial institutions, mostly credit unions, community and regional banks. And out of our 2,000 clients, about 1,300, approaching 1,400 customers are deposit retaking. Others are in the CRA space and specialty lender. We -- today, the journey started for most of us at MeridianLink around 4 years ago. So, when we were a $100 million business and a private equity firm, Thoma Bravo invested. Post our most recent acquisition of OpenClose, the business is touching $300 million. We have pretty much broken our business into, call it, consumer LOS, including mortgage and then I can give you a view, excluding mortgage, but -- and then our data verification business, which is focused on employment tenant background verification as well as mortgage credit reporting. The business from a mortgage standpoint, mortgage makes up about last quarter, about 20% of the company's revenues. The rest is tied into consumer lending and our consumer lending business over the last 3 quarters grew 14%, 17% and 20%. And it's a business that if you think about consumer lending in the U.S., we serve Main Street America. We serve through our mid-market institutions, a lot of Americans who is either touching the financial system through kind of an engagement through account opening or loan channels buying an auto, getting a credit card, personal HELOC loan or kind of other type of lending that the consumer participates in. The only loan channel of significance that we don't service through our platform is student lending, and that's for pretty obvious reasons.

Yes. Makes sense. And what were some of the highlights from last quarter that you want to make sure we know just to level set from a financial perspective.

Sounds good. The business is performing well. Our kind of headwind is mortgage. Luckily, it's the smallest part of our business.

Of course.

Overall, the business performed a little over $70 million in revenue and quite profitable, running kind of mid-30 margins on an EBITDA line and also highly free cash flow positive.

Yes, absolutely. That's really helpful. Nicolaas, maybe we can delve into just stepping back, right, really start to put ourselves into the customer shoes. What leads a credit union or a community regional bank, for example, to adopt MeridianLink? Typically, when a financial institution adds one of your products, what were they using beforehand, if anything?

So they -- mostly, we touch new logo clients in our world where we find them where they're using an LOS from a core provider, think Fiserv, FIS. Jack Henry today, white labels our product and resells our product. But they own a LOS that is typical legacy, more of a workload-driven LOS solution than an integrated solution. We have the whole consumer journey from account opening through all the loan types that they can interface with analytics, auto decisioning and if they need to be in the workout room collections. And we offer a platform. We don't offer point solutions to our clients. We compete if it's not the core, we compete with some point solutions for account opening or credit card opening or auto. But the onus is then on the smaller financial institution to do the integration, analytics, and it's a pretty big lift in most cases. So, we tend to run about 80% of the operations or the financial institution can run about 80% of their operations on our platform if implemented and it makes a ton of sense for them from an efficiency and simplicity standpoint. And if you look at industry data, most recent analytics, we did that if you compare MeridianLink's client base in terms of loan growth to industry loan growth, our clients typically perform 20% better than loan growth than a non-MeridianLink client.

Got it. Got it. That's actually very compelling. Nicolaas, maybe something that would be helpful, just for the investors in the room. Clearly, this is a Software-as-a-Service, this is a SaaS solution. But the pricing here might be a little different given the nature of the customers that you're serving. So, can you just level set us not getting too specific on numbers, but how does the pricing model here from MeridianLink?

Sounds good. Our mortgage loan origination platform is paid on closed loans. The rest of our loan origination platform is all on loan applications that makes its way through the platform. And when we contract with a client today, there's a minimum committed monthly revenue component. That is tied to the number of expected applications that will go through our business. And then there's overage charges on a monthly basis that our clients pay. So historically, the company was less focused, call it, 3, 4 years ago, less focused on monthly minimums. But as we kind of grew and we've become more sophisticated and kind of took on an owner-operated business and professionalized it, we've introduced monthly minimums. And today, it's part of the contracting. You cannot run on our platform without having a monthly income and also about 3.5, 4 years ago, it's the first time MeridianLink started driving price increases into the customer base. So, yes.

