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

Well, Sean, thanks for being with us. So just for everyone in the audience, I'm Ana Goshko, I cover technology and telecom credits at BofA and thanks for being at our 2023 Leverage Finance Conference Day 2. And we're thrilled to have MeridianLink and the company's Chief Financial Officer, Sean Blitchok. Sean, thanks so much for being with us.

Absolutely. Thanks for having me.

Great. So before we jump into questions. Any kind of opening comments on your part or anything to set the stage?

I don't think so. Another huge audience, which I appreciate. It's been a great conference so far and looking forward to the conversation.

Okay. Great. So MeridianLink is a cloud-based software vendor that sells applications to enable financial institutions, credit reporting agencies to manage consumer and mortgage loan origination workflows and account opening. I know that's a mouthful, but what I'm hoping to do is to go deeper into some of the various components of that and kind of make it a little more concrete. So I guess, first of all, could you just provide a brief history of the company? I know there's been some consolidation and some private and public aspects to it as well.

A brief history. Yes, we think about it in 3 phases. One was -- it's a founder led, founder originated through Tim Nguyen, our founder, bootstrapped company to $100 million. And his basic -- he's a Vietnamese immigrant. And he -- his basic premise was the lending process was too difficult. And so he started off his own technology. And really, if you want to think about it, building his own servers, everything on desktops, it was really something else in terms of some of the stories. Enter Thoma Bravo. Thoma Bravo was very interested in the company and its end markets and how MeridianLink was servicing those end markets and ended up acquiring the company, combining it with a company called CRIF, and so began the Thoma Bravo Phase 2 era. Thoma in 2021 now decided that the right answer was to go public. And so we took the company public. And for the last 2 years, have been building out what I would say, scale, number one, both in the technology and the products as well as our organization and the go-to-market and services and how we operate. And so I joined 18 months ago, coming from all large-cap public companies, and it was the first real hire -- maybe that had any public company experience. And so it's been a journey over the last 1.5 years, just with everything that comes with a public company, especially in my seat. So -- but it's been a wonderful journey and we've made a lot of progress.

Okay. And then your customer base probably 2 big customer sets. So the credit reporting agencies and financial institutions.

Yes. So we primarily serve financial institutions, think of assets under management, $100 million to $10 billion is what our quoted target market is. We have client financial institutions that are much bigger than that, but that is kind of who we target from a go-to-market motion and the CRAs make up the balance. We have around 400 CRAs. We're the only independent broker of that information. And so that isn't necessarily an area of tremendous growth, but it is very steady with a high contribution margin.

Okay. And then your key solution sets are focused on consumer loan, mortgage loan and then generally data verification is that right?

That's right.

Okay. And then on the customer sweet spot, you mentioned the size on the financial institutions. Why don't you target a larger financial institution?

Our product is -- I mean, if you think about those institutions that we -- 1,600 or so financial institutions. They're primarily -- they're 2/3 credit unions, 1/3 banks, small community banks. And our product fit is a fit for those customers because of its flexibility, of its configurability. And it's really for customers who don't have -- if you think about a really large bank, for example, they're going to have their own IT staff, they're going to be paying for -- the cores are going to occupy a large -- they're going to have a large presence. Our product is really a fit for the down market. Now as we grow and as our strategy evolves and as we become -- if there's one key takeaway, it's -- we will become the consumer end-to-end debt wallet, right? We will own the debt wallet of the consumer. And so if you think about that, then you start to extend upmarket a little bit from the stated $10 billion, and that becomes a lot easier. But when we're focused primarily on what we do today, consumer and mortgage, it really does fit for our target market.

Okay. And then you have a plethora of modules that you're selling to your customers, so kind of a 2-part question. So one, what are the most prevalent modules that you sell into each of the 2 main customer segments? And then where are you really trying to upsell and cross-sell the most? Where is the most opportunity for add-on modules?

Yes. So we're -- so if you think about our business, it's consumer is the biggest part of our business, and we like it there. It is 50% or so auto and whether that can be indirect or direct. We do personal loans, credit cards, account opening, everything across the consumer spectrum. We do a small commercial offering, small-medium business offering as well, but don't get into the commercial space as much. And then for the CRAs, we do mortgage credit link, which is data verification for mortgage. And then we do -- our acquisition of TazWorks, we do employment verification as well as background screening. So the data -- it's an interesting business cash cow business, but also we have a lot of connection points from that data that actually makes our platform more powerful, right? It gives us more data points, more valuable information to really do the automated decisioning, do the debt wallet optimization, some of the things that we've been working on the last year to 2 years.

