MeridianLink Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2023

There are 11 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to RegentLink's Second Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' 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, Gianna Rotellini.

Operator

Jenna, please go ahead.

Speaker 1

Good afternoon, and welcome to MeridianLink's Q2 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, Nicholas Voss Chief Financial Officer, Sean Blitchock and President, Go to Market, Chris Malouf. 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.

Speaker 1

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. During the call today, 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 Nicholas.

Speaker 2

Thank you, Gianna. Good afternoon, everyone. Thank you all for joining us for our Q2 2023 earnings call. I want to thank the entire MeridianLink team for delivering another solid quarter in the midst of the current macroeconomic backdrop. We continue to see healthy demand for the MeridianLink 1 platform, demonstrated by the business highlights in the quarter.

Speaker 2

There are a few key areas that led to our results. We are continuously improving our platform capabilities through product innovation and value added partner integrations. And for another quarter, the powerful capabilities of the MRIdianLink 1 platform Continued to drive new logo and cross sell momentum. Our GAAP revenue grew 3% year over year to $75,400,000 at an adjusted EBITDA margin of 36%, which is below the 2nd quarter guidance range on revenue and at the bottom end of the range on EBITDA. This was due to a $2,300,000 reduction in revenue related to a commercial dispute of a contract acquired through a past acquisition.

Speaker 2

Sean will provide more details on this shortly. Adjusted for this reduction, MeridianLink performed in line with our guidance at $77,700,000 and grew 6% year over year at an adjusted EBITDA margin of 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 state.

Speaker 2

Consumer spending has remained reasonably healthy. However, we continue to see pressure on lending volumes as anticipated. While we have seen positive signals on 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 and 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, both in line with our strategic investments in our go to market engine and services capabilities.

Speaker 2

It is the credit unions And community banks that we have seen remain resilient because of their innovative mindset and use of technology to quickly adapt to the evolving consumer lending needs To best position their business to do exactly that, 1, the health of our pipeline reinforces this view. Irrespective of the economic cycle, the market is undergoing increased digitalization and we believe MeridianLink 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, the search in digital transactions will accrue to our benefit because of our volume based business model And the fact that we serve the mid market. As we wait for markets to normalize, we remain laser focused on MeridianLink being the most Trusted Financial Services Technology platform, engaging with our customers to best position their businesses for resilient growth.

Speaker 2

Whether that be through a one stop shop for their landing needs or premier customer service, our goal is to optimize the success of our customers. We continue to realize our growth through their success. In a few minutes, Sean will speak about our Q2 financial performance and provide 2023 Q3 and full year guidance. Before that, I would like to give several updates on our three areas of growth acceleration that fueled our performance. 1st, engaging more deeply with customers 2nd, expanding the capabilities of the platform and third, empowering customers to grow more quickly and better serve their communities.

Speaker 2

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 was resilient in the 2nd quarter, with the majority driven by cross sell and up sell. This is a great proof point of how we have deepened our engagement with customers. Our teams are focused on working with them to optimize their use of MRIdlink 1 by increasing their module penetration. Let's look at a couple of cross sell wins in the quarter that demonstrate our success.

Speaker 2

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 case of MeridianLink 1 as different buyers within the same organization Come together and make a strategic decision to provide better 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 Partner together to cross sell the capabilities of the MeridianLink 1 platform to an existing indirect lending customer. While the initial engagement was focused on direct auto lending, the customer also selected home equity lending and Insight, our business intelligence tool To gain visibility across the platform, improve workflow efficiencies and scale their lending solution.

Speaker 2

As is often the case, When the customer engaged with Meridian Link 1 module, they quickly saw the value and adopted multiple modules to help accelerate growth. We also deepened our partnership with an existing Meridian Link 1 customer, we turned to our team to deploy a more automated collections module. By improving workflow efficiencies, the customer spends less time recovering late payments and more time maintaining positive client relationships. This points to our platform's focus on helping customers navigate the financial journey of their clients by providing an end to end digital solution. In Q2, we also engaged with over 1100 customers and partners for 3 days at our in person user forum, Breaking last year's record of attendance, the event led directly to significant pipeline creation for new logo, cross sell and partner integrations.

