Q2 2023 MeridianLink Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the region links second quarter 2023 earnings call. At this time, all participants are in a listen only mode.

I'll say the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded I would now like to turn the conference over to your first speaker today, Jennifer with Illini Jenna. Please go ahead.

Good afternoon, and welcome to Meridian line second quarter fiscal year 2023 earnings call.

We will be discussing the results announced in our press release issued after the market close today.

With me today, I'm Radian links Chief Executive Officer, Nicholas Watts, Chief Financial Officer, John glad job and President go to market.

Before we begin I'd like to remind you that today's conference call will include forward looking statements based on the company's current expectations.

Forward looking statements are subject to a number of significant risks and uncertainties and our actual results may differ materially.

For a discussion of factors that could affect our future financial results and business.

Please refer to the disclosure in today's earnings release, and the other reports and filings.

When times are that 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 today, 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 Joanna good afternoon, everyone.

Thank you all for joining us for our second quarter 2023 earnings call.

I want to thank the entire meridian linked team for delivering another solid quarter in the midst of the current macroeconomic backdrop.

Continue to see healthy demand for the <unk> one platform.

Demonstrated by the business highlights in the quarter.

There are a few key areas that later our results.

We are continuously improving our platform capabilities through.

Product innovation and value added partner integrations.

With another quarter, the Pascal capabilities of the Meridian link one platform continue to drive new logo and cross sell momentum.

Our GAAP revenue grew 3% year over year to $75 4 million and an adjusted EBITDA margin of 36%.

Which is below the second quarter guidance range on revenue and at the bottom end of the range on EBITDA.

This was due to a $2 3 million reduction in revenue related to a commercial dispute contract acquired through a past acquisition.

John will provide more details on this shortly.

Adjusted for this reduction.

<unk> performed in line with our guidance of $77 7 million and grew 6% year over year and an adjusted EBITDA margin up 38%.

This demonstrates another quarter of consistent growth and solid operating performance, which is a great achievement in the face of the current environment.

On that note.

I'd like to take a moment to touch on the macro trends that are impacting our business.

We continue to be in times of change and are witnessing the economy trying to find a more natural site consumer.

Consumer spending has remained reasonably healthy however, we continue to see pressure on lending volume as anticipated.

While we have seen positive signals in economic trends recently.

Interest rate levels are ultimately what drives our transaction based business model.

While there is economic uncertainty we are continuing to focus on what we can control.

Executing well on our scaling initiatives in selling through the headwinds.

On a positive note we continue to experience strong demand for our software solutions, finishing another quarter with solid bookings momentum and successful services delivery.

In line with our strategic investments in our go to market engine and services capabilities.

It is the credit Union and community banks that we have seen remains resilient because of the innovative mindset and use of technology to quickly adapt to the evolving consumer lending needs that exist today.

As the leading provider of a modern digital lending platform, we see customers continuing to choose Meridian Lake one to best position the business to do exactly that what.

The house without pipeline reinforces this view.

Irrespective of the economic cycle. The market is undergoing increased digitalization and we believe that any Italy is at its forefront.

Whether it's more competition consolidation or regulation, we expect that there will be pressure on financial institutions to automate their lending processes.

In each of these scenarios.

Search and digital transactions will accrue to our beta site because of the volume base business model and the fact that we serve the met market.

As we wait for markets to normalize we remain laser focused on variety of link being the most trusted financial services technology platform.

Engaging with our customers to best position the business this quarter affiliate growth.

Whether that be through a one stop shop for their daily needs.

Premium customer service.

Our goal is to optimize the success of our customers, we continue to realize our growth through the asset base.

In a few minutes Shaun will speak about our Q2 financial performance and provide 2023 third quarter and full year guidance.

Before that I would like to give several updates on our three areas of growth acceleration.

The outperformance.

Engaging more deeply with customers.

Second expanding the capabilities of the platform and third in Saudi and customers to grow more quickly and better serve their communities.

Let's start with a few highlights that demonstrate the success, we have had engaging with our customers across the organization.

As I touched on briefly bookings momentum Western Australia in the second quarter, where the majority is driven by cross sell and upsell.

A great proof point of how we have deepened our engagement with customers.

Teams are focused on working with them to optimize the use of meridian link one by increasing their module penetration.

Let's look at a couple of cross sell wins in the quarter that demonstrate our success.

We signed 14 consumer lending customers onto our mortgage lending solution in the first half of the year.

This is the perfect cross sell use cases, but I didn't like one is different bias within the same organization come together and make a strategic decision to provide digital lending capabilities on a singular platform to their clients. We see this as a fantastic signal that our platform strategy is working.

Our sales and services teams partnered together to cross sell the capabilities of the <unk>, one platform to an existing indirect lending customer.

While the initial engagement was focus on direct auto lending the customer also selected home equity lending and inside our business intelligence tool to gain visibility across the platform improve workflow efficiency and scale their lending solution.

As is often the case when the customer engage with Meridian link one module quickly saw the value and adopted multiple modules to help accelerate growth.