Okay. And then on average, your average customer has about 4.5 modules.

4.5 modules, and you can think of that as a consumer is doing auto, personal loans, credit cards or a customer is doing that inside of their institution. Our goal is never -- we have 14 modules. Our goal is not to have all 14 modules live. That's probably not healthy for -- I mean it's not a good customer journey. But we are defining what the right number of modules are for the end consumer. And if you own the consumer end-to-end with the customer, it's probably like 8 to 9 is more of a target, not 14 but much higher than 4.5. So a lot of room for cross-sell.

So do you have the sales and marketing structure that you need to be able to drive that?

Yes. So we -- this is something that we've been working on. If you look at our financials, we've been heavily investing in go-to-market and services [ one-two ]. We hired our new Chief Sales Officer in the fall of last year and have really been looking at differentiating our sales. So -- if you think about a couple of years ago, we had 4 salespeople. I mean the business literally came to us and we would pick up the phone. Now we have a very active go-to-market action that's very focused on customer type, very focused on product type. We have AEs who are focused on business as well as the cross-sell motion, the cross-sell motion being very successful in 2023 in a down market. And so the answer is yes. The go-to-market team has scaled immensely and is very well positioned going forward. So we didn't -- it's funny coming from a big company, but we didn't have things like BDRs. We didn't have things like a revenue operations function. We just -- we didn't have them, and now we do. And so we're in a position to scale out. We built the functions countercyclically, right? So it's been a down year. We're still going to grow at 6%. And so it's a good business. And our EBITDA margins are still very, very healthy even with the investment. But we feel like we're in a very good position from an investment and an earnings perspective, margin perspective, both gross and net to continue to make progress.

Okay. So lower mortgage volumes have been a headwind for your business. How else has the current, let's call it, an uncertain macro environment. So inflation, the higher interest rates impacted your business?

Yes. A quick point on mortgage. We -- our contract structures are such that we have minimums, contractual minimums. And so I do want to point out that although mortgage has been a headwind, it's primarily been a headwind in MCL, in the data verification component of the business. From an LOS perspective, we troughed out in the summer, latter part of the summer. And the majority of our revenue is at the committed minimum now. And so there's nowhere for us to go but up. And we see good things on the horizon. We bought OpenClose in the fall. We've just launched our new POS system on our mortgage product. So we feel really good about mortgage. On the rest of the business, consumer in 2022, consumer was -- had a banner year. It just really performed outstandingly well. And we all remember right, SVB happened, interest rates start climbing up. I think it sent consumer into more of a shock than anything else. And there's just been a wait and see attitude and approach. And so we've seen auto is -- as I said, is big part of our business, auto down, right? And that had a lot to do with new car inventories, shortages on products and chips, that kind of trickled down to the new -- or used vehicle pricing went up. So we had a lot of dynamics at play, and that's starting to unwind now. So in 2023, we faced a lot of those types of headwinds, and we're able to make it up. We still saw a lot of volume at account opening, and we still saw a lot of personal loans, a lot of credit cards, but less securitized loans, mortgage and auto being the primary two. But that does -- again, we've weathered the storm. We're a very resilient company given our operating model, and it positions us very well for FY '24.

Okay. What about just the impact on Banks -- on Bank IT budgets and sales cycle?

Yes. I would say for financial institutions all in, it's been a really interesting dynamic. So consumers pulled back. There was credit tightening across the board. But if you think about the profitability of a lot of financial institutions, it's very healthy. And the demand cycle has been good for us. So we still see a lot of demand for our products in the market and bookings has been really good in 2023. Now those are bookings that take a while to actually implement and get live, but the future is bright. So I don't -- it's one of those interesting things where the consumer -- and you pick up the Wall Street Journal, you read -- everything is doom and gloom. But in terms of actual IT budgets and what we see in the market today, it is the opposite. People are willing to spend. And I think it's really a function of digital transformation, right? Digital transformation I say all the time is at least 10 to 15 years behind other sectors. And I think now is the time where a retooling is happening; a retooling, getting ready for mortgage, a second wave, getting ready for a more normalized environment. The financial institution sector is one of consolidation. We all know that, it will continue to be. And I think the ones that will be the consolidators, not ease are the ones that are focused on how to do things faster, how to do things more efficiently, how to -- who are in tune with the consumer, which is all about digital at this point. I asked my daughter -- just as a side note, I asked my daughter to go to the -- she's 20. We were taking an international trip, and I asked her to go to the bank to get foreign currency and she -- I think she had a panic attack. She didn't know -- she never been to a bank. She didn't know what a bank was. She has her own bank. So it's just an interesting tidbit. I mean, the world is changing, right? And it skipped -- it kind of skipped over online too, is like everything has moved from banking kind of a very short period of online, now it's all about mobile, right? So it's really how do you capture everything from the digital banking, account opening front end all the way back and ensure that you have the entire value chain captured right there on your mobile device.

