Q3 2022 Meridianlink Inc Earnings Call
And business please.
Please refer to the disclosure in today's earnings release, and the other reports and filings we file from time to time with the Securities and Exchange Commission.
All of our statements are made based on information available to us as of today.
And except as required by law.
We assume no obligation to update any such statements.
During the call. We will also refer to both GAAP and non-GAAP financial measures.
You can find a reconciliation of our GAAP to non-GAAP measures included in our press release, which is posted to the Investor Relations section of our website.
With that let me turn the call over to Nicholas.
Thank you Eric Good afternoon, and thank you all for joining us.
I am pleased with outperformance in light of challenging macroeconomic conditions.
We believe our third quarter results demonstrate the resilience of our business model and we remain confident in our long term growth opportunities.
We delivered solid results, while advancing our strategic initiatives during the quarter.
But I didn't mean completed Q3 with GAAP revenue of $71 8 million.
Up 7% year over year, and 36% adjusted EBITDA margins.
Our consumer lending business remains strong growing at 21% year over year led by ongoing strength in personal and other non vehicle loan types.
We have experienced the fastest and largest relative increase in mortgage interest rates and history and currently see rates at a two decade highs.
A consequence of these higher rates is lower mortgage application and lending activity, which drove mortgage related rate when you're down to 21% of total only when you're in the quarter.
Sean will walk through our Q3 financial performance in more detail, but first I will focus on the key highlights of our business and we are investing for the future.
We see opportunities in current conditions.
Given that deposit taking financial institutions have higher net interest margins to date, we expect demand for our consumer lending business remained strong as customers and prospects seek ways to more effectively engage with their customers across the entire array of loan types.
We can see this momentum in our pipeline and successful bookings.
Additionally, we continue to invest to capture a disproportionate share of that 10 billion Tam while maintaining best in class margins.
In particular, we believe the opportunity exists now to create a differentiated alternative to the current mortgage lending software market leader by providing more advanced more open and more customer friendly capabilities.
This is why we announced today the acquisition of open close a leader in mortgage lending technology with a particular focus on supporting depository institutions.
We will discuss this more in detail in a little bit.
As we have outlined we have three ongoing areas of specific focus to drive accelerated growth.
First.
Engaging more deeply with our customers.
Expanding the capabilities of our platform.
And third empowering our customers to go more quickly and better serve their communities.
Top priority is engaging with our customers and prospects to ensure we can best serve our markets.
These conversations are an integral part of our go to market motion and we proactively facilitate them on an ongoing basis.
This is why we continue to invest in customer success as one of our priorities.
And we are seeing the benefits as customers are increasingly turning to meridian link to provide a full consumer lending experience.
A few recent wins include.
A longstanding credit union customers about ml consumer modules with over 33000 members.
Added to modernize the mortgage processes.
They extended their footprint by adding meridian lien mortgage to take advantage of a bite into that optimization technology, while benefiting from the increased synergies of a deeper integration, adding better cross selling functionality.
In another example, one of the largest transactions in the quarter was with an existing decision landmark customer.
As you know we gained this leading indirect lending functionality as part of the Dci acquisition.
This customer sort of new solution for direct consumer lending and account opening.
Our multichannel functionality and integration one of the day.
These are just a couple of the many wins in the quarter, we continued to see that meaningful engagement with our customers.
<unk>, both immediate and long term value to the market.
We have been investing heavily for the last few yesterday expand our platforms capabilities with innovative functionality.
As a Prime example, we have been moving our solutions from hosted environments to the public cloud.
Updating the user experience to reflect modern design and workflow.
We unveiled meridian linked one and 2021 as a cloud based multi product platform spanning the digital consumer lending journey from account openings through marketing loan origination and Decisioning.
But ideally one breaks down the silos that originally separated the parts of our business and reflected the divisions, we often see in the market.
We are proud to announce a quarter ahead of schedule the completed migration or the original meridian in Guam functionality entirely to the public cloud.
We are excited to bring the cloud benefits of increased security speed and scalability of deployment customers sooner than expected.
By expanding our platform capabilities, we attract new logos and drive cross selling which together drive more volume and revenue for Meridian link.
Finally.
Ideally empowers our customers to compete.
ROE and succeed in each market in which they participate.