We also deepened our partnership with an existing radio link one customer we tend to obtain to deploy a more automated collections module.

Improving workflow efficiencies the gastro space last time recovering late payments and more time, maintaining positive client relationships.

This points to our platforms focused on helping customers navigate the financial journey, all the clients by providing an end to end digital solution.

In Q2, we also engage with over 1001 on the customers and partners for three days at our English and use it for them breaking last year's record of attainments.

The event led directly to significant pipeline creation or new logo cross sale and partner integrations.

It also provides us an opportunity to recognize <unk> value customers for the strategic thinking.

<unk> and effective use of the Meridian platform, where the first day of the Orca Awards.

As a last point on our engagement efforts in the quarter, we made great progress in our services delivery capabilities.

Q1, yes.

Year over year services revenue growth has doubled.

Straining the success of the structural changes we have made to increase productivity.

Our strong services quarter takes us up well for future growth.

Our customers remain the focal point of everything we do and our ongoing engagement across the customer's seismic areas of the organization.

This commitment as.

As we serve more customers with greater efficiency, we accelerate growth for the business.

Turning to our second area of growth acceleration expanding the capabilities of the platform through product innovation and our partner network.

I think you'll see our sales motion, we are focused on creating value through the native capabilities of Meridian Lake one.

First we enhanced our platforms advanced decisioning capabilities to use a wider variety of customizable attributes in the loan decisioning process.

With this automated logic customers.

Customers price loans more effectively.

<unk> bought out of satisfaction.

Customers can now move beyond traditional scoring methodology and expand their reach to more credit worthy consumers faster while driving profitability.

In addition, we automated the loan and account cross selling workflows on the <unk> one platform removing the need for the loan officer to instead of being manually.

It is now is a place for our customers to increase cross sell volumes as they deepen their visibility of demand with the use of the platform.

We released a digital banking API commodity linked engage.

Marketing automation solution that enables customers to present, the slice office through online and mobile platforms.

This expands the customer's ability to reach target consumers through their.

Third digital channel.

Similarly, increasing conversion rates.

And England partner marketplace wins, we had a very successful quarter, enabling partners and we want to highlight one.

In the quarter, we added some integration with cortex.

National infrastructure and integration Technology company.

By combining comparatively what platform with broad access integration capabilities, we can rapidly integrate with other core providers.

This accelerates our customers' end to end lending cost base driving automation for the lender and faster decisioning for the consumer.

By expanding the platform's capabilities to create a seamless and personalized bottle of experience customers can now capture and retain more demand for the lending solutions, Inc. Increasing revenues format at Enlink.

Turning to our third area of focus, but I didnt linking palace customers to compete grow and succeed in the markets in which they participate.

We have a track record of enabling customers to win more clients and capture a greater share of the clients that wallet.

Basically if you go to market highlights in the quarter, where the customer chose meridionale to empower the growth journey.

For one we were excited to announce the go lives space Coast credit Union.

The largest credit Union in Florida.

Enlink inside.

Intelligence tool.

As a result infant approvals increased by over 25% and approximately 95% of OLED applications.

Our process and decided within one day.

Spice Coast credit and improved member experience is a testament to their expanded use of the meridian link one platform.

In addition, we achieved numerous high value platform sale wins this quarter.

As we evolve those demos.

But motion to sell but at Enlink, one customers are increasingly seeing the benefits of signing up with a trusted partner that enables them to offer multiple differentiated lending capabilities.

For example, we won our largest new logo deal in the last year with a customer looking to transform their infrastructure into a growth driver.

As part of the sales process as consulting team engage with the customer to accelerate growth across their portfolio of meridian linked consumer opening auto HELOC and business modules.

Another customer chosen readying lingua platform for its consumer home equity and business lending capabilities with.

We want the deal based on our ability to automate the decisioning process and improve operational efficiencies across the lending workflow.

These improvements streamline the client experience from application to funding sharpening the competitive edge of our customers' needs in the market.

I wanted to close where I began and thank the team.

They have a focus on customer success is driving the meridian linked continues to deliver consistent growth and healthy profitability levels. We.

Benefits from having a high quality resilient customer base dedicated to contributing greater value to their clients through connected and integrated bought our experience.

At Meridian link, providing a seamless innovative digital lending platform that enables our customers to deliver on that promise.

Central to everything we do.

I think the continued uncertainty through the remainder of the year, we are staying highly focused on executing our strategic initiatives.

We will continue engaging with customers to meet and exceed the digital lending needs.

By providing excellent customer support and innovating to expand our platform capabilities.

Flywheel starts with empowering our customers to grow as they automate the lending process and deepened visibility of demand where their use of meridian link one.

We strive to be the most trusted financial services technology platform acquisitions, our customers succeed.

I will now turn the call over to Sean to talk about our financial results and guidance.

Thank you Nicholas before diving in I would like to take a moment to echo my appreciation for the team's accomplishments this quarter.

Our business highlights demonstrate great progress against our objectives across the organization.

We're operating in a period of transformation for the business.

And in the midst of that we continued to execute well and empower our customer success.