Speaker 2

It also provided an opportunity to recognize 10 value customers for their strategic thinking, Innovation and effective use of the MeridianLink 1 platform with the first ever ARC Awards. As a last point on our engagement efforts in the quarter, we made great progress in our services delivery capabilities. Since Q1, our year over year services revenue growth has doubled, demonstrating the success of the structural changes we have made to increase productivity. A strong services quarter sets us up well for future growth. Our customers remain the focal point of everything we do And our ongoing engagement across the customer centric areas of the organization reflect this commitment.

Speaker 2

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. Critical to our sales motion, We are focused on creating value through the connected capabilities of MRIdianLink 1. First, We enhanced our platform's advanced decisioning capabilities to use a wider variety of customizable attributes in the loan decisioning process. With this automated logic, our customers price loans more effectively, increasing borrower satisfaction.

Speaker 2

Customers can now move beyond traditional scoring methodologies and expand their reach to more creditworthy consumers faster while driving profitability. In addition, we automated the loan and account cross selling workflows on the MeridianLink 1 platform, Removing the need for the loan officer to intervene manually, it's now effortless for our customers to increase cross sell volumes as they deepen their visibility of demand with this use of the platform. We released a digital banking API for Meridian Link Engage, Our marketing automation solution that enables customers to present personalized offers through online and mobile platforms. This expands the customers' ability to reach target consumers through their preferred digital channel, ultimately increasing conversion rates. Ending on partner marketplace wins, we had a very successful quarter enabling partners and we want to highlight 1.

Speaker 2

In the quarter, we added an integration with PortEx, a financial infrastructure and integration technology company. By combining the MeridianLink platform with Portex's integration capabilities, we can rapidly integrate with other core providers. This accelerates our customers' end to end lending process, driving automation for the lender and faster decisioning for the consumer. By expanding the platform's capabilities to create a seamless and personalized borrower experience, customers can now capture and retain more demand for the lending solutions, in turn increasing revenues for Meridian Link. Turning to our 3rd area of focus, MeridianLink empowers customers to compete, grow and succeed in the markets in which they participate.

Speaker 2

We have a track record of enabling customers to win more clients and capture a greater share of their clients' debt wallet. Let's review a few go to market highlights in the quarter where the customer chose MeridianLink to empower their growth journey. For 1, we were excited to announce the go live of Space Coast Credit Union, the 3rd largest credit union in Florida On MeridianLink Insight, our business intelligence tool. As a result, instant approvals increased by over 25% And approximately 95% of all loan applications are now processed and decided within one day. Space Coast growth and improved member experience is a testament to their expanded use of the MRIdian Link 1 platform.

Speaker 2

In addition, we achieved numerous high value platform sale wins this quarter. As we evolve our go to market motion to sell MarinLink 1, 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, our consulting team engaged with the customer to accelerate growth across their portfolio of Meridian Link consumer, Opening, auto, HELOC and business modules. Another customer chose the MeridianLink 1 platform for its consumer, Home Equity and Business Lending Capabilities.

Speaker 2

We won 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 our customers need in the market. I want to close where I began and thank the team. Their focus on customer success is a driving reason that MeridianLink continues to deliver consistent growth and healthy profitability levels. We benefit from having a high quality, resilient customer base dedicated to contributing greater value to their clients through connected and integrated borrower experience.

Speaker 2

At MeridianLink, providing a seamless, innovative digital lending platform that enables our customers to deliver on that promise is central to everything we do. Pacing 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 their digital lending needs, in part by providing excellent customer support and innovating to expand our platform capabilities. Our flywheel starts with empowering our customers to grow as they automate the lending process and deepen visibility of demand with their use of MeridianLink 1. We strive to be the most trusted financial services technology platform that positions our customers to succeed.