Yes, absolutely. It makes a lot of sense. Nicolaas, I'd love to zoom in a little bit on the consumer LOS business, which, as you said, is the majority of the business right now. Can you just give us a sense of the biggest components and maybe just step back, that consumer LOS business, you were helping your customers help consumers originate debt, right? And so with that as a foundation, what are some of the -- what are the biggest components of consumer debt that you service with that LOS? Which ones have kind of seen the biggest growth in the last couple of years?

We've lived an interesting time since the pandemic because there's a number of natural kind of headwinds and tailwinds coming and going at certain times. But the biggest part of our loan -- consumer loan origination platform is auto lending. And you would have expect that it should be new auto. But given the headwinds with new auto, we see our pre-owned auto business being more buoyant than new. Looking at it from a volume standpoint, auto makes up roughly 50% of the loan applications that run through our platform. Also, we have good activity. And I think some of that is tied, or we believe some of that is tied to consumer sentiment around personal loans right now, credit cards, HELOCs. And part of it is the consumer, I think, is kind of hunkering down a little bit for what may come as more of a winter that lies ahead. And we've seen that in business trends before around 2008-2009 around the Great Recession and then early stages of COVID as well, where there was a spike in personal loans and credit card applications. But kind of bulk of our business is auto. And right now, given the market on new is more challenged, pre-owned is a pretty healthy part of our business there.

Yes. That's really interesting. Staying in the consumer LOS business, I think the other big piece of the broader LOS business is mortgage, which, of course, we said, right, is not surprisingly seeing headwinds this year. Maybe the question for you, Nicolaas is, what's your outlook for the mortgage part of the business, given what's happening with loan volumes? And do you expect it to continue to shrink as a percentage of the business?

Well, first of all, we've concluded the acquisition of OpenClose, which roughly doubled the mortgage LOS numbers in our business. For us, it's a strategic acquisition, but your question wasn't that. I'll get back to that. Let's look at mortgage. If you look at mortgage where you remove refinancing as kind of a volume contributor to a large extent and you look at kind of first new home purchases, it's a very stable kind of number within a smaller band. And that's how we think and that's how we model our business. Our mortgage LOS business is down 12%, where the industry is down significantly more than that. And you're going to ask the question why. And the reason for that is we've won a ton of new logos and clients and we've also added more value in partner integrations to our existing and new clients where we earn more per completed mortgage loan application than what we've done 3, 4 years ago. So, we've kind of strengthened or made our price point per mortgage application more robust through the integrations, but we've also enabled a lot of new mortgage clients on the mortgage side of our platform. In addition to that, over the last 18 months, we've announced a feature maybe 18 months or so ago, which is consumer debt wallet optimization where we take a big view of the consumer's debt wallet as a whole. And if you are running our platform and you have our mortgage product, you have the ability to do more for the consumer from a refinancing or a repricing or kind of trying to make the whole package being looked at together. And part of that also drove cross-sell into our existing depository customer base as well as a focus on depository institutions for mortgage. And that's a little over half of our new logo wins. And the traditional IMB market that we've served with our mortgage LOS had more exposure to refinancing to where on the depository retaking side of say, more stable, not on the fringe of the credit spectrum market. So for us, I think we started taking the right steps, maybe 1.5 years, 2 years out by planning to be more focused on our target market with mortgage, driving more mortgage integrations and value to our platform and we've seen less impact. Now, where does the bigger market going? I'm not an economist. I rely on what I get out of MBA and others. Refinancing volumes have significantly declined. I think in 2022, we will remember that as the one of the biggest volume declines and drops in the history of mortgage volume. It's expected to kind of go sideways mostly in 2023 based on the latest forecast in October from MBA. New home purchases are kind of going sideways largely. I think it's going to be in the band that they forecast. We're building our forecast and our modeling on what we have from MBA with some of our own intelligence injected into it. But I feel the biggest hit have been dealt to the volumes in the industry. We certainly have a -- if I can call it a more select and premium customer base because our clients tend to not operate on the fringe edges of the mortgage industry, if you look at the depository retaking institutions. And credit unions specifically are pretty risk-averse by nature because they act in the best interest of their clients. So, I'm of the opinion, kind of unless we see a severe recession, it's mostly going to be a sideways market '23. And hopefully, in '24, there's a low pickup and that's also what MBA is just putting out there for us.