We have a track record of enabling our customers to win more clients and capture a greater share of their clients' wallet by providing best in class functionality flexibility and automation.
While some of our customers early in their digital transformation all of a sudden looking to optimize the client's journey to enable a touchless learning experience.
Q3, we saw both accelerating software module delivery to customers and increased uptake of the services and functions to more deeply automate lending processes in particular services revenue hit a new high water Mark as software projects delivered in the quarter with 50% higher than in Q1 of this year.
And we delivered an integration with <unk> technologies to provide for a more highly automated account opening process as our customers continue to see strong new account growth.
Now I want to turn to our announced acquisition of open close.
I've had the opportunity to spend a good deal of time with the leadership team and I'm thrilled to be joining forces with such a knowledgeable and customer focus group.
With our complementary product strengths and customer basis, we expect current customers of both organizations to benefit from a combination in the short and long term.
I know I have said this before but I want to emphasize this point.
The diversity of our business and strong unit economics enable sustained investment in critical growth and scale initiatives across the economic cycle.
The open closed acquisition and integration will create a premier solution that will increase our win rate and drive cross sell motion within the depository market.
To conclude Q3 was another strong quarter for Meridian link.
We accomplished several milestones and remain focused on engaging with customers to help prioritizing basements that expand our platform capabilities and the revenue opportunity.
But it didn't link as a customer focused business.
Our flywheel starts with a focus on empowering our customers to compete and better serve their clients and communities.
We invest to serve our customers' needs, which generate more revenue for us as those investments drive better solutions for their clients.
Before turning the call over to Sean I would like to recognize the meridian team for achieving the great place to work certification for the third year in a row.
This award spotlights, the culture and community at Meridian link positioning us well for future success.
Now Sean will review, our financial results and guidance, including near term expectations for open close.
Thanks, Nicholas and thank you again to everyone for joining us on the call today I'd like to start by echoing the comments made by Nicholas Britta Enlink has before it largely untapped market opportunity to drive to a $1 billion and beyond.
Continue to balance cost discipline and strategic investments.
Near term, we are closely monitoring how macroeconomic conditions are affecting the market. We will continue to tightly control, what we can while providing transparency and predictability for our business.
As for third quarter results, we generated total revenue of $71 8 million up 7% year over year, driven primarily by increased consumer lending transaction volumes and product go lives.
This is in line with our reported overall growth last quarter. Despite the continued decline of mortgage market lending.
The mortgage loan market continues to be a headwind.
Down 22% from last year and accounted for 21% of overall Meridian link revenue in the quarter roughly in line with our expectations.
More specifically mortgage related revenue in the quarter accounted for 6% of our lending software solutions and 62% of our data verification solutions.
Lending software revenue accounted for nearly 73% of our total revenue.
And grew 17% year over year.
Excluding the impact from the greater than anticipated slowdown in mortgage related revenue our lending software solutions grew 20% year over year, our highest rate in FY 'twenty two.
Adjusted gross margin in Q3 was 69% inline with expectations.
Accounting for stock based compensation GAAP gross margin was 61% or.
Our non-GAAP operating income was $12 1 million and our GAAP operating income was $4 5 million.
Adjusted EBITDA for the quarter was $25 9 million, representing an EBITDA margin of 36%.
This reflects ongoing cost structure discipline, which allows us to focus spending growth on generating demand and delivering our product roadmap.
We strategically invested 38% more in sales and marketing and 28% more in R&D compared to the third quarter of last year adjusted for stock based compensation. We expect our strong long term return on these investments, but continued to examine each expenditure on its individual merits.
Now turning to the balance sheet and cash flow statement.
We ended the third quarter with $115 8 million in unrestricted cash and cash equivalents up $15 5 million from the end of the second quarter.
Operating cash flow in the third quarter was $19 6 million and free cash flow was $16 9 million or 24% free cash flow margin.
And the trailing 12 month period, ending in the third quarter operating cash flow was $88 1 million and free cash flow was $79 4 million or 28% free cash flow margin.
<unk> current cash position and ongoing cash generation provide protection in this period of uncertainty, while enabling targeted investments for us to build value for our customers and shareholders.
I'll now pivot to the guidance for Q4, and an update for the full year of 2022.