Nicholas spoke about our achievements in the quarter and set the stage on the macro front.

I will further review how those trends have been impacting the business.

We have a business model that continues to perform through macroeconomic headwinds.

Our insulated by our contracted minimums and the majority of our non mortgage lending customers continue to see volume growth above their commitments.

As anticipated we continue to see a deceleration in that growth driven by the inverted yield curve and liquidity headwinds.

Despite the unprecedented macroeconomic dynamics at play.

There are a number of factors that give me great confidence in the business going forward.

First we have an industry.

<unk>, leading solution that enables customers to perform through the economic cycle.

Second quarter.

Quarter after quarter recapture strong demand for the Meridian link one platform, which will be a tailwind for the business.

And third we are seeing early indications of the anticipated normalization of the economy.

With that we expect that there will be an upside to our total growth is lending volumes recover across the platform.

While this recovery is happening with <unk>.

To counter cyclically and strategically invest to build the foundation for <unk> next phase of growth.

Now, let's review, our second quarter financial performance.

We generated total revenue of $75 4 million up 3% year over year.

Which was below our second quarter guidance range of 4% to 8% year over year growth.

As Nicolas mentioned this was due to a $2 $3 million reduction in revenue related to a commercial dispute for the reseller that we acquired from our acquisition of Street shares.

After further negotiations over the past quarter. We believe we have made the right business call to account for this accordingly, despite having satisfied our contractual obligation.

While immaterial in size I want to provide transparency around the one time nature of the impact as it is not indicative of the true revenue or operating performance of the business.

Adjusted for this reduction Murdy Enlink performed in line with our revenue guidance at $77 7 million growing 6% year over year.

And our adjusted EBITDA margin was 38% in line with the top end of our guidance range.

As CFO I am dedicated to improving our accounting and M&A processes.

We accounted for this dispute in full in the quarter and have made great progress reshaping, our company's financial processes and systems to support the business.

We do not anticipate any further one time M&A related items from our past acquisitions.

Despite the revenue reduction we completed our escrow obligation for the Street Schurz transaction, which resulted in the release and receipt of the $30 million escrow back to the company.

This will fuel our strategic allocation of capital, adding value to customers at the right price.

We will continue to scale organically and Inorganically as we believe that meridian late can become a 1 billion dollar plus business and we strive to be the go to partner for digitalization for all financial institutions in our market.

Now, let's look at our software solutions revenue breakdown.

As the primary driver of our lending software solutions non mortgage lending revenue contributed 87% and grew 1% year over year.

Adjusted for the $2 3 million in revenue reduction non mortgage lending revenue grew at 5% year over year.

Mortgage related revenue within lending software solutions inclusive of open close accounted for the remaining 13% of the total.

Combining both mortgage and non mortgage total lending software revenue accounted for nearly 74% of total revenue and grew at 8% year over year.

Adjusted for the $2 3 million revenue reduction total lending software revenue grew at 12% year over year.

Turning to data verification software solutions revenue accounted for nearly 26% of total revenue and declined 8% year over year.

This was driven by a 12% decrease in mortgage related revenue, which represents 61% of total data verification software solutions.

Staying on the topic of mortgage I'd like to take a minute and acknowledged that the decline in our mortgage volumes appears to have hit a trough in Q1.

This quarter total mortgage related revenue was up 13% from last year and generated 26% of overall meridian link revenue.

Which is a continuation of the sequential improvement we have witnessed this year.

As the mortgage market begins to recover we are staying focused on our platform strategy of cross selling mortgage lending to our consumer lending depository customers.

We believe we continue to outperform the market because we have scaled our solutions to be on the offensive.

Taking more share increasing use of meridian link one and providing the fit for purpose capabilities that enable customers to win.

The other 74% of our business continues to grow which is primarily led by the demand from existing depository customers for end to end consumer lending capabilities.

This brings me right back to our value proposition.

Merging link one enables customers to provide a frictionless lending process improving the consumer's experience.

As a customer sign on more modules the gain the ability to cross sell different loans to the consumer.

Turning to their trusted credit Union or bank using Meridian link one consumers can fully optimize their debt wallet.

Top of mind priority, especially in a high interest rate environment.

Moving to profitability accounting for stock based compensation GAAP gross margin was 62% adjust.

Adjusted gross margin in Q2 was 70%.

Before turning to operating performance in the quarter I'd like to break down the year over year increase in our operating expenses.

Compared to the second quarter of last year, G&A increased 17% on a GAAP basis, and 4% on a non-GAAP basis.

R&D increased 12% on a GAAP basis, and 6% on a non-GAAP basis compared to the second quarter of last year.

On a GAAP basis sales and marketing increased 57%, while on a non-GAAP basis sales and marketing increased 50% compared to the second quarter of last year.

The growth across our non-GAAP operating expenses was primarily driven by additional head count and increased compensation costs.

We continue to selectively invest in talent that supports our customer centric areas of the business that accelerate growth.

Now turning to our overall operating performance.

GAAP operating income was $1 5 million and non-GAAP operating income was 11 9 million.