Maybe this is a good segue just on to OpenClose, right? Because, I mean, you talked about how that will increase the size of your mortgage business. Tell us a little bit about the strategy behind that deal?

Yes, happy to. It's a business we got to know about 18 months ago or the principles at OpenClose. It had a hefty price stack 18 months ago, not a price tag, we were willing to transact around. But we kept the relationship working. Erik and our [ corporate ] team did a great job at staying in contact with them and as mortgage volumes declined, we just made sure they know we're an interested party. The strategy behind the deal is we have a great LOS product, but one of the areas that we need to invest in our business is a POS, and we traditionally partnered with many of the POS vendors out there, Blend, Roostify, Cloudvirga, SimpleNexus and others. And it makes sense for kind of a set of our customers that's kind of to in our world kind of mid-market and above. But a lot of our typical customers in the deposit retaking space would be very happy with an integrated POS. And we like and love what we found from a functionality standpoint at OpenClose. They made the pivot 4, 5 years ago to be more focused on depository retaking institutions and their workflow and their POS just works well, and we love what we found there. So, part of the strategy is to introduce their POS to our existing mortgage LOS clients and integrate that into our MeridianLink One platform. Our PPE, the pricing and packaging engine is superior and much deeper and ability to handle volume that theirs cannot. So, we're replacing their PPE engine here in the short term where their customers are gaining access to a more robust superior pricing engine. And then our mortgage LOS is already in the cloud, theirs is not, and we're going to be drifting the 2 mortgage LOSs together over the next 2 years. But if you have covered the POS side and you've covered -- POS is point of sale, and you've covered the pricing engine side, kind of how the loan gets run through and transacted is easier to bring together. So for us, it's a great fit. It removes our #1 competitor in the depository retaking space from a sales friction standpoint. And bigger picture, it doesn't matter where you fall on the ICE mortgage, Ellie Mae Black Knight deal, whether it happens or not, I think we're either going to be #3 behind Ellie and Black Knight or we will be #2, which will bring a good amount of opportunity in time to us.

Yes, absolutely.

It's a deal we like, we love it. We think it's going to make us a better player in the mortgage industry.

Yes. And I suppose it's only a question of time before mortgages eventually do come back, right?

Yes. I would tell you, I hate this feast and famine effect that you see with refinancing and mortgage, it kind of distorts what I think the industry really does. Part of what we're focused on in the deposit retaking space is not be as much exposed to the refinancing market. It's -- we think of mortgage as another consumer loan channel. It's one of the biggest -- is the biggest consumer lending market and business out there, trillions of dollars, we've historically not played meaningfully in it. And as we go into it, we just think of it, that's what our customers also need to be offering on our platform to our clients. So, it's a playbook that is different from the Ellie Mae and the Black Knights. We don't tend to be in the servicing business. We don't want to go as upmarket as Ellie Mae and Black Knight is. And I think it's fulfilling a sweet spot in kind of the mid-market deposit retaking the space.

Yes. That's interesting. Maybe if I shift over to the data verification part of the business, where, of course, there is also a component that is tied to mortgage. But there's also a growing component that is not tied to mortgage. And I think really where I'm going there is the TazWorks business. Right? And so maybe the question for you, Nicolaas, is how has that business performed since you've acquired it? And could that be, I guess, an important counterbalance, right, for the data verification business as mortgage these headwinds? Does that make sense?