Despite strong momentum in our pipeline and consumer volumes, we saw a mix shift and our volumes that created a topline headwind for the business in the second half.
For the fourth quarter estimated total revenue excluding the acquisition of open close is expected to be between $65 million and $67 million compared to 64 million for the same period in 2021.
This represents an estimated increase of 2% to 5% year over year.
For the full year 2022, we are expecting total revenue between $282 5 million and $284 5 million compared to $267 7 million for the same period in 2021.
This represents an estimated increase of 6% year over year.
We are continuing to add new customers and increased module penetration among our existing customers at a new level that more than offsets the historic decline in mortgage market volumes.
Calling short term moves in the mortgage market precisely is difficult.
We have reflected an incremental decline of the mortgage market in our guidance.
We expect the mortgage market to contribute approximately 18% of revenue for the fourth quarter of 2022 as rates continue to rise across the third and into the fourth quarter.
I would be remiss, if I didn't welcome our colleagues at open close.
This combination is extremely exciting and reflects our confidence in driving value in the mortgage lending market.
Currently open close delivers approximately $1 million per month in revenue and has been growing at a high teens rate throughout this year.
On a standalone basis, the company is slightly better than EBITDA neutral and we intend to reinvest synergies into building a robust market solution for the future.
On a non-GAAP basis, our fourth quarter estimated adjusted EBITDA is expected to be between 19 million and $21 million, representing EBITDA margins of approximately 30% at the midpoint.
Our first quarter is typically.
Seasonal low in both platform volumes and new customer go lives, both of which will affect our reported EBITDA in the quarter.
For the full year 2022, our estimated adjusted EBITDA is expected to be between $170 million and $109 million, representing EBITDA margins of approximately 38% at the midpoint.
With that Nicholas Chris and I are happy to take any of your questions and I'll turn it back over to the operator.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by one on your Touchtone phone.
You'll hear a three pronged acknowledging your request if you'd like to withdraw your question. Please press star followed by two if you're on a speaker phone. Please lift your handset before pressing any keys.
Your first question comes from the line of Bob Napoli from William Blair. Please go ahead.
Alright, Thank you and good afternoon.
I guess trying to just.
Understand whether or not there's any market share in your guidance.
We see the mortgage market has slowed down but how much different is the mortgage market.
Your market share in mortgage and other.
Other products.
Does that help.
Hello. This is Nicholas and thank you for the question.
I'm not sure.
We fully understand the question.
Is it.
Mortgage.
S to consumer.
<unk>.
No I'm, sorry, just trying to understand whether your market share in the mortgage market.
Whether you feel like.
The.
Obviously, the mortgage market is more difficult, but it is the market share of Meridian link chain.
Change so is the reduction.
The reduction in revenue in your guidance.
Just from the macro of the mortgage market or is there some some market share loss and more than during any other product.
I understand now.
I appreciate that clarification. There is no change we continue to do well, we actually part of the reason for the open close acquisition is to continue to in the past.
Where we feel there is a down cycle.
It positions us to capture incremental market share in deposit taking institutions. So from my perspective. This is a volume driven impact if you followed MBA and other industry data sources, you will see that based on our recent call down as late as October 23rd where it's one of the <unk>.
Cooldowns by MBA. So this is all driven by what we're seeing in the market from a volume standpoint.
As well as if you follow the data that has been published by the MBA Youll see the trough was now not in 'twenty, two but it's extending into 2003.
So that's the conservatism that you're seeing from from our perspective.
And then on the auto business. So many auto market has been pretty tough.
As well.
What are the trends been in New York.
Our auto business versus the.
The market and then just lastly, if you could give any that the size of the open close deal I know you gave the revenue, but I was wondering if you can give any feel for that purchase price.
This is Chris So first speaking to your question on auto Auto has remained consistent and consistently strong this year.
We're seeing <unk>.
Improvements in the auto industry going forward. So more recently, we've seen that the inventory has increased on new by over 50% and that portends well for our success to continue in the future.
Now I'll pass it on to Sean to talk about the open close.
Financials, yes.
Yes, this will be in our Q.
The open close purchase price was $65 million.
Yeah.
So Chris this deal.
One we're investing in the debt.
We saw a lot of value and we can certainly see a lot of value going forward and the combined company.
