Q3 2023 MeridianLink Inc Earnings Call
Ladies and gentlemen, thank you for standing by <unk> earnings call. At this time, all participants in a listen only mode. After the speaker expect <unk> there'll be a question and answer session P. C advice for today.
Francis being recorded.
To turn the conference over to your afraid to speak out today Diana <unk> Diana. Please go ahead.
Good afternoon, and welcome to the third quarter of fiscal year 2023 earnings call.
It will be discussing the results announced at a press release issued after the market closed today.
To me today, I'm ready and Chief Executive Officer, Nicholas Block, Chief Financial Officer, Sean Blood shock and President go to market Chris Lewis.
Before we begin I'd like to remind you by today's conference call will include forward looking statements based on the company's current expectation.
These 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 in business. Please refer to the disclosure and today's earnings release and the other reports and filing for me file from time to time with the Securities and Exchange Commission.
All of our statements I 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 referred to both gas and non-GAAP financial measures you can find the reconciliation of our gap 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 Jenna.
Good afternoon, everyone.
Thank you all for joining us <unk> 2023, earning school.
I'm proud to report that Q3 was another solid quarter of execution.
So it doesn't matter what platform, we continue to provide an into in digital lightning solution to our customers debase of the players.
Our leading position in the market is all things to the dedication and expertise of the entire meridian lengthy.
Well, we are continuing to monitor the impact of macro conditions. They are a few key drivers.
Business that have not changed and help us deliver consistent performance quartered off that border.
We have a talented go to marketing capturing strong new logo and crossrail demand for a seamless digital leading solution that is designed to accelerate growth.
We are also continuously improving the platform capabilities of meridian like one through product innovation and value added fault not integrations.
These drivers are evident in our results.
In Q3.
Gap or even in your savings.
7% a year 76.5 million.
[noise] and adjusted EBITDA margin of 39%.
This represents total revenue in line without guidance range and a solid beat unprofitability.
And vice a tasteful cost discipline in the corner.
We consistently achieve profitable growth.
Execute on a platform strategy that captures the entirety of the consumer stayed wallet for customers.
As borrowing needs evolve remains article to help our customers wouldn't and the time consumers by providing a personalized section is learning experience.
On that note.
Moved to Al Q3 updates on the three areas could I was et cetera, <unk> focus on the platform strategy that field outperformance.
First.
Engaging more deep you with our customers.
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Expanding the capabilities of the platform.
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Empowering customers to go more quickly and better serve their communities.
Starting with customer engagement I'll go to market team achieved another strong bookings quota and one an impressive roster of new logos.
We continued to see the top financial institutions now sweet spot.
To meridian link to reach the digital transformation golf.
Two three was a solid bookings quarter internal mortgage lending.
This is a fantastic achievement by the team that demonstrates the success and cross selling but I didn't like one at a time when mortgage rates are at the highest they've been in a generation.
We continue to see our most innovative customers investing to transform their mortgage lending processes as anticipate recovery in volumes.
On that note I would like to highlight the platform style one in the corner from my 2 billion Ah you're in bank. That's signed on both of them are I didn't link consumer and mortgage to replace that existing disparate systems.
Through meridian like one the customer is now using quite into depth optimization tool that empowers loan officers to maximize acceptance rates boost cross-sell opportunities and.
And deepen their relationships with clients.
We continue to engage with both banks and credit unions, let's see the value in choosing a consumer and mortgage modules together to accelerate their digital learning strategy.
Another impressive what other Dakota.
Altered from our engagement with like 500 million Ah you're in credit Union, We chose Meridian link consumer home equity.
An account opening to streamline the learning process.
This was like the high value when in Q3 that reinforces how leadership position in the industry.
We provide a differentiated platform.
<unk> form Saint diet lending, an account opening process to be more automated and personalized for the consumer.
Which in turn scared small deposits and loan growth opportunities for the customer.
Our customers remain the focal point of everything we do in.
Ongoing engagement through I would go to market efforts reflect this commitment S.
S B surf more customers with greater efficiency, we accelerated growth for the business.
Getting to a second area of growth acceleration expanding the capabilities of the platform through product innovation.
Really cool to a sales motion we are focused on improving the capabilities of Meridian link one that I felt customers digital lending strategy.
The remainder of zillion today, we have seen our customers focusing on key strategic areas.
Such as providing personalised support for consumers and adopting a real time financial processes informed by data and analytics.
We recently announced a new point of sale solution for the account opening and loan origination.
Link axis.
The meridian in consumer and mortgage modules available through meridian like one.
Driven by the demand for a more personalized consumer experience, but I didn't think access provides enhanced configurability, enabling customers to quickly find julia consumer replacing processes with better control.
By leveraging a new P. O is that maximizes engagement pessimist can capture more demand and accelerated growth.
We've also been innovating in our data analytic solutions to provide our customers with actionable insights for optimizing their learning processes.
For example, we announced a new data solution.
<unk> data connect which enables financial institutions to integrate did maready link consumer an account opening data directly into their own business intelligence dashboards allow.
Allowing for more insightful reporting.
And today's consumer driven market.
Being able to gain greater insights from multiple data sources.
And easily access key learning in one place helps our customers to have more clients faster driving the business forward.
In Q3.
We also expanded the connective capabilities of meridian like inside.
Active business intelligence solution.
To integrate with Meridian link engage and but I didn't link collect.
Really does integration engage customers are driving campaigns and developing stronger leagues for more applicant data with an improved ability to threat campaigns and progress.
<unk> customers have better visibility all their clients delinquencies to provide a clear path for what for maintaining client relationships.
These examples of innovation demonstrate the teams dedication to expanding our platform capabilities.