Yes, it does. First of all, the beginning of your question, the business has performed well and better than expectations. It's in the employment tenant and background screening verification space. And it's the largest kind of mid-market independent provider and the leading provider in that market. Now, our mortgage [ TRA ] or mortgage credit link business serve CRAs. And the TazWorks business serves CRAs as well. It's kind of an overlap in the CRA space. And we've partnered with TazWorks before the acquisition a couple of years ago. They were in our partner marketplace and we were basically data partners with each other. It was a natural extension for us where there is some level of anti-cyclicality in the 2 businesses. It tends to perform really well in kind of times of economic growth with employee and hiring and is accelerating. And when folks are shying away from mortgage, the background tenants creating part of the business is performing well when you tend to not go into a mortgage, but become a tenant out there. So, it's a business that we have overlap within our CRA space and that also fits our data verification strategy very well. And today, it's also now integrated into the rest of our data verification integration into the platform that helps us drive other decisioning and analytics across the consumer lending side because in the past, as a partner, we would have interacted with them for data. Now, it's part of our platform and integrated.

Yes, absolutely. Very helpful. Nicolaas, I want to shift to maybe some questions on the model and some of the takeaways coming out of last quarter. I think MeridianLink made some adjustments to the guide this past quarter based on what's happening to -- with the macro and with mortgages, as most of my companies have. But there was also a component in there that had to do with mix shifts happening within the consumer LOS business. And so I was wondering if you could just help us understand the consumer side a little bit more. You mentioned 50% of the loans are loan volume on the LOS side are coming from auto. But maybe what are some of the -- what are some of the loan types that have maybe some more favorable economics versus ones that are not...

That's a great question. So, we did lower our forecast on mortgage, given that what we've seen from MBA. MBA took a big swipe down, about 10% down in October. And we felt prudent to be fairly soft in our expectations for the remainder of the year. On the consumer lending side, it's a business and it's growing and it's accelerating. If you look at the last 3 quarters, consumer lending grew 14%, 17% and 20%. So, it is accelerating. What we've seen in the business kind of mid-Q3 happening is 2 things. Our rates per application is starting to get impacted by some of our larger clients because of the acceleration in overall volume driven by personal loans and credit cards. So, they have gone through some volume tier where they pay a little less per application and that impacts what our revenue per application gets into our platform. The second item that we've seen is the shift that happened also have less pull-through on our partner marketplace. And I would call it rather a rise in other areas where personal loans, if you think at $2,000 or $5,000, or $10,000 personal loan, have less pull-through from integrations than an auto loan at say, $25,000 or $35,000. There's no Kelley Blue Book integration, and there's no -- it's kind of a smaller dollar value to MeridianLink in the bigger ecosystem that's connected to our platform. So, we've seen that in the early cycles of COVID for maybe a quarter and half or so happening. And then we've seen it also back in the days around the Great Recession, although, MeridianLink was a smaller business, but kind of a similar trend. And I can't tell you at this stage if it's going to be with us in that same manner through 2023 or not, I think we need to see if we really enter a deep recession or a light recession. To me, it feels like consensus is there will be some form of a recession maybe leaning later. My expectations would be we're going to live with a bit of a mix shift for a period of time. And then when the consumer sentiment gets more buoyant, I think folks don't feel the need to protect themselves with access to cash or credit, the same way they kind of feel in a down cycle, and that tends to kind of shift away from that type of mix shift we've seen recently.

Got it. Got it. I think that opens up a question, particularly just all the experience that you have in the space and MeridianLink, which is a company that's been around since the '90s when you've been through multiple cycles, right? So, I want to take advantage of that -- of some of that experience that you've got. And maybe a little bit of a loaded question, but given where we're right now with rising rates, how do you think about the different parts of -- and mortgages is self-explanatory, right? Like that we know what's going to happen. But with the consumer LOS business, we're talking about a little bit of this mix shift, maybe lower attach rate of kind of integrations and stuff. But in sustained periods of rising rates, what are the other impacts that you see to the business?