It gets us to an at scale solution or approaching an app scale solutions for the mortgage products and they really have complementary set of features for us and so.
$65 million is the purchase price, but again it was it was a lot of value in the acquisition.
Yes.
Thank you I appreciate it.
Your next question comes from Alex <unk> from Raymond James. Please go ahead.
Hi, this is on for <unk>.
Just wanted to also touch upon.
Again can you talk about like your decision to go deeper into the mortgage thickness. It seems to be an area youre talking about diversifying away from as the year progresses, so what more to say.
R&D and <unk> functionality lives or does it more of a opportunistic by factoring into the macro thanks.
Okay.
This is Chris so first and foremost we've.
We maintained healthy momentum from a unit sales perspective over the last few years in mortgage.
<unk>.
As we go out into the market and look for opportunities to grow the business open close came to bear and it came to bear.
At a great value given the market conditions.
And that combined with our current unit sales momentum led to that led to the ultimate decision now when we think about the go forward.
What are how do we think about from a solutions that maximize our potential in the market.
Open close and Meridian, we have high highly complementary end market. So while open closed leans a little bit more heavily towards depository is which is highly complementary to the meridian like one customer story.
Were going away.
Mercury like mortgage 10 slightly over to the independent mortgage banker side. So there are some nuances between those two that will bring together that will add more value to our customers and being more specific over the short term we plan to leverage open close as point of sale and Configurable point of sale for all of the customer base.
As well as for on the mortgage side, we have a great position from.
From a competitive perspective on our pricing and packaging engine to serve the broader market. So that'll be that our first foray in to bring the best IP together for both customers Thats going forward.
Yes, and this is Shawn I'll just add that.
Competitively, there's really puts us in a unique position right. So I think that puts us in a position to compete with our top competitors going forward and the combined company.
Got it.
As a follow up question as well so with the Meridian week background like wrapping up the migration.
Just curious are there any other areas you are looking to like organically investing in how you grow the profitability around and really I think one platform.
Okay.
This is Chris I'm very excited one on completing the cloud migration and then second and equally exciting spring up the R&D capacity that was involved in moving to be a cloud native infrastructure.
So that that capacity will be directed towards supporting our customer promise, which again, that's nicholson Sean highlighted is around enabling our customers to out compete for consumers and we do that through speed.
You are fast and how you engage with consumers you can help them you can help our customers win.
And we will do that three ways from an R&D perspective, first is enabling tools around instant decisioning.
The second is supporting the first is the back office automation and verification tools that enable that instant Decisioning and then finally third now that were in our cloud infrastructure and this is coming to reality today.
To provide our customers benchmarking at how they're performing at every stage of the origination process. So they know where to invest and where to partner with us to help realize that result of speed.
Dan.
One thing.
Really plays out well and this is our goal on speed and helping our customers grow directly ties into our pricing model, where when our customers grow murdy on that growth.
Yes, I agree.
Just add.
One other comment.
In terms of organic growth I said this in my prepared remarks as well but.
Sales and marketing grew 38%.
Year on year and that is a really key strategic.
Investment for us and so we.
With volumes down in mortgage as an example, this is an excellent opportunity to what I call sell through it right and increase the installed base.
And we continue to build out our sales leadership team.
Our redefining our go to market motion.
And there will be our bookings piped.
Pipeline continues to look strong and will they get stronger over time because of this investment. So I agree wholeheartedly on the R&D and the roadmap piece and there is also the go to market piece, which I think is critically important as well.
Thank you.
Your next question comes from the line of Parker Lane from Stifel. Please go ahead.
Hi, Thanks, It's Matt <unk> on for Parker planning on opening closed topic, how will these solutions.
In the future home solutions price and with the solutions you currently offer and then how will how should we consider kind of the EBIT.
What would be accretive once kind of brought into your business model.
So coming out from a price perspective.
I find that bolt solutions are competitively priced in the market and where within the pricing. We have we're realizing economics that we find favorable as well as gaining our unit momentum. So I don't expect any change material changes there beyond our normal price increase rhythm as we invest in our products and create more value for our customers.
I'll hand onto Sean on the EBITDA realization aspect.
Yes, I mean, clearly we're not guiding to 'twenty three.
Our earnings for Q4.
Our EBITDA neutral, but we do have plans for the combined company company obviously.
