MeridianLink, Inc. (NYSE:MLNK) Q4 2023 Earnings Call Transcript
MeridianLink, Inc. (NYSE:MLNK) Q4 2023 Earnings Call Transcript March 6, 2024
MeridianLink, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by and welcome to MeridianLink’s Fourth 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.
Gianna Rotellini: Good afternoon, and welcome to MeridianLink’s fourth 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 the risks, uncertainties and other factors that could affect our future financial results and business, please refer to the disclosure in today’s earnings release and the periodic reports and filings we file from time to time with the Securities and Exchange Commission.
All of our statements are made based on information available to us as of today, and except as required by law, we assume no obligation to update any such statements. During the call, we will also refer to both GAAP and non-GAAP financial measures. You can find 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.
Nicolaas Vlok: Thank you, Gianna. Good afternoon, everyone. It’s great having all of you join us today. 2023 was another successful year for MeridianLink. We executed well on our strategic initiatives set in the beginning of the year that were designed to serve our customers with greater efficiency. As a result, we generated strong demand finishing the full year with software bookings exceeding the record we set in 2022, and we made great progress releasing ACV from our new logo and cross-sell wins. We also had a fantastic year of innovation with multiple product launches and partnerships to strengthen the capabilities of MeridianLink One. With the dedication and expertise of the entire MeridianLink team, we continue to deliver on our commitments to our customers and stockholders.
Turning to our results for the fourth quarter. Our GAAP revenue grew 6% year-over-year to $74.6 million with an adjusted EBITDA margin of 42%, exceeding the top end of our EBITDA guidance. Our performance in the quarter demonstrates our ability to execute in key strategic areas of the business that accelerate growth while also demonstrating cost discipline. It remains our goal to help customers navigate an evolving operating environment and outcompete for consumers by providing a personalized, frictionless lending experience. With that, let’s move to our Q4 updates on the three areas of growth acceleration that are anchored to our platform strategy. First, engaging more deeply with 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 with multiple high-value platform wins. The foundation we have set over the last 2 years to build and operate an efficient and high-performing Go-To-Market engine continues to drive growth. As I mentioned, we had record software bookings for the year, which was fueled by the cross-sell momentum of MeridianLink One. In Q4, we signed nine consumer lending customers to our mortgage lending solution, this is an excellent signal that our platform strategy and Go-To-Market is working. Next, we wanted to highlight a couple of high-value deals that we landed in the quarter that demonstrates the ongoing demand for MeridianLink One. The majority of our high-value deals are often with new customers signing on multiple modules, understanding the value of connected solutions that cater to nearly all consumer lending needs.
For example, one of our more significant ones are just under $500,000 ARR was a $1.4 billion AUM customer who signed on four MeridianLink consumer modules and our new point-of-sale solution that launched last quarter, MeridianLink Access. The customer chose MeridianLink One to lend through a digital channel, achieve greater automation and improve efficiency in decisioning and cross-selling. Another high-value win at just under $300,000 in ARR was with a $300 million AUM customer, who selected MeridianLink home equity and indirect lending based on the decisioning capabilities of MeridianLink One. This customer also chose our enhanced implementation services, which involves close collaboration to achieve specific results, such as loan volume growth and increased productivity.
This is a great example of how the MeridianLink team is dedicated to engaging with customers from the initial sale through implementation to accelerate growth. On that point, I would like to provide an update on the strategic investments we have made in talent and process improvements in our services organization over the last year. First, we are making progress releasing ACV. In Q4, total SaaS ACV release was the highest in the year. Second, we are becoming more efficient in releasing ACV. This progress is clear in our adjusted gross margin expansion in Q4, which is more than 400 basis points higher year-over-year. Last, we look forward to one of the biggest opportunities for engagement at our MeridianLink LIVE! Forum at the end of April in Nashville.
We can’t wait to showcase our in-depth capabilities that help customers achieve their digital transformation goals. Most importantly, MeridianLink LIVE! will create valuable moments of engagement and feedback that we can use to enrich our strategy and create additional value for customers and stockholders. These are just a few examples of how we engage more deeply with customers to accelerate growth for the business in the quarter. Looking to 2024, our Go-To-Market team is hyper focused on engaging with more prospects from new logo to cross-sell and our services team remains committed to bringing customers live faster. Moving to our second area of growth acceleration, expanding the capabilities of the platform through product innovation and partner integrations.
