Meridianlink Inc
NYSE:MLNK
Earnings Call Analysis
Q3-2023 Analysis
Meridianlink Inc
MeridianLink has maintained solid performance in the third quarter, with the company putting forward an end-to-end digital lending platform, ensuring steady year-over-year GAAP revenue growth of 7% to $76.5 million, and achieving an adjusted EBITDA margin of 39%. Their success is leveraged on product innovation, strong go-to-market teams, and capturing new customer demand.
MeridianLink is witnessing financial institutions adopting its digital lending solutions as part of their strategy, reflecting in solid bookings for total mortgage lending. A notable $2 billion bank looks to streamline lending processes by using their consumer and mortgage solutions together, highlighting product adoption and a strategic thrust to enhance platform capabilities.
The company introduced MeridianLink Access, a point-of-sale solution enhancing configurability and customer-facing processes. Innovations in data analytics, such as MeridianLink Data Connect, are providing financial institutions with tools for better insight and reporting to optimize lending practices. Through these developments, MeridianLink's customers can serve their clients faster and drive business growth.
MeridianLink has reinforced its growth through cross-sell strategies, with an example of one credit union customer expanding to consumer opening and indirect lending modules, leading to a recognition of over 5x the amount of annual recurring revenue from that customer. This approach is seen as a multiplier of revenue and a testament to the successful traction gained in the market.
MeridianLink has expanded its partnership with Experian, enabling real-time access to verified income and employment data, which allows financial institutions to streamline lending decisions. This integration magnifies the efficiency and competitiveness of their customers in the lending ecosystem.
Citing an expected recovery in volumes, MeridianLink reinforces mid-single digits growth contribution from same-store volume growth and anticipates consumer lending to continue its momentum into 2023. For the fourth quarter, revenue is expected to be between $73 million and $77 million, marking up to a 9% year-over-year increase, and overall an estimated increase of 5% to 6% year-over-year for total revenue.
MeridianLink is consciously refining its cost structure to support growth, with the anticipation that this will lead to margin expansion. Their inconsistency executing through market shifts and a resilient customer base positions MeridianLink well for a strong close to the year and to sustain growth in the future.
You don't have any saved screeners yet
Ladies and gentlemen, thank you for standing by. Welcome to the MeridianLink's Third Quarter 2023 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to turn the conference over to your first speaker today, Gianna Rotellini. Gianna, 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 are MeridianLink's Chief Executive Officer, Nicolaas Vlok; Chief Financial Officer; Sean Blitchok; and President, Go-to-Market, Chris Maloof. 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 filed from time to time with the Securities and Exchange Commission.
All of our statements are made based on information available to us as of today, and except as required by law, we assume no obligation to update any such statements. During the call, we will also refer to both GAAP and non-GAAP financial measures. You can find the 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 Nicolaas.
Thank you, Gianna. Good afternoon, everyone. 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.
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 GAAP revenue grew 7% year-over-year to $76.5 million at an adjusted EBITDA margin of 39%. This represents total revenue in line with our guidance range and a solid beat on profitability driven by successful cost discipline in the quarter. We consistently achieved profitable growth as we execute on a platform strategy that captures the entirety of the consumer take 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. On that note, let's move to our Q3 update on the 3 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 bookings quarter and won an impressive roster of new logos.
We continue to see the top financial institutions now sweet spot, turning MeridianLink to reach their digital transformation goals. Q3 was a solid bookings quarter in total mortgage lending. This is a fantastic achievement by the team that demonstrates the success in cross-selling MeridianLink One at a time when mortgage rates are at the highest they've been in the generation.
We continue to see our most innovative customers investing to transform their mortgage lending processes as they anticipate the recovery in volumes. On that note, I'd like to highlight a platform sale win in the quarter from a $2 billion Bank that's signed on both MeridianLink in consumer and mortgage to replace their existing disparate systems.
Through MeridianLink One, the customer is now using our patented debt optimization tool that empowers loan officers to maximize acceptance rates, boost cross-sell opportunities and deepen their relationships with clients. We continue to engage with both banks and credit 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 Unleaded Union, we chose MeridianLink consumer home equity and account opening to streamline the lending process. This was a key high-value win 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 turns 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 this commitment 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.
Critical to our sales motion, we are focused on improving the capabilities of MeridianLink One to drive our customers' digital lending strategy. To remain resilient 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 One. Driven by the demand for an all 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 PRS 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 insightful reporting.