[noise] support our customers that I T Jake initiatives.
Finally, our third area of focus for growth acceleration centered around our ability to empower customers to compete.
Drove and succeed in the markets in which they participate.
We've been very successful and empowering our customers to capture a greater share of declines that wallet through meridian link one.
This highlights a critical component of our platform strategy.
The capability to increase the adoption of modules among our current customer base, while fostering and hands connections with numerous partners to amplify the value of a comprehensive lending platform.
Starting with strong cross-sell ones in a quota.
One of our existing already a link like credit Union customers with a U M. A $400 million added meridian Lincoln's humor opening an indirect lending to offer a more diversified connected learning experience for the consumer.
Through these additional modules, but I didn't link will recognize over five times the amount of I R. R from the customer.
This is a perfect example of how the Crossrail motion that we've invasive into date can multiply or even you overtime accelerating growth as a platform strategy gains traction in the market.
We would also excited to sign a multi module deal with a 200 million Ah you immigrated union.
Currently uses meridian link consumer and added marine like mortgage business lending and business account opening in the corner.
This example.
Differentiated leaning capabilities of Meridian link one enabled a customer to balance liquidity and achieve strategic resignation. This while also winning share some larger players in the market.
Moving to a new partner integrations, we are hyper focused on teaming up with the most innovative players and the dishes lending space James <unk> customer growth.
First.
We expanded our capabilities with experience the world's leading global information services company that we've had the pleasure of working with over a decade.
But I didn't link customers can now integrated with experience and verify which provide lend us with real time access to verify income and employment information.
We also need your hands down, but I didn't and consumer and decision lane that integration was experience <unk> origination essentials, the company's automated decisioning agent.
From the initial verification process do a proving alone we have leverage the power of out bought lemonade work to streamline the learning process for customers.
Another part of the announcements and a quarter was about so cure a provider of digital identity verification.
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I didn't like one customers can now securely verify and onboard more consumers and that the hold time, eliminating fiction at sign up blogging fraudulent applicants.
This is a great example of how we are merging but I didn't link one way.
Which was bolted generate a I and automation across solutions.
Right, if I technology from partners.
We have a mutual goal without barter network to empower the digital transformation of our customers further improving their ability to quickly <unk>.
I'd like to end on unexciting enhancement do a long standing partner integration with Cox Automotives <unk> okay.
Comprehensive suite of indirect learning solutions for the industry's lodge a dealer lending network.
This enhancement, thanks out existing integration, which expedites credit applications and decisions between Dallas, and Linda and deliver a comparable level of speed to the contracting process.
With digital contracting Linda can speed up funding by increasing accuracy and compliance resulting in accelerated growth.
I want to close where I began and thank the team.
Their focus on empowering our customer success is the driving reason that meridian link continues to deliver consistent growth and healthy profitability levels. While they are a matter of fact this out of our hands, we have strengths and half position as the leader you know an extensive consumer lending market and we still have a long wait to take Shea.
We will continue to executing on our strategic initiatives that are designed to serve more customers with greater efficiency.
Which we expect will help accelerate growth for the business and increase value for stockholders.
With that I will now turn the call over to Sean to talk about our financial results and guidance.
Thanks, Nicholas and good afternoon to everyone.
Before I Die then I'd also like to take a quick moment to highlight the phenomenal team work and execution demonstrated this quarter.
We anticipated the market headwinds that our customers would face through the year.
And the team has remained steadfast and serving customers with best in class services and support to position their businesses for growth.
Not only are we focused on customer success, but we believe we also have significantly invested in the future success of Meridian link.
Continue to put the talent and processes in place to fuel our next phase of profitable growth in scale.
It's now a matter of executing on these strategic initiatives, while maintaining our cost structure.
That's exactly what we did in Q3.
Where do you like performed in line with our revenue guidance at 76.5 million.
Growing 7% year over year.
Additionally, we achieved an adjusted EBITDA margin of 39% well above the top end of our guidance range due to the combination of cost discipline and the initial pay off of our strategic investments.
Turning to financials to begin let's look at revenue.
First specifically breaking down software solutions.
Our total lending software revenue accounted for nearly 77% of total revenue.
Grew at 12% year over year.
As the primary driver of our lending software solutions non mortgage lending revenue contributed 88% and grew 6% year over year.
Mortgage related revenue within lending software solutions inclusive of open close the countered for the remaining 12 per cent of the total.
Turning to data verification software solutions.
Revenue accounted for nearly 23 per cent of total revenue in decline, 9% year over year.
This was driven by a 17 per cent decrease in mortgage related revenue, which represents 57 per cent of total data verification software solutions.
In Q3 total mortgage related revenue was up 11% from last year in January 22% of overall meridian like revenue.
Last quarter, we adjusted our expectations for mortgage volumes to recover at a slower pace in the second half of the year as indicated by industry sources.
While this gradual recovery played out in Q3, we stayed focus on what we can control.
Our platform strategy of cross selling mortgage lending to our consumer lending depository customers was successful as demonstrated by the go to market wins in the quarter.
The other 78% of our business continues to grow which is primarily led by the demand from our installed base for sweep of and and consumer lending capabilities.
This brings me back to the power of the platform routinely.
He didn't like one caters to the evolving lending needs of the consumer.
Those customers add on modules.
Their prime to grow even in the most challenging lending environments, which in turn increases the revenue opportunity for Meridian link.
Moving to profitability.
For stock based compensation gap gross margin was 65%.
Adjusted gross margin in Q3 was 72% representing a 300 basis point improvement year over year, driven by increased productivity of our services team and technology snack.
Before turning to operating performance in the quarter I'd like to break down the year over year change in our operating expenses.