Critical to our sales motion, we are focused on fine-tuning the MeridianLink One to drive our customers’ digital lending strategy. Over the last few years, we have invested in R&D to achieve significant technological strides, such as migrating to the public cloud and integrating multiple acquisitions. While we have accomplished these development goals, innovation is an ongoing commitment that keeps us in our market-leading position, and we remain focused on increasing the value of the platform for customers. Now let’s review how we expanded our capabilities in Q4. We integrated MeridianLink Engage with MeridianLink Collect to automatically identify and cater to pre-delinquent accounts. Through this functionality, our customers can work with consumers to optimize their debt wallet and avoid delinquency.
In today’s digital environment, consumers largely prefer handling banking and collection tasks through user-friendly technology instead of in-person interactions. This new integration is a great example of how the end-to-end capabilities of MeridianLink One cater to the evolving lending needs of the consumer. We also enhanced our existing integration with Zest AI, a leader in automated underwriting, to provide multiple custom credit scores for decisioning and MeridianLink Consumer loans, with more custom score options, our customers can increase their cross-sell opportunities. In addition to the automation and insights available through the MeridianLink One infrastructure, we leverage AI from our partner network to automate the lending process for customers.
Ending on an expansion within our Data Verification Software Solutions, we scaled our employment screening and background verification capabilities by partnering with Workato, a leading Enterprise Automation platform. Through Workato, we can accelerate the addition of new applicant tracking systems, or ATS integrations to capture new employers for our CRA customers to service. With more ATS integrations, the more volume and revenue we can process through our platform. Before moving to our next focus area, I’d like to provide an update on the traction that our MeridianLink Access launch has achieved so far. In 2023, we signed more than 40 customers in total on MeridianLink Access and MeridianLink Mortgage Access. This is an outstanding achievement by our Go-To-Market and product teams and is a great example of how we are innovating to generate more demand for the company.
Our product and partner updates in Q4 are just a few ways we are continuously improving the borrower experience to help customers capture and retain more demand for their lending solutions, in turn, increasing revenues for MeridianLink. Finally, our third area of focus for growth acceleration is centered around our ability to empower customers to compete, grow and succeed in the markets in which they participate. We’ve been successful in empowering our customers to capture a greater share of their clients’ debt wallet through MeridianLink One. This highlights a critical component of our platform strategy, the ability to increase the module penetration with our existing customer base, which ultimately increases the LTV of the customer. Starting with strong cross-sell wins in the quarter, an existing MeridianLink consumer customer with three modules added a fourth module, MeridianLink Access and enable dealer track e-contracting through our partner Marketplace, both announced in Q3.
With lending capabilities designed for configurability and automation, that customer improves the digital journey for the consumer. In this example, our sales team worked with a customer on a renewal that empowered long-term growth by capitalizing on our roadmap, further increasing the value of the customer for MeridianLink. We also signed an existing MeridianLink consumer and opening customer onto our Collect and Engage solutions to expand the use of MeridianLink One. This customer’s main focus was on finding connected lending solutions fit for serving a growing demand environment. This points directly to our value proposition of providing customers with a platform designed for scaling through digitalization tailwinds. Let me end on a successful go-live story.
We recently announced A+ Federal Credit Union, an existing MeridianLink consumer and mortgage customer with over 190,000 members and more than $2 billion in assets under management going live on MeridianLink Consulting, Engage and Insight. Over time, A+FCU has gone from using six disparate loan origination platforms to now only using MeridianLink One. Through our platform’s advanced decision capabilities, A+ Federal Credit Union doubled their instant approval rates on consumer loans. This a prime MeridianLink One success story where a customer further optimizes the lending process to approve loans faster and remove workflow inefficiencies, improving the member experience as a result. Before handing the call over to Sean, I want to emphasize that MeridianLink delivered consistent top line growth and expanding profitability levels through a year of restructuring and strategic investing to support future scaling.