In today's consumer-driven market being able to gain greater insights from multiple data sources and easily access key learning in 1 place helps our customers serve more clients faster, driving the business forward. In Q3 we also expanded the connected capabilities of MeridianLink Insight, our interactive buses 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 complaints and progress. Collect customers have better visibility of their clients delinquencies to provide a clear path forward for maintaining client relationships. These examples of innovation demonstrated team's dedication to expanding our platform capabilities to support our customers' strategic initiatives.
Finally, our third area of focus for growth acceleration is centered around our ability to empower customers to compete [indiscernible] in the markets in which they participate. We've been very successful in enabling our customers to capture a greater share of the client's debt wallet through MeridianLink 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 enhanced connections with numerous partners to amplify the value of our comprehensive lending platform.
Starting with strong cross-sell wins in the quarter, 1 of our existing MeridianLink Collect created union customers with AUM of $100 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 5x the amount of ARR from the customer. This is a perfect example of how the cross-sell motion that we've invested in to date can multiply our revenue over time, accelerating growth as our platform strategy gains traction in the market.
We were also excited to sign a multimodule deal with a 200 million AUM credit union who currently uses MeridianLink consumer and added MeridianLink Mortgage business lending and business account opening in the quarter. In this example, the differentiated lending capabilities of MeridianLink One enabled the customer to balance liquidity and achieve strategic growth initiatives while also winning share from larger players in the market.
Moving to our new partner integrations. We are hyper focused on teaming up with the most innovative players in the digital lending space to empower customer growth. First, we expanded our capabilities with Experian, 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 Experian Verify, which provides lenders with real-time access to verified income and employment information. We also enhanced our MeridianLink consumer and decision lender integration with Experian PowerCurve origination Essentials, the company's automated decisioning engine. From the initial verification process to approving the loan we have leveraged the power of our partner network to streamline the lending process for customers.
Another part of announcement in the quarter was [indiscernible] a provider of digital identity vacation and fraud solutions. MeridianLink One customers can now securely verify and onboard more consumers in realtime, eliminating friction at sign-up or blocking fraudulent applicants.
This is a great example of how we are merging MeridianLink One 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.
I'd like to end on an exciting enhancement to our long-standing partner integration with Cox Automotive dealer track, a comprehensive suite of indirect lending solutions for the industry's module dealer lending network. This enhancement takes our existing integration, which expedites created 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. 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 there are macro factors out of our hands, we have strengthened our position as the leader in an extensive consumer lending market and we still have a long runway to take share. 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.
With that, I will now turn the call over to Sean to talk about our financial results and guidance.
Thanks, Nicolaas, 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.
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. 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, nonmortgage 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 declined 9% year-over-year. 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. 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 a suite of end-to-end consumer lending capabilities. This brings me back to the power of the platform. MeridianLink One caters to the evolving lending needs of the consumer. As customers add on modules, they're prime to grow even in the most challenging lending environment, which in turn increases the revenue opportunity for MeridianLink.
Moving to profitability. Accounting for stock-based compensation, GAAP 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 stack.
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 GAAP basis and was flat on a non-GAAP basis. R&D declined 2% on a GAAP basis and increased 1% on a non-GAAP basis compared to the third quarter of last year.
And on a GAAP 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 growth across our non-GAAP 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.
Turning now to our overall operating performance. GAAP operating income was $5.6 billion, and non-GAAP operating income was $14 million. On a GAAP basis, net loss was $2.1 million or a negative 3% margin. And on a 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 noncritical 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, 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. I'll now pivot to guidance for Q4 and for the full year of 2023.
We've been guiding to a second half recovery in volumes, which is a key driver of our transaction-based business model. As a reminder, we expect same-store volume growth to contribute mid-single digits to our overall mid-teens growth algorithm in a normalized environment. In the current lending environment with the delayed recovery in mortgage and coming off of eyes last year in consumer, we're experiencing a drag in same-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 ACD release and enhancing MeridianLink One to sharpen our customers' competitive edge in the market.
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. 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 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 close, 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.
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 streaming market coming off of post-pandemic hiring. Understanding these dynamics, we expect consumer lending will continue momentum in 2023. And 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 a slight uplift in volumes in Q4 that will continue into next year. Now representing adjusted EBITDA margins of approximately 32% at the midpoint. For the full year 2020, 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. Over the last couple of 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.
I'd like to end on what we believe has consistently proven out quarter after quarter. MeridianLink 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. This resilience of our customers was 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, Merdian Link is well positioned to strongly finish out the year and sustain profitable growth in years to come. With that, Nicolaas, Chris and I are happy to take any of your questions, and I'll turn it over to the operator.
[Operator Instructions] Your first question comes from the line of Parker Lane from Stifel.
Matt Becker on for Parker. To start off, could you provide a little extra commentary around your mortgage solutions? Are you standing 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?