Compared to the third quarter of last year, G&A increased 8% on a gap basis and was flat on a non-GAAP basis.
R&D decline, 2% on a gap basis and increased 1% on a non-GAAP basis compared to the third quarter of last year.
And on a <unk> basis sales and marketing increased 50%, while on a non-GAAP basis sales and marketing increased 44% compared to the third quarter of last year.
The girl across our non-GAAP operating expenses was primarily driven by additional head count and increased compensation costs to fuel our go to market efforts.
We continue to selectively invest in talent and technology that supports our next phase of growth.
Turning now to our overall operating performance.
Yep operating income was 5.6 billion.
non-GAAP operating income was $14 million.
On a gap basis that loss was 2.1 million.
Or negative three per cent margin and non-GAAP basis, adjusted EBITDA was 29.8 million, representing a margin of 39%.
This represents an improvement of approximately 300 basis points on a sequential and year over year basis, driven by cost savings initiatives and ramping down non critical spend.
Now turning to the balance sheet and cash flow statement.
We ended the third quarter with $97.6 million in cash and cash equivalents, a decrease of 11.3 million from the end of the second quarter, but driven by $30.7 million worth of share buybacks.
Cash flow from operations was $21.3 million or 28% of revenue.
Free cash flow was 18.8, $9 or 25 per cent of revenue for the third quarter.
We continue to generate cash levels and provide protection in this period of uncertainty.
Enabling capital allocation opportunities for us to build value for our stockholders as.
As seen by the strategic buybacks executed in Q3.
I'll know pivot to guidance for Q4 and.
For the full year 2023.
We've been guiding to a second half recovery and volumes, which is a key driver of our transaction based business model.
Operator: Ladies and gentlemen, thank you for standing by.
Operator: Welcome to MeridianLink's third quarter, 2023 earnings call. At this time, all participants are in a listen-only mode.
As a reminder.
We expect the same store volume growth to contribute mid single digits to our overall mid teens growth algorithm and a normalised environment.
Operator: After the speaker's presentation, there will be a question and answer session. Please see advice that today's conference is being recorded.
And the current lending environment with a delayed recovery and mortgage and coming off of is last year and consumer we're experiencing a dragon same-store volumes as a result of credit tightening.
Gianna Rotellini: I would now like to turn the conference over to your first speaker today, Diana Rotellini, Diana, please go ahead. Good afternoon and welcome to MeridianLink's third quarter, fiscal year, 2023 earnings call. We will be discussing the results announced in our press release, issued after the market closed today. With me today, our MeridianLink's Chief Executive Officer, Nicholas Flok, Chief Financial Officer, Sean Blitchok, and President go to market, Chris Maloof.
Aside from volumes there additional performance drivers in our control that we have been hyper focused on to support current and future growth.
As we finish out the year, we will continue capturing new logos and cross-sell opportunities.
Celebrating a C D release.
And enhancing meridian link one to sharpen our customers competitive edge in the market.
Gianna Rotellini: 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. These 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 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.
On that note, we are reaffirming revenue guidance for the full year 2023.
For the fourth quarter estimated total revenue is expected to be between $73 million and 77 million compared to 70.6 million for the same period 2022.
This represents an estimated year over year increase of 3% to 9%.
For the full year 2023, we expect total revenue to be between $302 million and $306 million compared to $288 million for the same period in 2022.
Gianna Rotellini: During the call, we will also refer to both GAP and non-GAP financial measures. You can find the reconciliation of our GAP to non-GAP measures included in our press release, which is posted to the Investor Relations section of our website.
This represents an estimated increase of 5% to 6% year over year.
Or the mortgage related revenue, we expect the mortgage market to contributor approximately 23% of revenue for the full year 2000, twenty-three compared to 23% for the full year 2022.
Nicholas Flok: With that, let me turn the call over to Nicholas. Thank you, Gianna. Good afternoon, everyone.
Nicholas Flok: Thank you all for joining us for our third quarter 2023 earnings call. I am proud to report that Q3 was another solid quarter of execution. Through the MeridianLink One platform, we continue to provide an end-to-end digital lending solution to our customers to best serve their clients. Our leading position in the market is all thanks to the dedication and expertise of the entire MeridianLink team. While we are continuing to monitor the impact of macro conditions, there are a few key drivers of our business that have not changed and help us deliver consistent performance quarter after quarter.
To provide more color around the growth drivers in our total revenue.
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 will more than offset the data verification drag in 2023 and.
Ending the year with low single digit growth in total mortgage revenue.
On the non mortgage side, we continue to expect data verification revenue to be flat year over year as a result of headwinds and the employment screening market coming off of Postpay endemic hiring.
Nicholas Flok: We have a talented go-to market team capturing strong new logo and cross-sell demand for a seamless digital lending solution that is designed to accelerate growth. We are also continuously improving the platform capabilities of MeridianLink One through product innovation and value-added partner integrations. These drivers are evident in our results. In Q3, our gap revenue grew 7% here over here to 76.5 million at an adjusted EBITDA margin of 39%. This represents total revenue in line with our guidance range and a solid bead on profitability driven by successful cost discipline in the core.
Understanding these dynamics.
We expect consumer lending will continue momentum in 2023.
At a slower pace compared to last year.
As used car prices appear to be softening and our customers are weighted towards used auto lending, we expect a slight uplift and volumes in queue for that will continue in the next year.
Now turning to the adjusted EBIT Guide.
On a non-GAAP basis Fourthquarter estimated adjusted EBITDA is expected to be between $22 million and $26 million representing.
Representing adjusted EBITDA margins of approximately 32% at the mid point.