Speaker 2

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

Speaker 3

Thank you, Nicholas. Before diving in, I'd 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 continue to execute well and empower our customer Nicholas spoke about our achievements in the quarter and set the stage on the macro front.

Speaker 3

I will further review how those trends have been impacting the business. We have a business model that continues to perform through macroeconomic headwinds. We are 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.

Speaker 3

First, we have an industry leading solution that enables customers to perform through the economic cycle. 2nd, quarter after quarter, we capture strong demand for the MeridianLink 1 platform, which will be a tailwind for the business. And third, we're seeing early indications of the anticipated normalization of the economy. With that, We expect that there will be an upside to our total growth as lending volumes recover across the platform. While this recovery is happening, We continue to counter cyclically and strategically invest to build the foundation for MeridianLink's next phase of growth.

Speaker 3

Now let's review our 2nd quarter financial performance. We generated total revenue of 75 $400,000 up 3% year over year, which was below our 2nd quarter guidance range of 4% to 8% year over year growth. As Nicholas mentioned, this was due to a $2,300,000 reduction in revenue related to a commercial dispute for the reseller that we acquired from our acquisition of StreetShares. 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.

Speaker 3

Adjusted for this reduction, MeridianLink performed in line with our revenue guidance at $77,700,000 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 and 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 and A related items from our past acquisitions. Despite the revenue reduction, we completed our escrow obligation for the StreetShares transaction, which resulted in the release and receipt of the $30,000,000 escrow back to the company.

Speaker 3

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 MeridianLink can become a $1,000,000,000 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 $2,300,000 in revenue reduction, non mortgage lending revenue grew at 5% year over year.

Speaker 3

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 $2,300,000 in 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.

Speaker 3

Staying on the topic of mortgage, I'd like to take a minute and acknowledge 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've scaled our solutions to be on the offensive, Taking more share, increasing use of MeridianLink 1 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.

Speaker 3

This brings me right back to our value proposition. Meridian Link 1 enables customers to provide a frictionless lending process, improving the consumers' experience. As customers sign on more modules, they gain the ability to cross sell different loans to the consumer. By turning to their trusted credit union or bank using MeridianLink 1, consumers can fully optimize their debt wallet, a top of mind priority, especially in a high interest rate environment. Moving to profitability.

Speaker 3

Accounting for stock based compensation, GAAP gross margin was 62%. 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 Q2 of last year, G and A increased 17% on a GAAP basis and 4% on a non GAAP basis. R and D increased 12% on a GAAP basis and 6% on a non GAAP basis compared to the Q2 of last year.

Speaker 3

On a GAAP basis, sales and marketing increased 57%, while on a non GAAP basis, sales and marketing increased 50% compared to the Q2 of last The growth across our non GAAP operating expenses was primarily driven by additional headcount 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 1,500,000 And non GAAP operating income was $11,900,000 On a GAAP basis, our net loss was Negative $5,200,000 or negative 7 percent margin. And adjusted EBITDA was 27,100,000 representing an adjusted EBITDA margin of 36%.

Speaker 3

Highlighting the true operating performance of the business, Adding back the $2,300,000 of one time revenue reduction, adjusted EBITDA was 29,400,000 And an 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 2nd quarter with 108 In the last 12 month period ending in the second quarter, operating cash flow was $61,100,000 or 21 percent cash flow margin and free cash flow was 51,400,000 or 17% free cash flow margin. VirginLink's 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. Allow Pivik to guidance for Q3 and update guidance for the full year of 2023.

Speaker 3

We've 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 ACV release, the one time reduction in StreetShares revenue and Delayed recovery in mortgage volumes is substantial enough for us to lower our guidance range. For the Q3, estimated total revenue is expected to be between $76,000,000 $78,000,000 compared to $71,800,000 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 $302,000,000 and $306,000,000 compared to $288,000,000 for the same period in 2022.

Speaker 3

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 Q3 of 2023 compared to 21% for the Q3 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 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 OpenClose, we expect our lending revenue will more than offset the data verification drag in 2023, ending the year with mid single digit growth in total mortgage related revenue.