On a GAAP basis.

Our net loss was negative $5 2 million or negative 7% margin.

And adjusted EBITDA was $27 1 million, representing an adjusted EBITDA margin of 36%.

Highlighting the true operating performance of the business, adding back the $2 3 million of one time revenue reduction adjusted EBITDA was $29 4 million.

Adjusted EBITDA margin of 38% in line with the top end of our guide.

Now turning to the balance sheet and cash flow statement.

We ended the second quarter with $108 9 million in unrestricted cash and cash equivalents, an increase of $31 1 million from the end of the first quarter driven by the street shares escrow release.

In the last 12 month period, ending in the second quarter operating cash flow was $61 1 million or 21% cash flow margin and free cash flow was $51 4 million or 17% free cash flow margin.

Burden links ongoing cash generation provides protection in this period of uncertainty, while enabling strategic capital allocation for us to build value for our customers and our shareholders.

I'll now pivot to guidance for Q3 and update guidance for the full year of 2023.

We have been guiding to a second half recovery in mortgage related revenue and are beginning to see a rebound in our volumes and through industry sources, such as the mortgage bankers Association.

However, this recovery is happening at a delayed pace, if we compare current forecast to beginning of the year forecast.

While we have been adding new customers, increasing cross sell and accelerating ACB release.

The one time reduction in street shares revenue and this delayed recovery in mortgage volumes is substantial enough for us to lower our guidance range.

For the third quarter estimated total revenue is expected to be between $76 million and $78 million.

Paired to $71 8 million for the same period in 2022.

This represents an estimated year over year change of 6% to 9%.

For the full year 2023, we expect total revenue to be between $302 million and 306 billion compared to $288 million for the same period in 2022.

This represents an estimated increase of 5% to 6% year over year.

For the mortgage related revenue, we expect the mortgage market to contribute approximately 23% of revenue for the third quarter of 2023 compared to 21% for the third quarter of 2022.

As a result of the delay in the recovery of the mortgage market. We expect this level to continue through the year.

To provide more color around the growth drivers and our total revenue.

The mortgage related revenue guide implies a continued decline in data verification revenue given the impact of tough comparable in 2022.

With the inclusion of open close we expect our lending revenue were more than offset the data verification drag in 2023, ending the year with mid single digit growth and total mortgage related revenue.

On the non mortgage side, we continue to expect data verification revenue to be flat year over year as a result of headwinds in the employment screening market coming off post pandemic hiring.

Understanding these dynamics, we expect consumer lending.

<unk> momentum in 2023, just at a slower pace compared to last year.

As used car prices appear to be softening according to industry sources.

And our customers are weighted towards the used auto lending, we expect an uplift in volumes in the back half of the year.

Now turning to the adjusted EBIT Guide.

On a non-GAAP basis third quarter estimated adjusted EBITDA is expected to be between $27 million and $29 million, representing adjusted EBITDA margins of approximately 36% at the midpoint.

For the full year 2023, we expect our adjusted EBITDA range to be between $104 million and $108 million, representing adjusted EBITDA margins of approximately 35% at the midpoint.

Our adjusted EBIT Guide reflects the continued operating discipline in areas that do not contribute meaningfully to growth acceleration.

Over the last year, we've made strategic investments to build the foundation for Meridian. When this next phase of growth.

These investments have fueled our go to market engine improved our platform capabilities and enabled services delivery.

We're seeing great progress in each of these areas and expect that momentum to accelerate next year.

I'd like to end on what we believe has consistently proven out quarter after quarter.

Meridian link has a team that can execute well through market volatility.

We also have a resilient customer base, who is focused on investing in the lending capabilities needed to best serve their clients.

Our values are improving the borrower experience and being a trusted partner align with our customers.

Those shared values underpinned their success as well as ours.

We will continue delivering on our mission to be the most trusted financial services technology platform as the market embraces accelerated digitalization and eventual normalization.

With that Nicholas Chris and I are happy to take all of your questions and I'll turn it 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 the star followed by the one on your telephone keypad, if you will.

G Dawn swamp acknowledging request questions will be taken in the order received should you wish to cancel your request. Please press the star followed by the two one moment. Please for your first question.

And your first question comes from the line of Koji Ikeda from Bank of America. Please go ahead.

Hey, guys. Thanks, Thanks, so much for taking the questions.

A couple from me so the first one just really thinking about the growth algorithm over the medium term.

A meaningful piece of that Formula is net new customers and I know you guys talked about 14, new customers in the prepared remarks.

When we look at the kind of the metrics here in the financial supplement it does.

That lending software solutions customers declined here for the second straight quarter down to 593 customers. So so just can you can you help us.

Can you walk through that a little bit and help us understand the dynamics, there and how we should be thinking about net new organic customer growth over the medium term.

Yes, Hey, Koji, it's Sean.

Thank you for the question I think there is.

There's a couple of things interesting about.

The customer count.

And it's a metric that the algorithm I wouldn't say necessarily has changed but the dynamic has changed so for example.

We've seen more consumer only customers go into consumer and mortgage.