Nicholas Flok: We consistently achieve profitable growth as we execute on a platform strategy that captures the entirety of the consumer state wallet for customers. As borrowing needs evolve, it remains our goal to help our customers win and retain consumers by providing a personalized, frictionless lending experience.
For the full year 2000, twenty-three, 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 EBITDA Guide reflects the continued operating discipline in areas that do not contribute meaningfully to growth acceleration.
Nicholas Flok: On that note, let's move to our Q3 updates on the three areas of growth acceleration focused on the platform strategy that field our performance. First, engaging more deeply with our customers. Second, expanding the capabilities of the platform and third, empowering customers to grow more quickly and better serve their communities. Starting with customer engagement, our go-to-market team achieved another strong booking score and won an impressive roster of new logos. We continue to see the top financial institutions in our sweet spot turning to MeridianLink to reach their digital transformation goals.
Over the last couple of years, we've made strategic investments to build the foundation for future scale.
We are now at the point of continuously optimizing our cost structure to support incremental growth, which will in turn drive margin expansion as volumes impact the bottom line.
I'd like to end on what we believe is 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's focused on investing in the lending capabilities needed to best serve their clients.
Nicholas Flok: Q3 was a solid booking score in total mortgage lending. This is a fantastic achievement by the team that demonstrates the success in cross-selling MeridianLink 1 at a time when mortgage rates are at the highest they've been in a generation. We continue to see our most innovative customers investing to transform their mortgage lending processes as they anticipate a recovery in volumes. On that note, I'd like to highlight a platform sale one and a quarter from a $2 billion AUM bank that's find on both MeridianLink consumer and mortgage to replace their existing disparate systems.
This resilience of our customers was evident in the global financial crisis <unk>.
Throughout the Covid related downturn and has proven to be true and the recent unprecedented market dynamics.
With the investments we have made in place brooding link is well positioned to strongly finish out the year and sustained profitable growth in years to come.
With that.
Nicholas Flok: Through MeridianLink 1, the customer is now using our patented depth optimization tool that empowers loan officers to maximize acceptance rates, boosts cross-sell opportunities, and deepen their relationships with clients. We continue to engage with both banks and creative unions that see the value in choosing our consumer and mortgage modules together to accelerate their digital lending strategy. Another impressive one in the quarter resulted from our engagement with a 500 million AUM-created union. We chose MeridianLink consumer, home equity, and account opening to streamline the lending process.
Nicholas Chris and I are happy to take any of your questions and I'll turn it over to the operator.
Thank you and ladies and gentlemen, you will now begin the question and answer session should you have a question. Please press the start I'll update the number one on your telephone keypad.
Here at <unk> Com acknowledging your request and your questions that'd be pulled into Oregon it'd be I received should you reached a declining polling process <unk> followed by the number two and just a reminder gives me submit yourself come asking one question. If you had a follow up question can you scratch timeline again, one lemon can you spell <unk>.
Our first question.
Your first question comes from the lineup Parker Lane from people and I need your pin.
Hello.
For Parker, Thanks for taking my question.
Nicholas Flok: This was a key high value one in Q3 that reinforces our leadership position in the industry. We provide a differentiated platform that transforms the entire lending and account opening process to be more automated and personalized for the consumer, which in turn creates more deposit and loan growth opportunities for the customer. Our customers remain the focal point of everything we do and our ongoing engagement through our go-to market efforts reflect its commitment. As we serve more customers with greater efficiency, we accelerate growth for the business.
To start off could you provide a little extra commentary around your mortgage solutions recently, new customers and that segment contributing to volumes at all and what impact of your scene.
Arms from higher interest rates through this past month. Thank you.
We continue to see new logo wins as well as cross-sell wins within our mortgage business on.
On a year over year basis outside of one large deal.
The first three quarters of last year were ahead of last year in terms of bringing on new five positioning us for the future. It's been a really good year in that regard and I think it speaks us executing on the thesis we had with acquired broken glass.
Nicholas Flok: Turning to our second area of growth acceleration, expanding the capabilities of the platform through product innovation. Critical to our sales motion, we are focused on improving the capabilities of MeridianLink 1 to drive our customers digital lending strategy. The remainder is early and today we have seen our customers focusing on key strategic areas such as providing personalized support for consumers and adopting real-time financial processes informed by data and analytics. We recently announced our new point of sale solution for account opening and loan origination, MeridianLink Access, for the MeridianLink consumer and mortgage modules available through MeridianLink 1.
Yeah, and I would just add this is shaun.
I would echo cresses comments that.
The cross-sell motion.
With mortgage has been has been very successful.
<unk>, so we're seeing what we're saying.
<unk>, which is kind of the Ah major.
A major building block of the platform strategy going forward on on the specifically on the volume question, where where outperforming M. B a more outperforming the broader market, but <unk> mortgage had I mean are.
Nicholas Flok: Driven by the demand for a more personalized consumer experience, MeridianLink Access provides enhanced configurability, enabling customers to quickly fine-tune their consumer-facing processes with better control. By leveraging a new POS that maximizes engagement, customers can capture more demand and accelerate growth. We've also been innovating in our data analytics solutions to provide our customers with actionable insights for optimizing their lending processes. For example, we announced a new data solution, MeridianLink Data Connect, which enables financial institutions to integrate their MeridianLink consumer and account opening data directly into their own business intelligence dashboards, allowing for more insights for reporting.
Mortgage volumes have been <unk> and continue to be a headwind for sure I think our pricing model with the Minimum's.
And.
Give installation to some of that volume downside, but certainly it's starting it's starting to pick up but but still I had one nonetheless so.
Q2, Q3 has come off the floor or or we've seen too you know the the trough I think cause has been behind US Q2, Q3 as <unk> better in terms of volume results.
We expect that to continue in the queue for the F Y 24.