Speaker 3

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 We'll continue 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 used auto lending, we expect an uplift And volumes in the back half of the year. Now turning to the adjusted EBITDA guide. On a non GAAP basis, 3rd quarter estimated adjusted EBITDA is expected to be between $27,000,000 $29,000,000 representing adjusted EBITDA margins of approximately 36% at the midpoint. For the full year 2023, We expect our adjusted EBITDA range to be between $104,000,000 $108,000,000 representing adjusted EBITDA margins of Approximately 35% at the midpoint.

Speaker 3

Our adjusted EBITDA guide reflects the continued operating in areas that do not contribute meaningfully to growth acceleration. Over the last year, We've made strategic investments to build the foundation for MeridianLink's next phase of growth. These investments have fueled our go to market engine, And expect that momentum to accelerate next year. I'd like to end on what we believe is consistently proven out Quarter after quarter. MeridianLink has a team that can execute well through market volatility.

Speaker 3

We also have a resilient customer base who is focused on investing in the lending capabilities needed to best serve their clients. Our values of improving the borrower experience and being a trusted partner align with our customers. Those shared values underpin 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.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. And your first question comes from the line of Koji Ikeda from Bank of America. Please go ahead.

Speaker 4

Hey guys, 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. But when we look at the kind of the metrics here in the financial supplement, it does show that Lending Software Solutions customers declined here for the 2nd straight quarter Down to 1593 customers.

Speaker 4

So just 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?

Speaker 3

Yes. Hey, Koji, it's Sean. Thank you for the question. I think there's a couple of things interesting about the customer count. And it's an the algorithm, I wouldn't say necessarily has changed, but the dynamic has changed.

Speaker 3

So for example, We've seen more consumer only customers go into consumer and mortgage. So the cross sell motion is what we've been focused on a lot in the last couple of quarters and we're seeing success So that's important. We are seeing new customer growth across all of our business, but we are 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 IMBs in the space, all at 70% To a 30% depository, and that has completely shifted. So we're shifting to a seventy-thirty model the other way.

Speaker 3

There are customers who are in financial distress, bankruptcy. They're as you know very well, there's a lot of consolidation in the market In that space, and so we're seeing a lot of offset in our total customer count. So I think the overall growth algorithm that we speak of is still it still holds true. But right now, I think the cross sell component is taking up more space than the new logo, And we're okay with that. We're okay with that, given the overall market dynamics.

Speaker 4

Got it. No, that's super helpful. And just a follow-up here. Sean, in your prepared remarks, you mentioned you're seeing a delayed recovery. But when we look at the forecast here for the mortgage side, the revisions have been pretty bullish upward from what we've seen.

Speaker 4

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 delay play out? And then are you also seeing a delay on the consumer side? And I guess specifically with the more consumer Auto loan data that we've seen.

Speaker 3

So 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 MBA forecast, primarily as well as other data sources, but they have continually rolled Forward with the recovery. And so there has been when we initially guided the year, there has been an 8% Decline in that recovery in the combined Q3 and Q4. And We had predicted the decline largely for Q1 and Q2. We had anticipated a faster recovery Starting in Q2 and going into Q3 and Q4 and that's just really, really slowed.

Speaker 3

So now The if I remember correctly, it's negative 3% for Q3 and around 30% in Q4 growth From the MBA, 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.

Speaker 4

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

Speaker 3

Thank you, Koji.

Operator

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

Speaker 5

Thank you. I'm sorry, I'm Just a little confused by the guidance with the deceleration in the non mortgage. It looks like it declined. I'm not sure what I'm missing here, but the non mortgage growth rate decelerated Significantly this quarter and I think that's building to your guidance. Is that not right or what am I missing?

Speaker 3

Non mortgage It grew 5% in Q2. Non mortgage As a total in the second half, we'll grow high single digits. And so I'm not sure We'd have to get into the what specifically is confusing, Bob.