So.

They are cross the cross sell motion is what we've been focused on a lot.

The last couple of quarters, and we're seeing success in that so that's important we are seeing new customer growth across all of our business, but we're also seeing that offset by.

Primarily mortgage so if you think about mortgage.

Flash back a year ago.

18 months ago, we were heavily weighted towards <unk>.

<unk> aerospace call it 70% to 30% depository.

And that has completely shifted so we're shifting.

270, 30 model the other way.

There are customers, who are in financial distress bankruptcy. There as you know very well theres a lot of consolidation in the market.

In that space and so we're seeing a lot of offset.

And our total customer count so I think the overall growth algorithm that we speak of is is still it's still holds true.

But right now I think the cross sell component is taking up more space and then the new logo and we're okay with that broker with that given the given the overall market dynamics.

Got it no that's super helpful and just a follow up here.

Sean in your prepared remarks, you mentioned you are seeing a delayed recovery, but when we look at the forecast here for the mortgage side.

<unk> had been pretty bullish upward from what we've seen so.

Why are you seeing a delayed recovery or maybe the better question is what is it about the end market that is causing that delay how long have you seen that delayed play out and then are you also seeing a delay on the consumer side and I guess, specifically what the more the consumer auto loan data that we've seen.

So to answer to answer the last question first so no consumer.

We see the same growth that we saw when we initially guided the year.

I think mortgage if you look at the NBA forecast.

Primarily as well as other data sources, but they have continually rolled forward the better recovery and so there has been when we initially guided the year.

There has been an 8% decline.

A decline in that recovery in the combined Q3, and Q4 and we had we had predicted decline largely for Q1 and Q2.

Had anticipated a faster.

Recovery Star.

Starting in Q2 and going into Q3, and Q4 and Thats just <unk>.

Really really slow so now.

If I remember correct.

The negative 3% for Q3 and around 30% in Q4 growth.

Yes.

From the MBA.

That's that's not the numbers that we had initially modeled so while we do see recovery in Q2, and we will continue to see recovery. It's just not at the pace that we feel we can keep up with.

In the second half.

Got it. Thank you so much thanks for taking the questions.

Thank you Cody.

Thank you and your next question comes from the line of Bob Napoli from William Blair. Please go ahead.

Got it thank you.

Yes.

Just a little confused by the.

The guidance with the deceleration in mortgage.

It looks it looks like it declined.

<unk> here, but the non mortgage growth rate decelerated.

Significantly this quarter and I think thats built into your guidance is that right or am I missing.

Okay.

Non mortgage.

Alright grew five through.

<unk> grew 5%.

In Q2.

Non mortgage for as a total in the second half will grow.

The high single digits, and so im not sure.

We'd have to get into the <unk>.

What specifically is confusing Bob.

Okay I guess.

On the 5% to high single digits.

Just I mean, what we're modeling is a continued acceleration.

In auto we're seeing account opening strength.

Credit cards is kind of.

Moderate growth low single digits.

Personal loans has been very healthy as well so.

Q2 has been again.

Sumer in total.

It is.

In Q2 was a good positive story for US we expect more of the same in Q3 and Q4, certainly not what we saw in FY 'twenty two in terms of the growth rates, but we anticipated that we have not come off.

Our guide for consumers since the beginning of the year.

Okay.

I know.

The backlog can you give some color on the backlog I know a big initiative was too.

Accelerate onboarding of backlog, but how is the backlog overall trended and how have you progressed on accelerating you referenced on accelerated onboarding.

Okay.

Bob This is Nicholas.

It's been going really well if you look at our services results for the quarter.

Growth of 28%.

<unk>.

Is clearly showing progress made by dean and the delivery team.

It's one of our stronger quarters.

Pat over the last few quarters.

We are seeing good progress made and we've seen it.

Celebrated ACB release, Q2 over Q1, which means we impacting the backlog so pretty pleased with that progress and the results and services now keep in mind.

Once we've delivered a client.

And the client has made life.

At Amp cycle off of that so as we continue to release ICD 10 projects life with clients.

Keep ramping for.

Roughly 12 months or so after the <unk>.

<unk> been deliberate so for mass effect are pretty pleased with the properties might there.

Thank you and if I could just sneak in one last one just as we think about 2020 for the long term what is the right.

Both rate to think about that.

EBITDA margins what is the right level to think about for Meridian link as you think about 'twenty for really the long term.

So.

It's important to step back and think about our strategic initiatives and our strategy overall.

We for the last year, we've been saying, we can grow at a stronger pace.

So I think 2024 guide will well.

I'm not guiding to 2024, right now, but I think that would be represented in this one.

But you'll have to the macroeconomic conditions appear to be.

Alleviating and so I think we'll talk more about that when we guide for FY 'twenty, four but not not right, but the whole direction and the whole strategy of the company has been to increase our installed base and increased growth.

To get the rebound.

When the rebound happens, we get kind of the.

Effect of that through our volume channels. So I would expect a higher growth rate in 2004.

Great. Thank you very much appreciate it alright, thanks, Bob I appreciate it.