Okay. I wanted to move into the competitive and pricing environment. I've got a series of questions. But one, are you able to capture new logos still? Or is there a pretty high kind of saturation of your TAM at this point and you're really kind of focused more on the cross-sell, upsell?

What I would say is in terms of our TAM and our SAM, we are not -- so we're 23%, 25% penetrated into our SAM. So that's a good number, but there's still plenty of runway for new logo. I think the new logo -- it has been weak or has been less than what we've seen in the past. And so -- but that's not a function of the SAM as much as our intention. We've seen a lot of cross-sell demand in our existing base, and we're still a small company. And so we focused on cross-sell intentionally because if you think about consumer to mortgage, which is the primary cross-sell use case right now, that's capturing exactly what we want to capture. If we can capture mortgage and consumer products, 80% of the battle is won. Because then you're going to start to see, again, this -- the debt wallet optimization, the automated decisioning, marketing, automation, the things that we do very, very well, but don't sell as much of as one-off products, start to cross-sell as well.

Okay. I think your customer accounts are slightly down year-to-date. Like what's driving that?

Yes. So again, mostly intentional, we've seen churn increase in the last couple of quarters. Go back 2, 3 years, we were signing up independent mortgage brokers left, right and center. We were signing up smaller institutions that were focused on refi, were focused -- were riding the mortgage boom. And I don't necessarily want that -- those as customers. And so I would say we're letting a lot of those customers go, and a lot of them are going bankrupt and are financially distressed anyway. And so I worry less about the customer count as I do ARR, and our ARR has grown 3x our customer counts over the last 5 years. And as long as that's the case, I'm fine. And that kind of goes back to my earlier comment about consolidation. We will continue to see consolidation in this market. And so if my customer count stays at 2,000 and we triple the size of the business, I'm okay with that.

What's your average contract length?

Another very positive attribute of our contracts. And nonetheless, if you think about it, it is very difficult to rip and replace. And so we have 3- to 5-year contracts on average to start, and we renew based on those 3- to 5 years. And so our average contracts, I want to say is, at this point, 24 months, 25 months, something like that. But that's all-in with mortgages as well. So from a consumer standpoint, very long-term contracts.

And then what's the best retention metric to focus on?

It's a great question. I -- so where in '24 -- when we come out with our guide for '24, where we'll release long-term targets, which we'll try to clarify this a little bit. Net retention gets a little bit -- you have to have a degree in this because volumes are included. And because volumes tend to fluctuate up and down, it can artificially affect NRR. So I would say gross retention is the easiest. Are we retaining what we started off with. And then I think -- again, I say that half jokingly, I think NRR is the right metric to focus on as long as we understand what's in there, right? So we -- I don't think customer retention is as important as are we retaining revenue. And then from a gross to net, you can really see the volume up and down and then layer in the growth algorithm associated with that.

Okay. And then price increases, have you put in price increases? Are they sort of programmed and you have any escalators in your contracts?

Yes. So another very positive attribute of the model this -- when we sign a contract, we obligate annual price increases. So in consumer, for example, our target is 7%. I will negotiate that with minimums. So if you're willing to sign up for a higher minimum, i.e., guaranteed revenue, we'll come down on the price a little bit. So we're realizing 3% to 5% across the board on price increases. And as part of our growth algorithm, and so it's a -- we can do better, I think. I think we can get past the 5%. But if you think about, again, in a normalized environment, our algorithm, volumes come back. We articulate 5% around that, but that can be much higher, 5% on new logo and 5% on the combination of cross-sell and price, which is -- those are pretty reasonable targets.