Okay fantastic. Thank you very much.
Nicholas Flok: In today's consumer-driven market, being able to gain greater insights from multiple data sources and easily access key learning in one place helps our customers serve more clients faster driving the business forward. In Q3, we also expanded the connective capabilities of MeridianLink Insight, our interactive business intelligence solution, to integrate with MeridianLink Engage and MeridianLink Collect. Through this integration, engage customers are driving campaigns and developing stronger leads for more applicant data with an improved ability to track campaigns and progress.
And your next question comes from the line up a really in Latin America B T. I G. J line is okay.
Alright. Thanks for taking my question. This is still on for Matt kind of wanted to know how significant is the the friction reduction with the recently announced experience verify partnership kind of compared to what was available before.
The new integrations discuss including the one that you highlighted represent our efforts to expand our clients abilities to profitably learned downmarket.
So as you think about our client base and one of the things that makes us Brazilian as the fact that our customers tend to learn to triple a consumers that sat our our customers also want to serve the broadest base of their of their community as possible and our new advanced Decisioning a solution that we announced earlier in the year allows.
Nicholas Flok: Collect customers have better visibility of their clients' linkancies to provide a clear path forward for maintaining client relationships. These examples of innovation demonstrate the team's dedication to expanding our platform capabilities to support our customers to strategic initiatives.
Clients to layer in these different verification services. So that we can reach we can enable our clients to reach these audiences profitably and with confidence.
Nicholas Flok: Finally, our third area of focus for growth acceleration ascended around our ability to empower customers to compete, throw and succeed in the markets in which they participate. We've been very successful in empowering our customers to capture a greater share of the client's debt wallet through MeridianLink 1. This highlights a critical component of our platform's strategy, the capability to increase the adoption of modules among our current customer base, while fostering enhanced connections with numerous partners to amplify the value of our comprehensive lending platform.
So we have a number of solutions of that category that enable that <unk> that that type of capability.
Okay, great. Thanks for taking my question.
Thanks, Bill again.
Thank you. Your next question comes from the lineup <unk>. How can you be asked your line is open.
Hey, good afternoon, guys. Thanks for taking my question.
I just wanted to get an update on how the backlog is trying to Q2 between a new logo and cross-sell and if you could provide any update on Monday volumes that you've seen in October. Thank you.
Nicholas Flok: Starting with strong cross-cell wins in the quarter, one of our existing MeridianLink Collect created union customers with AUM of 400 million added MeridianLink consumer, opening and indirect lending to offer a more diversified connected lending experience for the consumer. Through these additional modules, MeridianLink will recognize over five times the amount of ARR from the customer. This is a perfect example of how the cross-hell motion that we've invested into date can multiply our revenue over time, accelerating growth as our platform strategy gains traction in the market.
Hi, good afternoon, it's Nathan.
We've.
Since the beginning of the year waiting leaf restructure our sales at.
Oh alright.
So this is organization and created practice areas. We've seen a continued increase in productivity, but that'd be good a leather we have come off a really strong bookings quarter, again, which contributed to bowling backlog, but we pretty <unk> [laughter].
Making pretty good progress and will continue to make progress in the backup yeah. I think we're gonna exit the yeah, probably lower than last year from a backlog standpoint.
Nicholas Flok: We were also excited to sign a multi-module deal with a 200 million AUM-created union who currently uses MeridianLink consumer and added MeridianLink mortgage, business landing, and business account opening in the corner. In this example, the differentiated landing capabilities of MeridianLink 1 enable the customer to balance liquidity and achieve strategic growth initiatives while also wanting shares from larger players in the market.
But we will carry some backlog in it they won't be some healthy backlog, we getting into 2024.
But the team has been firing on all cylinders.
Pretty pretty successful in delivering implementations today.
Yeah, Nick that's just on you asked I believe about volumes as well.
Nicholas Flok: Moving to our new partner integrations, we are hyper-focused on teaming up with the most innovative players in the digital landing space to empower customer growth. First, we expanded our capabilities with experience, the world's leading global information services company, that we've had the pleasure of working with over a decade. MeridianLink customers can now integrate with experience verify, which provide lenders with real-time access to verified income and employment information. We also enhanced our MeridianLink consumer and decision-lender integration with experience power curve origination essentials, the company's automated decisioning engine.
In general funding.
The app a slight recovery that we thought in particular for for mortgage and for auto auto is a little bit slower <unk> I think the dynamic is it you know of pricing.
Coming down and then and they used the auto market supply covering and the new new auto market is definitely happening is just a little a little bit of slow but worse.
We'll continue in queue for.
Nicholas Flok: From the initial verification process to approving the loan, we have leveraged the power of our partner network to streamline the landing process for customers. Another partner announcement in a quarter was but so-cure, a provider of digital identity verification and fraud solutions. MeridianLink 1 customers can now securely verify and onboard more consumers in real-time, eliminating friction at sign-up of blocking fraudulent applicants. This is a great example of how we are merging MeridianLink 1, which was built to generate AI and automation across solutions with innovative AI technology from partners. We have a mutual goal with our partner network to empower the digital transformation of our customers further improving their ability to quickly process volume.
The rest of consumer can you you know is at four cast and so you know our our queue for total guide will be will be approximately mid mid mid single digit growth and.
Oh I don't I don't think we're in a bad position from from volume perspective.
All in but.
Suddenly have a launching pad for you know a lot of future volumes.
Got it thanks for all the color is very helpful.
Yep. Thanks Bye.
Thank you your next question.
<unk> <unk> <unk> <unk> Bank of America your line of <unk>.
Hey, this is Natalie.