We have a track record of intentional capital allocation, investing organically and inorganically in areas that provide value to customers and stockholders. To set the stage for 2024, we have made strategic investments that we expect will propel the company forward. We are focusing on what’s in our control, which includes accelerating ACV release and generating demand. We’ve also worked to tee up a strong customer success strategy to empower the customer growth journey through MeridianLink One. Thanks again to the team. Their focus on empowering our customer success is a driving reason that MeridianLink continues to deliver strong performance. I’m looking forward to seeing what we can accomplish together this year. With that, I will now turn the call over to Sean to talk about our financial results and guidance.
Sean Blitchok: Great and thank you Nicolaas. Before diving in, I’d also like to take a moment to highlight the phenomenal teamwork and execution demonstrated in the quarter. The team has remained steadfast in serving customers with best-in-class services and support to position their businesses for growth. Turning to our financial achievements in 2023, MeridianLink had an impressive year of profitable growth, supported by consistent cost discipline, a great achievement in the face of the challenging macroeconomic conditions. We have aligned our cost structure to support future scaling and to expand profitability going forward. We also strategically deployed our capital through stock repurchases to generate value for our stockholders.
In terms of our key performance indicators, we continue to refine our internal processes and external disclosures to better represent the underlying drivers of our performance. On that note, I want to highlight our resilient annual recurring revenue or ARR and net retention metrics in the quarter. We finished Q4 with ARR of $257.5 million and a net retention rate of 98%. Specifically, however, our lending software solutions finished the year even stronger with a net retention rate of 101%. Excluding the impact from mortgage volumes, the net retention rate of our consumer lending revenue was 103%. The primary drivers of our net retention rate are cross-selling additional modules, volume growth and price increases. There is stability in our retention rate due to how sticky our customer base is.
The more customers use our platform to automate and integrate their lending processes, the lower the probability for churn. As Nicolaas mentioned in his remarks, we also finished another quarter with an impressive roster of new logo wins. In the fourth quarter, we had 1,996 total customers using our software solutions. On an organic basis, total customers declined 2% year-over-year. While there has been increased churn from lower-value mortgage-related customers as a result of financial distress, we view this as an optimization of our customer base. As the market normalizes, we focus our Go-To-Market efforts on sticky depository customers, we expect to see an improvement in new logo going forward. To understand how these metrics have trended over time and by solution type, please reference the financial supplement made available on our Investor Relations website.
Shifting focus to our fourth quarter financials. We generated total revenue of $74.6 million, up 6% year-over-year, driven primarily by the resilience of consumer lending transaction volumes and increased product go-lives from both new and existing customers. Breaking down Software Solutions. Our total lending software revenue accounted for nearly 80% of total revenue and grew at 8% year-over-year. As a primary driver of our lending software solutions, non-mortgage lending revenue contributed 87% and grew 5% year-over-year. Mortgage-related revenue within lending software solutions accounted for the remaining 13% of the total. Turning to Data Verification Software Solutions. Revenue from those solutions accounted for nearly 20% of total revenue and declined 3% year-over-year.
This was driven by a 6% decrease in mortgage-related revenue, which represents 56% of total data verification software solutions for Q4. In Q4, total mortgage-related revenue was up 9% from last year and generated 22% of overall MeridianLink revenue, driven by the uplift from OpenClose, which we acquired in November of last year. Now transitioning to profitability. GAAP gross margin was 66%. Adjusted gross margin in Q4 was 74%, representing a 400 basis point improvement year-over-year driven by increased productivity of our services team and technology stack. Before reviewing our operating performance in the quarter, I’d like to break down the year-over-year changes in our operating expenses. Compared to the fourth quarter of 2022, G&A increase to 1% on a GAAP basis and decreased 16% on a non-GAAP basis.
R&D declined 12% on both a GAAP basis and non-GAAP basis compared to the fourth quarter of ‘22. On a GAAP basis, sales and marketing increased 34%, while on a non-GAAP basis, sales and marketing increased 29% compared to the fourth quarter of 2022. The changes across our non-GAAP operating expenses were primarily driven by rebalancing headcount and increased compensation costs to fuel our continued Go-To-Market efforts. We are selectively investing in talent to support our growth, while ramping down spend in other areas like R&D now that we’ve completed significant technology projects, such as the migration to the public cloud. Now moving to our overall operating performance. GAAP operating income was $6.8 million and non-GAAP operating income was $15.2 million.