Speaker 5

Okay. I guess, how do you go from the 5% to high single digits?

Speaker 3

Just I mean, what we're modeling is a continued acceleration in auto. We're seeing account opening strengths. Credit cards is kind of moderate growth, low single digits, and Personal loans has been very healthy as well. So Q2 has been again consumer in total is In Q2 was a good a positive story for us. We expect more of the same in Q3 and Q4.

Speaker 3

Certainly not what we saw in FY 2022 In terms of the growth rates, but we anticipated that we have not come off of our guide for consumer since the beginning of the year.

Speaker 5

Okay. And I know the backlog, can you give some color on the backlog? I know a big initiative was In accelerate on boarding of backlog, but how is the backlog overall trended? And how have you progressed on accelerating You referenced on accelerate onboarding.

Speaker 2

Bob, this is Nicholas. It's been going really well. If you look at our services results for the quarter, growth of 28% It's clearly showing progress made by Dean and the delivery team. It's one of our stronger quarters that we've had over the last few quarters. We are seeing good progress made and we've seen Accelerated ACV release Q2 over Q1, which means we're impacting the backlog.

Speaker 2

So pretty pleased with that Progress and the results and services. Now keep in mind, once we've delivered a client And the client is made live, it's a ramp cycle after that. So as we Continued to release ACV and turn projects live with clients. They keep ramping for roughly 12 months Also after the project's been delivered. So from our perspective, pretty pleased with the progress made there.

Speaker 5

Thank you. If I could just sneak in one last one. Just as we think about 2024 as a long term, what is the right growth rate to think about? And The EBITDA margins, what is the right level to think about for MeridianLink as we think about 2024 or really the long term?

Speaker 3

So I think 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 I'm not guiding to 2024 right now, but I think that will be represented in the 20 We still have 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 right. But The whole direction and the whole strategy of the company has been to increase our installed base and increase growth To get the rebound so when the rebound happens, we get kind of the effect of that through our volume So I would expect a higher growth rate in 24.

Speaker 5

Great. Thank you very much. Appreciate it.

Speaker 3

Thanks, Bob. Appreciate it.

Operator

Thank you. And your next question comes from the line of Matt VanVliet from BTIG. Please go ahead.

Speaker 6

Hey, good afternoon. Thanks for taking the question. I guess as you look back over the history of the company, Obviously, there's not a lot of times where interest rates have been quite this high. But when you've seen movement, like we have over the last several quarters, Where do you feel like there's maybe an upper bound of consumer, I guess, Just need 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?

Speaker 3

Hey, Matt, Sean. So it's a great question. If you look back at the data, the last time that we saw Non growth in consumer was 2,008, 2,009 and it was a blip for 1 quarter. So I think things have to be pretty dire for consumer not to grow. It's a matter of how much it grows.

Speaker 3

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 is 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 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 federal 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 got a little bit out over my But hopefully that helped a little bit.

Speaker 6

That's great. Thank you. And then also Greg.

Speaker 2

Maybe something to add there to Sean's question as well is, consumers are still Spending, but the type of spending that where it's coming from is still from savings and checking accounts. If you look at pre pandemic levels, the data shows there's about 10% to 15% more in bank accounts now than pre pandemic. What we are saying is and it's kind of been a consistent process that started probably Late Q1 or so, there is a continued tightening of credit happening. And We are certainly seeing higher numbers of loans being rejected than it's one of the highest levels Of loan rejections in 5 years or so. And I think what we are seeing happening at this stage is The consumer is not engaging as much in lending given the rates and credit tightening and using cash Some of the purchases that they're doing at this point in time with an expectation that there's going to be some level of normalization.

Speaker 2

And in my opinion, we kind of living through that and the guide that Sean discussed is reflective of I was expecting the back half of the year being softer specifically if you look at the data around mortgage with MBA. MBI kept pushing out, pushing out their recovery on mortgage volumes and it has pushed into 2024 and it's reflective in our guide.