Great. So you did acquire OpenClose November of last year. So that's -- and some of the year-over-year comparability has got a little bit -- a little bit of noise in there. So what's your organic revenue growth this year?

Well, everything is organic is what my answer is to The Street. So everything -- even OpenClose is organic. If you want to exclude OpenClose, that's around $12 million of revenue. So we'll actually be about flat.

Okay. Okay. And then revenue growth targets from here.

Yes. Very easy to -- again, I'd kind of called out the growth algorithm, the 5, 5, 5; 15% is our stated currently as our stated growth target. I think that -- if you think about the volume environment, consumer grows every year for the last 25 years in our market at 7.5% to 8%. It just does and it has through the great recession, it has through the financial crisis. It just -- we had one -- there was one dip in growth and that for one quarter, and that was it. So consumer is very, very healthy. Mortgage is cyclical, but coming back. We already started to see that happening, coming back this quarter. And so we'll expect that in '24. So from a volume perspective, I think '24 is going to very positive. New customer cross-sell, however you want to think about it, we're signing up new business as well. And so I expect one of the key things that I'm focused on is we have to accelerate our services. We have to accelerate our implementations and get to revenue faster. And so that's been a key focus area. But just coming back to your question, I think it's 15% in a normalized environment. I -- we're easily a Rule of 50 company. And I think we can be a Rule of 60 company in -- with what we've built today in a normalized environment.

Okay. So yes, you've preempted the next question.

Sorry.

No, that's good. So on capital allocation and planned uses of free cash flow. So I think you've made several comments on the likelihood of additional consolidation. So how active is your M&A pipeline? And then what are other key uses of cash? And obviously, we're at a debt conference, so I want to understand like what your leverage target is and I know you've been buying back some stock, you still have some capacity left under your program. So plans on shareholder returns, keeping your leverage at a target and M&A? How do you rank those?

Yes. So kind of the inverse of way -- where you laid it, how you laid it out. I think M&A is a key focus for us. And everybody keep -- all the bankers keep telling me that the spreads are good -- the bid-ask spreads are getting tighter and everything is starting to narrow. And I don't necessarily see that. And I think that's a function of a lot of companies that came out in free money time and the capital structures that they have. And I think that it will happen in FY '24. You're going to start to see those companies running out of cash. You're going to start to see interest rates come down a little bit or stabilize. And I think that you're going to be able to write a bigger check easier. And so that's -- we have a very active M&A pipeline. I talked to at least a company a week and several -- a bucket of companies I talk to quite a bit. And so I think that's coming and inevitable at some point. We have been buying back stock. At the current price, we see a lot of long-term value for our shareholders in that buyback. And so that is now authorized again through '24. I just came out of the Board meeting a couple of weeks ago, authorizing more of that. So until -- we have a very good debt instrument in place, no punitive covenants. And so I don't -- I'm not worried about where -- our net lever is around 3x at this point. And so I'm not worried about that as much as I'm growing the business. And so that's what I'm going to be focused on for the foreseeable future. And if -- we kick off a lot of cash. And so if we have $100 million or so on the cash, on the balance sheet, then we will continue the buyback.

Okay. And then if -- I might as well ask the question. On the M&A discussions pipeline, are they tuck-ins? Or is there something more substantial that is -- [ potential ]...

I think it's both. I mean in our tuck-in strategy, we look for either technological innovation that can deliver speed and efficiency to our customers, right? Or two, new functionality that we don't have. But I think there are bigger -- I mentioned digital banking. That's something that I think really is something that would -- if you think about a cross-sell, it's just a no-brainer, right? For an LOS and a digital bank to get together, that's a bigger transformation type of deal. If you think about embedded finance, there's companies that are doing a really, really nice job, and that's becoming more and more commonplace. And so us getting ahead of something like that would be a transformative deal. Commercial is a little bit more tricky, right? So commercial would have to be a bigger transformative deal because they're very -- consumer and commercial are just very, very different.

Okay. Great. So I think we're out of time. Are there any key points we missed or key takeaways that you'd like to focus on?

No. We talked about a lot of it. Thank you for coming. I -- again, MeridianLink is very well positioned for next year. I'm looking forward to it. I'm looking forward to '23 coming to an end. And so a lot of positive things on the horizon for us.

Okay, Sean, thank you very much for coming...

Thank you very much for having me.

And joining us.

Absolutely.

Okay, great. Thanks.