So you guys execute it in terms of mortgage lending and you talked about cross selling really helping drive that they're could you dig a little deeper into the automotive segment. I know you said, it's slower than you hope that you're taking the reacceleration into account for next quarter. So I had to see how that was tracking compared to expectations. It along with that what are we acceleration.
Nicholas Flok: I'd like to end on an exciting enhancement to a long-standing partner integration with Cox Automotive dealer track, a comprehensive suite of indirect landing solutions for the industry's larger dealer landing network. This enhancement takes our existing integration, which expedites credit applications and decisions between dealers and lenders and delivers a comparable level of speed to the contracting process. With digital contracting, lenders can speed up funding by increasing accuracy and compliance resulting in accelerated growth.
Spectation for account openings and personal loans playing out.
We continue to see an uptick in new vehicle sales as inventories recover and the incentives that are following that as as as lender as automakers are are looking to offer those lenders as putting pressure on used auto which continues to lag.
All that being said, we're starting to see early indications of a recovery specifically around the wholesale used prices are starting to decline Martha Vermont, which is an indication of future success in in a tummy in quarters and then the other element just keep in mind, new new vehicle sales.
Nicholas Flok: I want to close where I began and thank the team. Their focus on empowering our customer success is the driving reason that MeridianLink continues to deliver consistent growth and healthy profitability levels. While they are macro factors out of our hands, we have strength and opposition as the leader in an extensive consumer landing market. And we still have a long run way to take shape.
About 25% of our lending volumes and also present an opportunity in the future is all those vehicles come off lease and enter the used auto market. That's another opportunity for the business in the future of our customers.
Nicholas Flok: We will continue executing on our strategic initiatives that are designed to serve more customers with greater efficiency, which we expect will help accelerate growth for the business and increase value for stockholders.
Got it thank you.
And once again, if you would like to ask a question can you spell <unk>.
Sean Blitchok: For that, I will now turn the call over to Sean to talk about our financial results and guidance. Thanks, Nicholas, and good afternoon to everyone. Before I dive in, I'd also like to take a quick moment to highlight the phenomenal teamwork and execution demonstrated this quarter. We anticipated the market headwinds that our customers would face through the year, and the team has remained steadfast in serving customers with best-in-class services and support to position their businesses for growth.
Your next question comes from the line at Addax Escalade Lehman changed your line of <unk>.
Hi, This is Jessica on for Alex Thanks for taking my question I just wanted to.
<unk> 2024, what's on a product roadmap for next year and beyond like what are you most excited to invest in and our customers are interested in and I think anybody's investment is there any changes or pier head count to your checking for next year. Thanks.
Our our investment status strategy remains unchanged. So it gets all about automation speed and Personalised decisioning. So all of our roadmap items of line to those three categories. All designed to help our customers out compete for consumers and it can be a little different by low type will have.
Sean Blitchok: Not only are we focused on customer success, but we believe we also have significantly invested in the future success of MeridianLink. We continue to put the talent and processes in place to fuel our next phase of profitable growth and scale. It's now a matter of executing on these strategic initiatives while maintaining our cost structure. That's exactly what we did in Q3. MeridianLink performed in line with our revenue guidance at $76.5 million, growing 7% year-over-year. Additionally, we achieved an adjusted EBITDA margin of 39%, well above the top end of our guidance range, due to the combination of cost discipline and the initial payoff of our strategic investments.
More announcements to come in the coming your what are our new release schedule. It looks like but more recently, we did a lot we did announced the launch of our money and like access product, which enables our customers to have more flexibility and how they streamline their process for consumers is as they entered the digital channel.
Yeah.
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24 had counted at our guide upcoming.
Sean Blitchok: Turning to financials to begin, let's look at revenue. First, specifically breaking down software solutions. Our total lending software revenue accounted for nearly 77% of total revenue, and grew at 12% year-over-year. As the primary driver of our lending software solutions, non-mortgage lending revenue contributed 88% and grew 6% year-over-year. Mortgage-related revenue within lending software solutions inclusive of open close accounted for the remaining 12% of the total. Turning to data verification software solutions, revenue accounted for nearly 23% of total revenue, and decline 9% year-over-year.
Thank you and there are no further questions at this time I would like to turn it back to <unk>, that's where I can relax.
Okay.
Well. Thank you for taking the call today as we close I want to explain the final. Thank you to our team.
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Sean Blitchok: This was driven by a 17% decrease in mortgage-related revenue, which represents 57% of total data verification software solutions. In Q3, total mortgage-related revenue was up 11% from last year, and generated 22% of overall MeridianLink revenue. Last quarter, we adjusted our expectations for mortgage volumes to recover at a slower pace in the second half of the year, as indicated by industry sources. While this gradual recovery played out in Q3, we stayed focused on what we can control.
They sell us performance and thanks again for joining us today.
Thank you and ladies and gentlemen. This concludes today's conference call. Thank you for participating email address <unk>.
Sean Blitchok: Our platform strategy of cross-selling mortgage lending to our consumer lending depository Successful, as demonstrated by the go-to-market wins in the quarter. The other 78% of our business continues to grow, which is primarily led by the demand from our installed days for a suite of end-to-end consumer lending capabilities. This brings me back to the power of the platform, MeridianLink won caters to the evolving lending needs of the consumer. As customers add on modules, they are primed to grow even in the most challenging lending environments, which in turn increases the revenue opportunity for MeridianLink. Moving to profitability, accounting for stock-based compensation gap gross margin was 65%. Adjusted gross margin in Q3 was 72%, representing a 300-basis-point improvement year-over-year driven by increased productivity of our services team and technology spec.