On a GAAP basis, net loss was $29.6 million or negative 40% margin, which includes a onetime non-cash tax expense of $29.4 million recorded in the quarter for the recognition of a valuation allowance on certain deferred tax assets. On a non-GAAP basis, adjusted EBITDA was $31.1 million, representing a margin of 42%. This represents an improvement of nearly 900 basis points on a year-over-year basis, driven by work to optimize our cost structure. The majority of this adjusted EBITDA beat was structural and demonstrates our strong cost discipline, which we plan to continue this year. Now pivoting to the balance sheet and cash flow statement. We ended the fourth quarter with $80.4 million in cash and cash equivalents, a decrease of $17.1 million from the end of the third quarter, driven by stock repurchases.
Cash flows from operations was $12.5 million or 17% of revenue, and free cash flow was $9.6 million or 13% of revenue for the fourth quarter. Now let’s look at full year 2023 results. Overall, we anticipated the credit tightening that happened across our consumer base and executed well on our scaling initiatives to counter the deceleration in volume growth. As we have seen in past cycles, our customers stayed resilient in a challenging operating environment and made the strategic decision to purchase our solutions that are designed to help accelerate growth. With continued demand and our ability to take customers live faster drove our performance. For the full year 2023, we generated total revenue of $303.6 million, up 5% year-over-year. Breaking down our revenue growth by software solutions, our total lending software accounted for nearly 76% of total revenue and grew at 11% 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 accounted for the remaining 12% of the total. Turning to Data Verification Software Solutions. Revenue from these solutions accounted for nearly 24% of total revenue and declined 10% year-over-year. This was driven by an 18% decrease in mortgage-related revenue, which represented 59% of total data verification software solutions in 2023. In 2023, total mortgage-related revenue was up 5% from 2022 and generated 23% of overall MeridianLink revenue driven by our lending solutions. We are seeing volume recovery in the mortgage market. However, we still expect it to take time for customers to grow above their minimum commitments such that volume will drive revenue growth.
As that recovery continues, we’re staying focused on what we can control. Our platform strategy of cross-selling mortgage lending to our consumer lending depository customers continues to be successful as demonstrated by the Go-To-Market wins that Nicolaas discussed. The other 77% of our business continues to grow, which is primarily led by the demand from our existing customers for a suite of end-to-end consumer lending capabilities. That 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 are primed to grow even in the most challenging lending environment, which in turn increase the revenue opportunity for MeridianLink. Transitioning to profitability.
GAAP gross margin was 64% for 2023. Adjusted gross margin was 72%, representing a 100 basis point improvement year-over-year driven by increased productivity of our services team and technology stack. Before reviewing our operating performance in 2023, I’d like to break down the year-over-year change in our operating expenses. G&A increased 12% on a GAAP basis and increased 5% on a non-GAAP basis. R&D increased 12% on both a GAAP basis and a non-GAAP basis. And on a GAAP basis, sales and marketing increased 51%, while on a non-GAAP basis, sales and marketing increased 48%. The growth across our non-GAAP operating expenses demonstrates our commitment to our previously discussed investments in Go-To-Market and scale initiatives. We believe, we now have the necessary infrastructure in place to support future scaling and expect to accelerate top line growth as we generate more demand with an industry-leading suite of solutions and partner capabilities.
For our overall performance, GAAP operating income was $15.5 million, and non-GAAP operating income was $51.1 million. On a GAAP basis, net loss was $42.5 million or negative 14% margin. And on a non-GAAP basis, adjusted EBITDA was $113 million, representing a margin of 37%. On to the balance sheet and cash flow statement. Cash flows from operations were $68 million or 22% of revenue, and free cash flow was $57.8 million or 19% of revenue for the year. We continue to generate funds that can be used to invest in the business, pursue acquisitions, deleverage or repurchase stock under the repurchase program that our Board authorized earlier this year. Before moving to our guidance for the year, I want to provide an update around our internal controls as previewed in our 8-K filing on February 6 this year and noted in the earnings release issued today.