Thank you and your next question comes from the line of Matt Van Vliet from BPI. Please go ahead.

Hey, good afternoon, Thanks for taking my question.

As you look back over the.

The history of the company, obviously theres not a lot of times, where interest rates have been quite as high but when you're seeing movement.

Like we have over the last several quarters.

Where do you feel like there is maybe an upper bound of <unk>.

<unk>.

Yes.

Pos density to responding negatively towards rates continuing to go higher so how should we think about if there are any additional rate hikes, how that could impact the various consumer areas.

Okay.

Hey, Matt Sean.

So it's a great question, if you look back at the at the data.

The last time that we saw or non growth in consumer.

<unk> 2008, 2009, and it was a blip for one quarter.

So I think things have to be pretty dire.

For consumer not to grow it as a matter of how much it grows.

The interest rate environment is the single most important factor for both consumer and mortgage for us.

But I think.

I'm old enough to remember when 7% rates were.

Not that big of a deal. So there was a normalization process that I think we're undergoing now as well.

Where.

The rates.

The fed will do what the fed will do.

But the rates themselves will become more normalized.

With either a mortgage or the consumer I don't even if the fed decides to raise again.

I think the spread for example in mortgage between mortgage rates and the fed rate.

Provides enough cushion, where we'll see I think we're going to see.

A little bit of a leveling off in terms of the deceleration.

Going forward you asked about consumer so.

I think I've got a little bit out over my skis, but hopefully that helped a little bit.

That's great. Thank you and then.

Great.

And maybe something to add there.

Two to Sean's question as well is.

Consumers are still.

Spending, but the type of spending that.

It's coming from is still from savings and checking accounts.

If you look at pre pandemic levels. The data shows that it's about 10% to 15% more in bank accounts now that pre pandemic.

What we are saying is this.

Being a consistent process that started probably.

Late Q1, or so data so.

Continued tightening of credit it happened.

Happening and.

We are certainly seeing higher numbers of loans being rejected.

Then is it.

It's one of the highest levels of offload rejections.

Five years or so.

I think what we are.

Being happening at this stages.

The consumer is not engaging us much in lending given the rates and greater tightening and using cash for some of the purchases that they are doing at this point in time with an expectation that there's going to be some level of normalization.

In my opinion, we kind of living through that and the guide that Sean discussed is reflective of us expecting the back half of the year.

Being softer specifically if you look at the data around mortgage with NBA NBA.

NBA kept pushing out pushing out the recovery on mortgage volumes and it is pushed into 'twenty four and it's reflected in our guide.

Okay very helpful. And then you talked about.

Growing success on the upsell cross sell can you give us a sense of whether it's a snapshot now or kind of what the forward outlook.

It looks like in terms of the mix of customers on the consumer lending side that already have mortgage so kind of how long is the runway there and then maybe a bigger picture.

Maybe any kind of update you can share in terms of the total number of.

Loan types that the average customer has versus.

Maybe what that number is for some of your largest most penetrated customers to give us.

Sense of how much.

Kind of dry powder is out there just in the install base.

Yes. This is Chris thank you.

I'd like to go back to a call out we gave on the upswing in the early indication of success, we are having cross sell.

Contained within last last quarter's earnings really what we're seeing now is a continued trend along that trajectory all tied as a derivative to that investment we made last year and go to market and our ability to drive cross sell.

You brought up the mortgage department is really all of our products that we're building this cross sell motion around and around and what we're seeing and benefiting from now.

Is that that early traction, where we're showing that we can build new products. We can byproducts in the M&A realm integrated into our product suite and then bring it to our clients in a situation where they see one plus one equals more than two because that's the only way that that type of emotion a successful, particularly in an environment, where you brought up mortgage where there's different buyers.

Within the financial Institution survey.

Bullish on our capabilities, there and the track record to come now that your final your follow on questions from a mortgage perspective, but as well as cross sell as we are in the early stages of our penetration.

And our time spent on that that motion. If you even go back to the history of Maria My point It started.

The mortgage and consumer divisions, a decade ago, where largely separate but over the last 10 years were meaningfully brought them together from all aspects of the organization and now that we're seeing that take that bet.

Come to bear.

Okay.

Matt just one one last comment if you think about cross sell.

In Q2 alone we saw mid single digit growth from from cross sell.

It's something that not only are we focused on we're already proving out to be successful.

Yeah.

Great I appreciate it.

Thank you and your next question comes from the line of Scott <unk> from Wolfe Research. Please go ahead.

Hey, good afternoon, guys and thanks for taking my questions maybe.

Maybe first one on the consumer lending side wondering if you can maybe parse out some of the performance you saw with your clients sort of by loan type between whether it's auto credit card personal loans and how those performed this quarter relative to your expectations.

Sorry, Scott Shaw.

Haven't learned how to hit the mute button.

I talked about it a little bit earlier, but I think.

The first comment I'll make is overall growth for consumer.

As anticipated as forecasted.

Look at the different loan types strong in account opening.

Very strong.

And.

Personal loans so.