We continue to see new logo wins as well as cross-sell wins within our mortgage business. On a year-over-year basis, outside of 1 large deal in the first 3 quarters of last year, we're ahead of last year in terms of bringing on new clients positioning us for the future. It's a really good year in that regard. And I think it speaks to us executing on the leases we had with acquired local...
Yes. And I would just add -- this is Sean. I would echo Chris' comments that the cross-sell motion with mortgage has been very successful. We -- so we're seeing consumer to cross-sell wins, which is kind of the a major building block of the platform strategy going forward.
On the -- specifically on the volume question, we're outperforming MBA or outperforming the broader market. But mortgage had -- I mean our mortgage volumes have been a headwind and continue to be a headwind for sure. I think our pricing model with the minimums give installation to some of that volume downside. But certainly, we're -- it's starting to pick up, but with still a headwind nonetheless. So Q2, Q3 has come off the floor or we've seen the trough, I think, has been behind us. Q2, Q3 has been better in terms of volume results, and we expect that to continue into Q4 and into FY '24.
And your next question comes from the line of William McNamara from BTIG.
This is Bill on for Matt. I wanted to know, I guess, how significant is the friction reduction with the recently announced Experian Verified partnership kind of compared to what was available before.
The new integrations discussed, including the 1 that you highlighted, represent our efforts to expand our clients' abilities to profitably lend down market. So if you think about our client base, 1 of the things that makes us resilient is the fact that our customers tend to lend to AAA consumers.
That said, our customers also want to serve the broadest space of their community as possible. and our new advanced decisioning solution that we announced earlier in the year allows our clients to layer in these different verification services so that we can reach -- we enable our clients to reach these audiences profitably and with confidence. We have a number of solutions in that category that enable that type of capability.
Your next question comes from the line of Nick Cremo from UBS.
I just wanted to get an update on how the backlog has trended in Q2 between new logo and cross-sell? And if you could provide any update on lending volumes that you've seen in October?
Good afternoon, it's Nicolaas. We've -- since the beginning of the year, when we restructured our sales our services organization and creative practice areas. We've seen a continued increase in productivity and ability to deliver. We have come off a really strong bookings quarter again, which contributed to building backlog, but we pretty making pretty good progress, and we'll continue to make progress in the back half of the year.
I think we're going to exit the year probably lower than last year from a backlog standpoint, but we will carry some backlog. And there will be some healthy backlog we're carrying into 2024. But the team has been fighting some of this and pretty successful in delivering implementations today.
Yes. Nick, this is on. You asked, I believe, about volumes as well. In general, funding 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 market, 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 total guide will be -- 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.
Your next question comes from the line of from Bank of America.
This is Natalie Ho on for Cody. You guys 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 lower than you hoped, but you're taking the reacceleration into account for next quarter. So I wanted to see how that was tracking compared to expectations and along with that -- what a reacceleration expectations 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 automakers are looking to offer those lenders is putting pressure on used auto, which continues to lag. All that being said, we are starting to see early indications of a recovery, specifically around -- the wholesale used prices are starting to decline month-over-month, which is an indication of a piece of success in the coming quarters.
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 up lease and enter the used auto market, that's another opportunity for the business in the future of our customers.
[Operator Instructions] your next question comes from the line of Alex Sklar from Raymond James.
This is on for Alex. I just wanted to -- as we're entering 2024, what's on the product road map for next year and beyond? Like what areas you're most excited to invest in and that customers are interested in? And have you thinking about your investment, is there any changes to your head count you're expecting for next year?
Our investment strategy remains unchanged. So it's all about automation, speed and personalized decisioning. So all of our road map items aligned to those 3 categories, all designed to help our customers compete for consumers, and it can be a little different by loan type.
We'll have more announcements to come in the coming year and what our new release schedule looks like. But more recently, we did announce the launch of our MeridianLink Access Fund, which enables our customers to have more flexibility in how they streamline their process for consumers as they enter the digital channel.
Yes. Just quickly on the headcount. We're tracking to our headcount number in FY '23, and we'll talk more about FY '24 head count in our guide upcoming.
And there are no further questions at this time. I would like to turn it back to MeridianLink team for further remarks.
So thank you for attending the call today. As we close, I want to extend the final thank you to our team. We have consistent strong performance distinguishes MeridianLink from the competition. In fact, I'm proud to share that in Q3, 83 included MeridianLink in the top 50 of its 2023 global 100 List. This achievement would not be possible without the strength and innovative spirit of our team. I'm proud of the solid performance, and thanks again for joining us today.
Thank you. And ladies and gentlemen, this concludes today's conference call.