Speaker 6

Okay. Very helpful. And then you talked about growing success on the upsellcross sell. Can you give us a sense of whether it's a snapshot now or kind of what the forward outlook 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 a sense of how much Kind of dry powders out there just in the installed base.

Speaker 7

Yes, this is Chris. Thank you. I'd like to go back to a call that we gave on the upswing and the early indication of success we're having cross sell Contained within 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 in go to market and our ability to drive cross sell.

Speaker 3

You brought up the mortgage part,

Speaker 7

but it's really all of our products that we're building this cross sell motion 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 buy products in the M and A realm, Integrate it into our product suite and then bring it to our clients in a situation where they see 1 plus 1 equals more than 2 because it's the only way that type of motion is successful, Particularly in an environment where you brought up mortgage where there's there are different buyers within the financial institution. So I remain bullish on our Capabilities there and the track record to come. Now that your follow on questions from a mortgage perspective as well as cross sell is, We're in the early stages of our penetration and our time spent in that motion. I If you even go back to the history of MarineLink when it started, the mortgage and consumer divisions a decade ago were largely separate. And over the last 10 years, we have meaningfully brought them together from all aspects of the organization and now we're seeing that benefit come to bear.

Speaker 3

And Matt, just one last comment if you think about cross sell. In Q2 alone, we saw mid Single digit growth from cross sell. So it's something that not only are we focused on, we're already proving out to be successful.

Speaker 6

Great. Appreciate it.

Operator

Thank you. And your next question comes from the line of Scott Wardsell from Wolfe Research. Please go ahead.

Speaker 8

Hey, good afternoon guys and thanks for taking my questions. Maybe first one on the consumer lending side, wondering if you can maybe Parce 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

Speaker 9

your expectations.

Speaker 3

Sorry, Scott. Sean, I haven't learned how to hit the unmute button. I talked about it a little bit earlier, but I think the first comment I'll make is overall growth for consumer Was it as anticipated as forecasted. If you look at the different loan types, Strong in account opening, very strong in personal loans. So think non asset based loans.

Speaker 3

Vehicle was a headwind for us a little bit, But we expect that to turn around in half 2. And good growth In all other loan types, including cards. And so but those would be the ones that I would call out as Really good growth and just a little bit of an offset in auto.

Speaker 8

Got it. Got it. That's helpful. And then maybe just a follow-up on margins. I'm looking at the updated guide.

Speaker 8

It looks like the guide down on revenue was flowed through into the guide down on EBITDA. And understand that you're continuing to invest For future growth, but just kind of wondering if we were to see kind of a further slowdown in lending volumes and Potentially impacting revenue, how you guys could flex some of your expense levers to maybe preserve margins? Thanks.

Speaker 3

Yes. So that's correct. We are I mean, we are we're doing 2 things at once, I think is the important part of the story. We're investing in growth, but we Are also rightsizing, restructuring the company as well. So we've diverted a lot of our Spend towards customer facing, customer engaging parts of the business to accelerate that piece.

Speaker 3

Our overall headcount has come down. And so we're keeping pace from a margin profile perspective. I could paint a picture where revenue does something where we're we either Have to relook at our cost structure or it's Going to impact the bottom line, but we don't see that right now. I think within the we thought very carefully about this guide. And the EBITDA, I think, is on pace.

Speaker 3

And so we'll continue to operate the business. Are there levers? Sure. There are always levers to pull. There are levers that I think as a management team, we're comfortable with where we're at right now.

Speaker 3

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 proves us otherwise.

Speaker 8

Got it. That's helpful. Thanks guys.

Operator

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

Speaker 10

Thanks. Nicholas, I wanted to dig in more into the idea of auto decisioning as it relates to consumer lending. You spoke to it a bunch in the prepared remarks. I know that you've got some partnerships in place that are assisting with the workflows, but can you just talk about, are you now enabling a full touchless lending process? And with that, what percent of your base do you think is ready to actually implement those types of auto decisioning processes?