I would tell you, our demand environment has not changed. In fact, I would venture out to say we've seen some buoyancy in recent times. I was at a CUNA Mutual Conference in San Diego a little over a month ago, which is a very focused credit union conference. And the overall theme was positive, buoyant where the current rate environment benefits deposit retaking institutions on spread. They're actually more profitable and have the ability to do more with their business. And what I noticed at the conference as a theme was they feel they have the ability to better compete with fintechs whose cost of capital have significantly increased over the last, call it, 12 months. If you think about it, they don't run a balance sheet, they're not depository retaking. And credit unions are, they tend to -- well, they're also non -- they nonprofits, they're not a taxpayer. They act in the best interest of their members. And they're buoyant. They're pretty excited about the ability to compete full loans. They -- our conversations with our prospects and plans are positive. We've had -- even with the backdrop of some of the sentiment around Q3, we've had a decent bookings quarter in Q3, and we're expecting a very solid Q4 from a bookings standpoint. So, I think the big picture if you want to walk out with something here in the room today is we feel the demand environment is strong. Our customer or target customer is investing in digitalization trends. We are dealing with headwinds in mortgage, but that's not a forever situation times kind of it's a business that's quite cyclic in mortgage. The biggest decline of mortgage is behind us and it was driven by refinancing. And on the consumer lending side, the business keeps accelerating. And we've had a very successful selling and go-to-market playbook play out where we're sitting on 8 to 9 months of backlog that we need to implement over the course of the next 12 months or so. So, I'm pretty buoyant in terms of where we're at. I think we've weathered the mortgage storm better than many others, given that we continue to grow the business overall. We've made a strategic investment in mortgage because we believe where our acquisition target place is accelerating our road map there. And then our consumer lending business, we've got a great demand environment, strong backlog, and we're scaling to grow into dealing with the backlog. So although, the headwinds on new vehicle, although, there's headwinds from price and mix shift, the business is accelerating if you kind of look at 14%, 17% and 20% growth on the consumer lending side.

Yes. Yes, absolutely. You talk about the backlog. And I think I remember this a couple of quarters ago, you're talking about really needing services capacity to address the backlog that you've built, right, to implement it. And so I was wondering if you could just talk about that dynamic a little bit, to the extent you disclose, I mean, how much is there in backlog? And how are you on the services on that building of services capacity in order to deliver on that backlog?

So, we've done a very good job at staffing the services business. We found pockets of skills in the industry. Some of our competitors have gone through some layoff activity. And you don't always find the best people that gets laid off. You find the best people who's kind of disenfranchised after the layoff. But we found some good skills, which we -- training and ramping in the cycle. We've also build out partner capacity with a couple of partners that we're going to lean on to help us work through the backlog. Our business isn't a services business. I would love to over time to come to build out more of a partner ecosystem, where it's not just implementation-driven but also reseller-driven. But we've seen in Q3 a bit of a downturn in our backlog, which shows, and you've seen the revenue acceleration services grew about 30% in Q3, which is starting to show the acceleration that we're expecting to see with the increased capacity. My expectation would be, given the strength in our bookings and our pipeline, we've entered -- our Q4 pipeline is the biggest pipeline we've had in the history of this company. We've really got a good cycle going and momentum in our go-to-market environment. We're not adding a ton of salespeople right now, quota-carrying salespeople because I don't want to continue to add backlog that I lengthen it out. Our focus and our investments are right now more focused and geared towards services. My expectation is we're going to see a small uptick back in Q4 on backlog given the size of our quarter and being a fourth quarter and then starting to work it down again in 2023.

Got it. And of course, as you implement those customers, those customers are kind of the gift that keeps on giving, right, in terms of ongoing volume once you lock one in, the volume that they generate in the year following is the real value, if you will.

Correct. And none of the clients buy all of our modules. Our typical client today run about 4.5 of our modules that the business has out of the 14 modules. And we typically start with a customer with a handful couple and then we continue to add over time as we -- once we've landed, we start expanding within the customer.

Yes, absolutely. Well, so many more questions, but unfortunately, that's about all the time that we have left. Nicolaas, Erik, Gianna, thank you so much for the time here. I really enjoyed learning more about the business.

Thank you, Saket. I appreciate the opportunity to be here with you on stage and thank you for joining folks.

For sure.

Thank you.