Although the assessment is still ongoing, after working diligently with our auditors, we expect to report in our upcoming 10-K a material weakness related to controls over revenue, specifically regarding customer contracts and billing. There has been no restatement of prior period financial statements, no change to previously reported financial results, and we do not expect any change to the expected timing of our 10-K. As we continue to mature as a public company, we’ve been highly focused on improving our control environment. So our increased resourcing and audit processes and scrutiny, the company has uncovered additional areas for improvement. We believe, we have the right remediation in place to address these deficiencies. And those remediation efforts have been and remain underway.
I’ll now pivot to guidance for Q1 and initial guidance for the full year of 2024. As we saw last year, interest rate levels, related credit tightening and consumer settlement are just some of the main drivers of the loan volumes that our customers capture through our software solutions. Until we see the market respond to a substantial change in these drivers, we expect our customers to continue operating in a challenging credit environment. As part of our comprehensive forecasting process, we incorporate external industry data points, and we will update our expectations accordingly as there is increased uncertainty around the lending environment going forward. Aside from volumes, there are additional performance drivers in our control that we have strategically invested in to accelerate growth.
We will continue to prioritize capturing new logos and cross-sell opportunities, accelerating our ACV release and innovating MeridianLink One to meet the evolving consumer lending needs that exist today. For the first quarter, estimated total revenue is expected to be between $75 million and $78 million compared to $77.2 million for the same period in 2023. This represents an estimated year-over-year change of negative 3% to 1%. For the full year 2024, we expect total revenue to be between $313 million and $323 million compared to $303.6 million for the same period in 2023. This represents an estimated increase of 3% to 6% year-over-year. For mortgage-related revenue, we expect the mortgage market to contribute approximately 20% of revenue for the first quarter of 2024 and expect to end the full year 2024 around the same percentage.
To provide more color around the drivers of our total revenue. The mortgage-related revenue guide represents a decline year-over-year because we expect that it will take time, the recovery in volumes to push our customers above their committed minimums and therefore, impact revenue growth. On the non-mortgage side, we expect modest growth year-over-year in data verification revenue as the employment screening market reacts to the economy normalizing. Understanding both of these dynamics, we expect consumer lending will drive momentum in 2024. While industry sources are signaling continued headwinds impacting the used auto market, we plan to continue winning new customers and cross-selling other consumer loan types through MeridianLink One. Now focusing on the adjusted EBITDA guide.
On a non-GAAP basis, first quarter estimated adjusted EBITDA is expected to be between $28 million and $31 million, representing adjusted EBITDA margins of approximately 39% at the midpoint. For the full year 2024, we expect our adjusted EBITDA range to be between $123 million and $130 million, representing adjusted EBITDA margins of approximately 40% at the midpoint. Our adjusted EBITDA guide reflects our continued commitment to operating discipline in areas that we do not believe contribute meaningfully to growth acceleration. We believe 2024 represents an inflection point as our past strategic investments have built the foundation for growth and for future scaling. We have aimed to optimize our cost structure to support incremental growth, which we expect will, in turn, drive margin expansion as volumes impact the bottom line.
With that, I’d like to touch on how we are thinking about capital allocation going forward. While we continue to strategically repurchase shares, we are planning to reprioritize M&A as the market presents opportunities. We want to be active in the M&A environment with a focus on continuing to add value to our customers and stakeholders. To wrap up, I’d like to reiterate how resilient the company has been throughout a difficult operating environment. All thanks to a team that knows how to execute and put the customer first, something we’ve done for over 25 years. We will continue to prioritize our customer-centric scaling initiatives in 2024, resulting in expansion of organic growth and profitability. With that, Nicolaas, Chris and I are happy to take any of your questions, and I’ll turn it over to the operator.
Operator: Thank you. [Operator Instructions] Your first question comes from the line of Alex Sklar from Raymond James. Please go ahead.
Alex Sklar: Great, thank you. Sean or Nicolaas, your commentary around prioritizing the ACV release. I just – it would be helpful if you could help frame kind of how much backlog you have from bookings that aren’t yet implemented today and how that kind of compares to the size of that bucket last year? Thanks.
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