Terms of synergies.
We also.
We will see a lot of top line synergies from the combined company.
Kind of from a product perspective complementary products.
A broader customer set and so while again, we're not going to talk about the go forward FY 'twenty three numbers I think you can start to start to see where EBITDA will improve through both the top and bottom line.
Got it that's it for me thanks.
Dave.
Yeah.
Your next question comes from Nick Crammer from Credit Suisse. Your line is open.
Hey, guys. Thanks for taking my question I, just wanted to dig into the strength in lending solution and ex mortgage holding up nicely I was wondering if you could break that out between kind of like a same store sales from existing customers as well as contributions from new customers.
And then related to that.
A lot of positive commentary on the pipeline I was curious as to what kind of revenue visibility you have going into 2023, excluding the mortgage market.
Thank you.
Okay.
Hey, Thanks, Sean.
<unk>.
Yeah.
So.
Can you repeat your first question I, just want to make sure I'm answering the question appropriately.
Yes, sure. So the strong growth in lending solutions ex mortgage in the quarter, how much of that ballpark was from new customers that you didn't have last year versus existing customers.
So a lot of it is same store sales is what I would say, we do our bookings this year.
With new customers.
Don't disclose bookings, but I would say we are seeing a healthy amount, especially given the market, but most most of it is coming from same store sales.
That is in line with the volume that we're seeing we're seeing healthy volumes with our existing customer base, that's supporting the top line, especially in consumer.
<unk>.
And then sorry, I just lost your second question as well.
No worries.
Theres just a lot of positive commentary on the call.
As to the pipeline.
As had been growing at I was curious as to what kind of revenue visibility that gives you going into 2023 kind of backing out the uncertainty, but the mortgage.
Yes, sorry about that so in Q3.
We had a really good quarter, we have a strong pipeline for Q4. So we have good line of sight into FY 'twenty three in terms of revenue.
There is always a how fast can you turn it on component. So one thing we haven't talked about is is our backlog and services, which actually had a really good quarter in Q3 backlog Kim came down we're performing with velocity.
Inside of the services organization.
I do think with.
With the bookings and the new pipe.
What we're seeing in Q4, it's yet to be seen where the where their backlog lands.
But to answer your question specifically.
Good visibility into FY 'twenty three right now what we are grappling with more is the predictability.
Alrighty around the volumes.
Understood. Thank you very much.
Thanks, Nick.
Your next question comes from the line of Andrew Schmidt from Citi.
Please go ahead.
Hey, guys. Good evening and thanks for taking my questions first I wanted to start off just just about just demand in terms of where you're seeing sort of the pipeline across consumer LLS I remember I think last quarter, you mentioned strength of HELOC.
And things like that but just curious if there is any sort of changes in terms of where you're seeing demand along the platform. Thanks.
Yes.
This is Chris demand has remained.
Very consistent and I think youll see this as you look across the broader bank continuum is that they continue to invest from an it budget perspective, particularly on digital transformation and this is reflected in our pipeline. So that's looking from MLC consumer.
Perspective, it's largely consistent and when you look at the mortgage component.
We see consistent demand or even increasing demand from a depository perspective as those organizations look to retool and then on the independent mortgage bank side were targeting organizations that have the scale such that they can to make that investment. So it's largely unchanged and if I was to call. It any change at all as we have seen an uptick.
In our home equity demand as some lenders look to create a broader portfolio. One example, as we just went live with low depot on their home equity product.
That said, the largely unchanged and we're making investments accordingly, yeah and I'll just add.
One of the things that I've been pleasantly.
Prize, but it's good is that that profile has remained unchanged, especially dividend the mortgage market. So while.
There are things like volumes that we can't control that are more macroeconomic what we can control is what we saw in our installed base and the projected.
Pipeline going into 'twenty, three is very healthy around mortgage and so consumer continues up until the right.
Mortgage has been healthy as well and so I think it's again it speaks volumes to the acquisition.
Our competitive position and the combined.
The company going forward and what it's going to be able to do what the opportunity is.
To a point, where there's a leveling off and even.
Increase in the volume on mortgage.
Thank you for that and that's actually a great segue into my next question I wanted to flip sides of the sort of decrease in loan volume.