Sean Blitchok: Before turning to operating performance in the quarter, I'd like to break down the year-over-year change in our operating expenses. Compared to the third quarter of last year, GNA increased 8% on a gap basis and was flat on a non-gap basis. R&D declined 2% on a gap basis and increased 1% on a non-gap basis compared to the third quarter of last year. And on a gap basis, sales and marketing increased 50% while on a non-gap basis, sales and marketing increased 44% compared to the third quarter of last year.
Sean Blitchok: The growth across our non-gap operating expenses was primarily driven by additional headcount and increased compensation costs to fuel our go-to-market efforts. We continue to selectively invest in talent and technology that supports our next phase of growth.
Sean Blitchok: Turning now to our overall operating performance. Gap operating income was 5.6 billion and non-gap operating income was 14 million. On a gap basis, net loss was 2.1 million or a negative 3% margin and on a non-gap basis adjusted EBITDA was 29.8 million, representing a margin of 39%. This represents an improvement of approximately 300 basis points on a sequential and year-over-year basis, driven by cost savings initiatives and ramping down non-critical spend.
Sean Blitchok: Now turning to the balance sheet and cash flow statement. We ended the third quarter with 97.6 million in cash and cash equivalence, a decrease of 11.3 million from the end of the second quarter, but driven by 30.7 million worth of share buybacks. Cash flow from operations was 21.3 million or 28% of revenue, and free cash flow was 18.8 million or 25% of revenue, for the third quarter. We continue to generate cash levels and provide protection in this period of uncertainty while enabling capital allocation opportunities for us to build value for our stockholders, as seen by the strategic buybacks executed in Q3.
Sean Blitchok: I'll now pivot to guidance for Q4 and for the full year 2023. We've been guiding to a second half recovery and volumes, which is a key driver of our transaction-based business model. As a reminder, we expect Saint-Store volume growth to contribute mid-single digits to our overall mid-teens growth algorithm in a normalized environment.
Sean Blitchok: In the current lending environment with the delayed recovery and mortgage and coming off of eyes last year in consumer, we're experiencing a drag in Saint-Store volumes as a result of credit tightening. Aside from volumes, there are additional performance drivers in our control that we have been hyper-focused on to support current and future growth. As we finish out the year, we will continue capturing new logos and cross-sell opportunities, accelerating ACV release and enhancing Meridian Link 1 to sharpen our customer's competitive edge in the market.
Sean Blitchok: On that note, we are reaffirming revenue guidance for the full year 2023. For the fourth quarter, estimated total revenue is expected to be between 73 million and 77 million compared to 70.6 million for the same period 2022. This represents an estimated year over year increase of 3 to 9%. For the full year 2023, we expect total revenue to be between 302 million and 306 million compared to 288 million for the same period in 2022.
Sean Blitchok: This represents an estimated increase of 5 to 6% to year over year. For the mortgage-related revenue, we expect the mortgage market to contribute approximately 23% of revenue for the full year 2023 compared to 23% for the full year 2022. To provide more color around the growth drivers in our total revenue, the mortgage-related revenue guide implies a continued decline in data verification revenue given the impact of tough comparables in 2022. With the inclusion of open closed, we expect our lending revenue will more than offset the data verification drag in 2023, ending the year with low single-digit growth in total mortgage revenue.
Sean Blitchok: 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 of post-pandemic hiring. Understanding these dynamics, we expect consumer lending will continue moment in 2023. Just at a slower pace compared to last year. As used car prices appear to be softening and our customers are weighted towards used auto lending, we expect the slight uplift in volumes in Q4 that will continue in the next year.
Sean Blitchok: Now, turning to the adjusted EBITDA guide. On a non-gap basis, fourth quarter estimated adjusted EBITDA is expected to be between 22 million and 26 million, representing adjusted EBITDA margins of approximately 32 percent at the midpoint. For the full year 2023, we expect our adjusted EBITDA range to be between 100 to 4 million and 108 million, representing adjusted EBITDA margins of approximately 35 percent at the midpoint. Our adjusted EBITDA guide reflects the continued operating discipline in areas that did not contribute meaningfully to growth acceleration.
Sean Blitchok: Over the last couple years, we have made strategic investments to build the foundation for future scale. We are now at the point of continuously optimizing our cost structure to support incremental growth, which will in turn drive margin expansion as volumes impact the bottom line.
Sean Blitchok: I would like to end on what we believe is consistently proven out Q4 after Q4. 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. This resilience of our customers with evident in the global financial crisis throughout the COVID-related downturn and has proven to be true in the recent unprecedented market dynamics. With the investments we have made in place, Meridian link is well positioned to strongly finish out the year and sustain profitable growth in years to come.
Operator: With that, Nicholas, Chris and I are happy to take any of your questions and I'll turn it over to the operator.
Operator: Thank you and ladies and gentlemen, we will now begin the question and answer session. Should you have a question? Please press the star followed by the number one on your telephone keypad. You will hear a three-tone prompt acknowledging your requests and your questions will be pulled in the order they are received. Should you wish to decline from the polling process? Please press the star followed by the number two. And just a reminder to please limit yourself from asking one question. If you have a follow-up question, please press the star one again. One moment please for your first question.
Parker Lane: Your first question comes from the line-up. Parker Lane from Speakl. Your line is open. Thank you, Parker. Thank you for taking my question.
Nicholas Flok: The start-off could you provide a little extra commentary around your mortgage solutions? I'm understanding new customers in that segment contributing to volumes at all and what impact are you seeing on volumes from higher interest rates through this past month? Thank you. We continue to see new logo wins as well as cross-fell wins within our mortgage business. On a year-over-year basis, I was kind of one large deal in the first three-quarters of last year, we're ahead of last year in terms of bringing on new fines, positioning us for the future. It's been a really good year in that regard and I think it speaks to us executing on the thesis we had with Applied and Open Close.