Non asset based loans vehicle was a headwind for us a little bit.

But we expect that to two <unk>.

Turnaround in half two.

And good growth in all other loan types, including cards.

And so but those would be the ones that I would call out as as really good growth and just a little bit of an offset in auto.

Got it got it that's helpful. And then maybe just a follow up on margins looking at the updated guide it looks like the guide down on revenue has flowed through into the guide down on EBITDA and I understand that you are continuing to invest for future growth, but just kind of wondering if we were to see kind of a further slowdown in.

In lending volumes and potentially impacting revenue how you guys could flex some of your expense levers to maybe preserve margins. Thanks.

Yes, that's correct.

I mean, we are we're doing.

Two things at once I think is the important part of the story, we're investing in growth, but we are also.

Right sizing and restructuring the company as well so we have diverted a lot of our.

Spend towards customer facing.

Customer engaging.

<unk> of the business to accelerate that piece.

Our overall head count has come down and so.

We are keeping pace from a margin profile perspective, I could paint a picture where.

Revenue does something where we either.

Have to re look at our cost structure.

Or it's going to impact the bottom line, but we don't see that right now.

I think within we thought very carefully about this guide.

And the EBITDA I think is on pace and so we'll continue to operate the business are there levers assure there are always levers to pull there.

There are levers that I think as a management team.

We're comfortable with where we're at right now we believe that we have the right team going forward positioned correctly around the customer.

And so we'll continue down that path until something purchase otherwise.

Got it that's helpful. Thanks, guys.

Yes.

Thank you and your next question comes from the line of Alex Sklar from Raymond James. Please go ahead.

Thanks, Nicholas I wanted to dig in more into the idea of auto Decisioning as it relates to consumer lending spoke to the bumps in the prepared remarks, I know that you've got some partnerships in place that are that are assisting with the workflows, but can you just talk about are you now, enabling a full touch lift lending process.

And with that what percent of your base do you think is ready to actually implement those those types of auto decisioning processes.

Hi, there.

I think it is.

SaaS growing group of clients that is paying attention to what our decisioning and also integrating.

Third party.

Data sets that you can argue is introducing a score that is artificially artificially kind of.

Incubated and developed an enriched.

What we are seeing is as more customers asking for the ability to do that we've released an enhanced.

Auto Decisioning.

Module that out.

Customers have started using and larger customers and customers is dealing with higher volumes that are showing more interest in.

But I would tell you it's probably I would say is the question is Randy that's a hard one to answer, but it's probably less than a third that I would say is already ready, but it's a fast growing sub sanction and my expectation would be in a couple of years. If you don't do auto Decisioning.

And you don't have attached this lending playbook that is meaningful and substantial in your business you will miss out.

On.

Engaging with your customer and closing the loan.

Some of our larger customers are very focused on it we spoke about.

The space Coast trade Union.

To improve the touchless and auto Decisioning.

Meaningfully with technology that they implemented and we are engaging and working with multiples of others in the same way but.

<unk> is probably going to be one of the bigger.

Initiatives that our customers will have and will invest in here on the foreseeable feature.

Alright, Thats great color.

And Sean maybe I just want to follow up on your answer to <unk> in a couple of other questions.

Earlier, but the mortgage outlook for the second half of the year.

I can appreciate given how we've seen the industry forecast walk down from the start of the year wanted to be conservative there, but you just had mortgage I think was about 26% of revenue this quarter and I think you said it would only contribute 23% of revenue the rest of the year can you just kind of help bridge why mortgage should drop off.

In terms of its total contribution to revenue versus the second quarter levels.

Yes, so the 'twenty six 'twenty.

<unk> 25, and a half.

And I would say so.

Our net but I think it's important I do think it drops off not I mean, when we say mortgage.

There is a combination of lending and mcl in there as well.

We've seen continued drag from from Mcl.

As part of the walk down.

And just the.

The rest of the business is growth is the other is the other component. So I just think as a percent of total.

Those numbers are pretty easy to get to if you want to talk about numbers, we're talking about $3 $5 million.

Of revenue.

Coming out of the mortgage guidance.

And it's and it's.

It's a combination of both lending and and DBS. So it's.

I know we have a call later, we can talk about in detail more but.

It's really just the recovery of the delayed recovery is really the primary reason I mean, that's just it's not going to happen fast enough for us to recover, especially around mcl in the lending solutions as well.

And keep in mind I'll tell you that.

The growth.

The growth.

For example in Q2.

We saw good growth in open close.

Which.

Okay.

Good.

I don't want to say it skews the number but definitely when.

When we talk about mortgage growth being in the double digits.

It's part of the story as well and so we have to look at the open closed acquisition and how it is going to perform in half two as well.

Okay. Thanks for the color there.

Thank you and your next question comes from the line of Andrew Schmidt from CB <unk>. Please go ahead.

Hey, guys. Thanks for taking my questions and I appreciate all the detail here.

I wanted to dig in just to the <unk>.

<unk> about cross sell versus net new obviously the investments in cross sell bearing fruit I'm seeing a lot of momentum there. So a lot of wood to chop, but do you feel like more investment is needed on the net new side.