Speaker 2

Hi there. I think it's a fast growing group of clients that is paying attention to auto decisioning And also integrating 3rd party datasets that you can argue is Introducing a score that is artificially kind of Incubated and developed and enriched. What we are seeing is more customers are asking For the ability to do that, we've released an enhanced, order decisioning Module that our customers have started using and larger customers and customers who's Dealing with higher volumes have shown more interest in. But I would tell you it's probably I would say if the question is ready, that's a hard one to answer, but it's probably less than a third that I would say is ready, ready, but it's a fast growing sub And my expectation would be in a couple of years, if you don't do auto decisioning and you don't have a touchless lending Playbook that is meaningful and substantial in your business. You will miss out on Engaging with your customer and closing the loan.

Speaker 2

Some of our larger customers are very focused on it. We spoke about Space Coast Credit Union, who improved the touchless and order decisioning and Meaningfully with our technology that they implemented and we are engaging and working with multiples of others in the same way, Ham. But My view is probably going to be one of the bigger initiatives that our customers will have And we'll invest in here in the foreseeable future.

Speaker 10

All right. That's great color. And Sean, maybe just want to follow-up on your answer to Koji and a couple of other questions earlier. But the mortgage outlook for the second half I can appreciate given how we've seen the industry forecast walk down from the start of the year wanting to be conservative there. But you just had mortgage, I think, was about 26 percent of revenue this quarter.

Speaker 10

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 2nd quarter levels?

Speaker 3

Yes. So The 26 is 25.5 and I say so it's a net, but I think it's important. I do think it drops off Not I mean, when we say mortgage, there's a combination of lending and MCL in there as well. We've seen continued drag from MCL, which is part of the lockdown. And I just The rest of the business's growth is the other component.

Speaker 3

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 $3,500,000 Of revenue coming out of the mortgage guide. And It's a combination of both lending and DBS. So it's We can I know we have a call later? We can talk in detail more, but it's really just the recovery the delayed recovery Is really the primary reason.

Speaker 3

I mean, it's just it's not going to happen fast enough, for us to recover, especially around MCL And the lending solutions as well. And keep in mind too that The growth, for example, in Q2, we saw good growth in open close, which I don't want to say excuse the number, but it definitely when we talk about mortgage Growth being in the double digits, that's part of the story as well. And so we have to look at the OpenClose acquisition and how it's going to perform in half 2 as well.

Speaker 10

Okay. Thanks for the color there.

Operator

Thank you. And your next question comes from the line of Andrew Schmidt from Citi. Please go ahead.

Speaker 9

Hey, guys. Thanks for taking my questions and appreciate all the detail here. I wanted to dig in just to The question on cross sell versus net new. Obviously, the investments in cross sell bearing fruit, 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?

Speaker 9

Or are there other reasons, whether it's market maturity That we're in the cycle, things like that, that make you more comfortable with where you're at in terms of just the net new kind of sales resources. Thanks a lot guys.

Speaker 7

Yes. This is Chris. Thank you for the question. The 2 biggest dynamics you're seeing at play Our mortgage team predominantly used to go after independent mortgage banks. So all those were classified as new logos.

Speaker 7

Now that team is directed almost exclusively at cross selling to depositories, which is not reflecting in the new What I would argue though is in that scenario, the long term value of those clients is higher. Their staying power is stronger. It's tying directly into the retention capabilities of the broader platform. So that's one aspect. And then Sean brought up the other element as well We are seeing some you are seeing some independent mortgage banks facing difficulties that are impacting our number as well.

Speaker 3

Yes. And Andrew, you used 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 a new logo team With a very good leader in place who's focused on new logo, I think there is a cycle, A pipeline build of new logo that is very healthy, and we'll start to see the payoff of the new logos Down the road.

Speaker 3

And I don't mean far down the road. But for right now, I think the dynamic with mortgage Is offsetting even the new logos that we do see. So just as an added narrative.