Sean Blitchok: Yeah, and I would just add, this is Sean. I would echo Chris' comments that the cross-cell motion with Mortage has been very successful. We're seeing consumer to cross-cell wins, which is kind of the major building block of the platform strategy going forward. Specifically on the volume question, we're outperforming MBA, we're outperforming the broader market, but Mortage, our mortgage volumes have been a headwind and continued to be a headwind, for sure. I think our pricing model with the minimums give insulation to some of that volume downside, but it's starting to pick up but would still a headwind nonetheless.
Sean Blitchok: Q2, Q3 has come off the floor, or we've seen the trough as behind us. Q2, Q3 has been better in terms of volume results, and we expect that to continue into Q4 and into FY24. Okay, fantastic. Thank you very much.
William McNamara: And your next question comes from the line up, William McNamara from BTIG. Your line is open. Thanks for taking my question. This is Bill on format.
Nicholas Flok: I kind of wanted to know, I guess, how significant is the friction reduction with the recently announced experience, verify partnership, kind of compared to what was available before? The new integrations discussed, including the one that you highlighted, represent our efforts to expand our clients' abilities to profitably lend down market. So as you think about our client base, and one of the things that makes us resilient is the fact that our customers tend to lend to AAA consumers.
Nicholas Flok: That said, our customers also want to serve the broadest base of their community as possible, and our new decision solution that we announced earlier in the year allows our clients to layer in these different verification services so that we can reach, we can enable our clients to reach these audiences profitably and with confidence. We have a number of solutions of that category that enable that type of capability. Okay, great. Thanks for taking my question. Thanks, Bill. Thank you.
Nick Clemmel: Your next question comes from the line of Nick Clemmel from UBS. Your line is open. Good afternoon, guys. Thanks for taking my question.
Nicholas Flok: I just wanted to get an update on how the backlog has turned into Q2 between new logo and cross-cell, and if you could provide any update on lending volumes that you've seen in October. Thank you. Good afternoon. It's made this week. Since the beginning of the year when we've re-structured our services organization and created practice areas, we've seen a continued increase in productivity and volatility level. And they will be some healthy backlog we're getting into 2024, but the team has been fighting on all cylinders and pretty successful in delivering implementations today.
Sean Blitchok: Yeah, Nick Desserson, you asked me to leave about volumes as well. In general, at the slight recovery that we thought in particular for mortgage and for auto, auto is a little bit slower than hoped. I think the dynamic is pricing, coming down in the used auto markets, supply recovering in the new auto market. It's definitely happening. It's just a little bit slow, but that will continue in Q4. The rest of consumer is at forecast, and so our Q4 total guide will yield approximately mid single-digit growth, and so I don't think we're in a bad position from a volume perspective all in, but we definitely have a launching pad for a lot of future volumes. Yeah, thanks for all the color and it's very helpful. Yep, thanks. Thank you.
Natalie Howell: Your next question from from the line of Aussie, Koji, Ikeda from Bank of America. Your line is open. Hey, this is Natalie Howell on for Koji. See, that's executed in terms of mortgage lending, and you talked about cross-selling, really helping drive that there. Could you dig a little deeper into the automotive segment? I know you said it's slower than you hope, but you're taking the re-exceleration into account for next quarter. So I wanted to see how that was tracking compared expectations, and along with that, what are re-exceleration expectations for account openings and personal loans playing out.
Natalie Howell: Thanks. We continue to see an uptick in new vehicle sales as inventories recover. And the incentives that are following that as automakers are looking to off those lenders is putting pressure on used auto, which continues to lag. All that being said, we're starting to see early indications of recovery specifically around the wholesale use prices are starting to decline month over month, which is an indication of future success in the coming quarters.
Natalie Howell: And then the other element just keep in mind new vehicle sales represent about 25% of our lending volumes and also represent an opportunity in the future as all those vehicles come off lease and enter the used auto market. That's another opportunity for the business and the future of our customers. Thank you. And once again, if you would like to ask a question, please press this far one again.
Alex Sklar: Your next question comes from the line of Alex Sklar from Raymond James, your line is open. Hi, do you think that's going on for Alex? Thanks for taking my question.
Nicholas Flok: I just want to, as we're entering 2024, what's on the product roadmap for next year and beyond? Like, what areas are most excited to invest in and that customers are interested in? And I think if anybody's investment, is there any changes up here in your head count there, especially for next year? Thanks. Our investment strategy remains unchanged. So it's all about automation, speed, and personalized decisioning. So all of our roadmap items align to those three categories, all designed to help our customers out compete for consumers, and it can be a little different by loan type.
Nicholas Flok: We'll have more announcements to come in the coming year, what our new release schedule looks like. But more recently, we did a lot, we did announce the launch of our MeridianLink Access product, which enables our customers to have more flexibility in how they streamline their process for consumers as they enter the digital channel. Yeah, just quickly on the head count, we're tracking to our head count number in FY23, and we'll talk more about FY24 head count in our guide upcoming. Thank you, and there are no further questions at this time.
Nicholas Flok: I would like to turn it back to MeridianLink team for further remarks. Well, thank you for tuning the call today. As we close, I want to explain the final thank you to our team. They have consistent, strong performance, distinguishes MeridianLink from the competition. In fact, I'm proud to share that in Q3. I already see included MeridianLink in the top 50 of its 2023 Global Fentech 100 list. This achievement would not be possible without the strength and innovative spirit of our team. I'm proud of this health performance, and thanks again for joining us today.
Operator: Thank you, and ladies and gentlemen.
Operator: This concludes today's conference call.
Operator: Thank you for participating. You may now disconnect.