To drive growth there or are there other reasons, whether it's market maturity.

We are in the cycle things like that that.

Make you more comfortable the way you are at in terms of just the net new kind of sales resources.

Thanks, a lot guys.

Yes. This is Chris. Thank you for the question the big the two biggest dynamics youre seeing it play our mortgage team predominantly used to go after and mortgage backs. So all of those were classified as new logos now that team is directed almost exclusively at cross sell onto depository, which is not.

<unk> and the new global Us what I would argue though is in that scenario. The long term value of those clients is higher.

They are staying power is stronger it's tied directly into the retention capabilities of the broader platform. So that's one that's one aspect and then Sean brought up the other element as well where some of that we are seeing some some.

You are seeing some independent mortgage banks facing difficulties that are impacting our numbers as well.

Yes, and Andrew.

We use the word cycle I do think it's important to key in on that.

It's not to say that we haven't invested in new logo we have.

New logo team.

Very good leader in place who is focused on new logo I think there is a cycle.

Pipeline build of new logo that is very healthy.

And we will start to see the pay off of the new logos down the road.

I don't mean far down the road, but for right now I think the dynamic with mortgage.

As offsetting even the new logos that we do see.

So just just hasnt added.

And added narrative.

Got it thank you Chris Thank you Sean.

Maybe I could ask about the back half pickup.

Consumer LLS the non mortgage piece I know, it's been asked a couple of times I'll take another shot at it.

Just in terms of the drivers there is it is it purely.

Or I should say, primarily volume base in terms of the expectations of the expectation of a reacceleration or.

Is there also kind of cross sell or net new implementation, that's driving that may have a follow up but that's a good place to start.

Okay.

I mean to be quite honest.

Simply.

Not simply it is primarily driven by volumes by volume pickup.

And even though we've talked about the components of consumer.

And still seeing growth in Q2.

Do think that the volumes.

We'll pick up further.

Particularly around.

In auto.

Got it okay. Thank you for that and then just does that just last kind of follow up to that.

I guess is that directionally consistent with what youre seeing throughout the obvious question is just confidence in that in that pickup in sort of do you feel like it.

I think you've done a good job forecasting so far.

Do you feel like.

This is derisked or.

I guess the question is what's the visibility on that pick up in terms of volumes. Thanks a lot.

Andrew I am always confident in our forecast.

I am not.

So we use multiple data sources.

Being the primary.

Are most of our base is we have a.

Roughly.

70, 30 split on used.

So youre seeing good headlines around new inventory good headlines around new sales.

We think that is a downstream impact on used as well that is very positive but for use as an example, the number I think is.

Minus 2% year over year.

For us sales from.

From Cox.

So we've anticipated that and we think that we can do better than that.

And so.

Sure.

All data sources are being considered in the forecast is what I would say and I am confident in the half to forecast as it relates to the different loan types.

Got it. Thank you very much John appreciate the commentary yes, yes.

Yes.

Thank you and your next question comes from the line of Parker Lane from Stifel. Please go ahead.

Yeah, Hey, thanks, guys.

That's going on in the interest of time here Nicolas you guys announced a few interesting partnerships with AI providers during the quarter and I was hoping to hear a little bit more about.

We're in the platform and what problems you think AI can be thrown at today and where the industry is as far as embracing more automation.

Okay.

Yeah. Thanks for the question this is Chris.

Today, we are seeing the greatest pickup in AI in this industry, it's around decisioning or specifically around decisioning scores.

Some hesitance hesitancy in its adoption due to the potential impacts around fair lending.

Something we work with our customers and our partners and to help them Cross that bridge going forward I think.

Cross all of the industries, there's a lot of areas, where AI has application I mean, specifically looking at this you could have at ways to accelerate.

Member service Representatives are engaging with consumers in person online in the call Center, we already have solutions within our product that makes recommendations on how our clients provide promotional offers to drive credit card usage.

Deposit behavior as well as lending behavior, all based on highest propensity to.

To take that action. So it's front and center now the biggest difference in this industry versus others is the regulatory nature.

We need to be very cautious about and thoughtful as we rollout of solutions to our customers and we will do that as a combination of our own and partners as we do today.

Understood. Thanks for the color for us.

Okay.

Thanks Barbara.

Thank you and your next question comes from the line of sockets Calia from Barclays. Please go ahead.

Awesome, Hey, guys. Thanks for taking my question here I'll also keep it keep it to one and apologies in advance I joined late so.

Hopefully this question Hasnt been asked yet, but Sean maybe for you.

Just high level I think the revision to this year's guide on revenue was about $5 million to $7 million.

How much of that is from the onetime customer item and is that just in this quarter and how much of it is from the revised view on the mortgage market.

Our $2 3 million of it.

From the.

The dispute with the reseller.

And.

The balance of it is due to the mortgage pressure.

E.

Delay in recovery and mortgage.

Got it very helpful. Thank you.

Yes. Thanks.

Thank you there are no further questions at this time. Please proceed.

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