Speaker 9

Got it. Thank you, Chris. Thank you, Sean. Maybe I could ask about the back half pickup In consumer LOS, the non mortgage piece, I know it's been asked a couple of times, so I'll take another shot at it. Just in terms of the drivers there, Is it purely or I should say primarily volume based in terms of the expectations of the expectation of reacceleration or is there also kind of a Cross sell or net new implementation that's driving that.

Speaker 9

Then I have a follow-up, but let's go ahead and start.

Speaker 3

I mean, to be quite honest, it's simply not simply, it's primarily driven by volumes, By volume pickup. And even though we've talked about the components of consumer And still seeing growth in Q2, we do think that the volumes will pick up Further, and particularly around in auto.

Speaker 9

Got it. Okay. Thank you for that. And then just Last kind of follow-up to that. What I guess is that directionally consistent with what you're seeing?

Speaker 9

Because the obvious question is Just confidence in that pickup in sort of do you feel like I think you've done a good job forecasting so far, But do you feel like this is derisked or I guess the question is what's the visibility on that pickup in terms of volumes? Thanks a lot.

Speaker 3

Andrew, I'm always confident in our forecast Until I'm not. So we use multiple data sources, COGS being the primary. Most of our base is we have roughly seventy-thirty split on used to So you're seeing good headlines around new inventory, good headlines around new sales. We think that has a downstream impact on used as well. That is very positive.

Speaker 3

But for used as an example, the number I think is minus 2% year over year for used sales from Cox. We so we've anticipated that and we think that we can do better than that. And so

Speaker 10

All data

Speaker 3

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 different loan types.

Speaker 9

Got it. Thank you very much, Sean. Appreciate the commentary.

Speaker 3

Yes.

Operator

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

Speaker 8

Yes. Hey, thanks guys. I'll ask Quan in the interest of time here. Nicholas, you guys announced a few interesting partnerships With AI providers during the quarter, I was hoping to hear a little bit more about where 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?

Speaker 7

Yes. Thanks for the question. This is Chris. So today we're seeing the greatest pickup in AI in this industry around decisioning or Specifically around decisioning scores. Now there's been some hesitancy in its adoption due to the potential impacts around fair lending.

Speaker 7

That's something we work with our customers and in our partners and to help them cross that bridge. Going forward, I think Across all industries, there's a lot of areas where AI has application. I mean, specifically looking at this, you could have ways to accelerate how 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 take that action. So it's front and center now.

Speaker 7

The biggest difference in this industry versus others is the regulatory nature that we need to be very cautious about and thoughtful As we roll out solutions to our customers and we'll do that as a combination of our own and partners as we do today.

Speaker 8

Understood. Thanks for the color, Chris.

Speaker 4

Thanks, Barbara.

Operator

Thank you. And your next question comes from the line of Saket Kalia from Barclays. Please go ahead.

Speaker 10

Awesome. Hey, guys. Thanks for taking my question here. I'll also keep it to 1 and apologies in advance, I joined late. So hopefully this question hasn't been asked yet.

Speaker 10

But Sean, maybe for you. Just high level, I think the revision to this year's guide on revenue was about $5,000,000 to $7,000,000 How much of that is from the one time customer item? And is that just in this quarter? And how much of it From the revised view on the mortgage market.

Speaker 3

$2,300,000 of it was from The dispute with the reseller and the balance of it is due to the mortgage pressure, Sure. I. E. The delay and recovery in mortgage.

Speaker 10

Got it. Very helpful. Thank you.

Speaker 3

Yes. Thanks, Saket.

Operator

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

Speaker 2

Thank you, operator. I'd like to thank you for joining the call today And extend a final thanks to the Marine Link team. Our focus and dedication set us apart and help us better serve our growing list of customers. As I observed the team interacting with customers at our user forum, it was obvious how much we all care about helping each and every customer And partner achieved their objectives and grow successfully. Our people make the difference and I'm proud of their solid performance.

Speaker 2

Thanks again for listening in and I look forward to speaking with you. Back to you, operator.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may

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Earnings Conference Call
MeridianLink Q2 2023
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