Revenues associated with that is that you might have a little bit better visibility of that kind of starts to bottom out eventually at some point.
Yeah.
Is there a free.
<unk>, we can start to think about in terms of long term growth.
Or any updates in terms of how you think about long term growth as we see mortgage start to hopefully settle out in the foreseeable future just curious to get.
Any updated thoughts there. Thank you.
Okay.
Yes.
This is Chris I assume this is a question around our own volumes. So ill answer in two parts one reinforcing what Sean said, we're going to sell through this drop and we're going to leverage it as an opportunity to grow this business and invest in it and then the second element is I always think about the mortgage market as purchasers are relatively <unk>.
<unk> over time, although more recently that has proven to be difficult as the system saw a shock.
The quick increase in interest rates, it's refinance those that go up and down so as I look forward to.
Looking to the future when Refis come back as they always do we will be very well positioned to capture those economics, and then again reinvest in the business for future growth.
Okay. Thank you very much guys.
Thank you.
Your next question comes from Matt Van <unk>.
<unk>. Please go ahead.
Hey, good afternoon, thanks for taking the question.
I guess first are you seeing any kind of.
Either calibration or studying out of your customers' willingness to get out there and more aggressively market different lending products.
And sort of how thats met with consumer demand now that ray.
The rate of change of rates has slowed and are they sort of a little more comfortable with.
Putting putting as much capital to work here to get lend it out or are you still seeing people kind of sitting back waiting for rates to move even higher before they maybe more aggressively push to get more especially on the consumer side lending done.
Yeah.
Okay.
Hi, Matt This is Nick listen Great question.
We're not seeing a change in the demand environment right now.
The momentum is there as shown in the cross reference a strong third quarter in bookings and we continue to see pipeline build.
Also from a overall standpoint remember our customers are largely to Basel III, taking institutions and they do well with the largest spread.
And.
What we see today is not a slowdown in the digital transformation in fact based on interest from customers.
To continue to engage and invest while this.
This period of dislocation exists from an economic standpoint.
Yes.
This is Chris as well from a consumer marketing perspective going back to our customers our customers target consumers on the higher end of the credit profile.
And given the health of those consumers there hasn't been a reason for them to back off from that approach and I havent heard consumers, bringing that up yet our customers bring that up yet.
Okay very helpful and then.
Obviously, another another deal here, but just curious longer term how you're.
Adjusting your M&A outlook.
Or what are prices are valuations looking like and especially in the private markets have they started to come down and more more alignment with the public market valuations are you still seeing a disconnect in how are you approaching that from the overall M&A strategy. Thanks.
I think last time, we talked Matt we were talking about the appetite for M&A clearly, we have an appetite for M&A I think the private public question.
It's starting to become clearer.
I think the expectations of the private market are starting to come.
<unk> in line with the public market, if not if not inline.
But that doesn't change our appetite will continue to look for.
Growth opportunities that are adding value to <unk>.
Our customers long term.
We will continue to look for value opportunities former at Enlink and open close is a perfect example of that.
And so.
Again private or public.
It doesn't really matter as much as.
How much value, it's delivering to our customers and how much value, it's delivering to our company.
Yes.
Great. Thank you.
Thank you Matt.
Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by one.
Your next question comes from Bob Napoli from William Blair.
Right.
Got it.
Charlie.
Great.
Thanks.
Sure.
Condition.
<unk>.
Yes.
Yes.
Hey, good morning.
Sure.
Yes.
Thank you.
Operator can you talk a lot.
Thank you I think that was somebody else's earnings call. So.
There are no further questions at this time I will turn the call over to Nicolas for closing remarks.
Thank you operator.
As a reminder, meridian link enables the details the transformation of our customers.
In an area of spending they continue to prioritize and we've discussed that today we.
We help our customers get the most value out of their digital spend so they can compete and succeed in the modern marketplace.
We as a company <unk> there any enlink is basically employees are driven by helping our customers succeed and that gets noticed in fact, but any enlink was recently named as number 54 on the 2022 global IDC Fintech 100 ranking.
The annual ranking represents the world's leading hardware software and service providers to the financial services industry and this was our first year participating.
I am extremely proud of this achievement and I am confident in our ongoing success. Thank you for joining us today. Thank you operator.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you disconnect your lines.
Okay.