MeridianLink, Inc. (NYSE:MLNK) Q3 2022 Earnings Call Transcript November 7, 2022
MeridianLink, Inc. misses on earnings expectations. Reported EPS is $0.06 EPS, expectations were $0.08.
Operator: Ladies and gentlemen, thank you for standing by and welcome to MeridianLink's Third Quarter 2022 Earnings Call. At this time, all participants are in 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, Erik Schneider. Erik, please go ahead.
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Erik Schneider: Good afternoon and welcome to MeridianLink's third quarter fiscal year 2022 earnings call. We will be discussing the results announced in our press release issued after the market closed today. With me 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 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, Erik. Good afternoon and thank you all for joining us. I am pleased with our performance in light of challenging macroeconomic conditions. We believe our third quarter results demonstrate the resilience of our business model and we remain confident in our long-term growth opportunities. We delivered solid results while advancing our strategic initiatives during the quarter. MeridianLink completed Q3 with GAAP revenue of $71.8 million, up 7% year-over-year, and 36% adjusted EBITDA margins. Our consumer lending business remains strong growing at 21% year-over-year led by ongoing strength in personal and other non-vehicle loan types. We have experienced the fastest and largest relative increase in mortgage interest rates in history and currently seeing rates at a two decade highs.
A consequence of these higher rates has lower mortgage application and lending activity, which drove mortgage related revenue down to 21% of total revenue in the quarter. Sean will walk through our Q3 financial performance in more detail, but first I will focus on key highlights of our business and where we are investing for the future. We see opportunities in current conditions given that deposit taking financial institutions have higher net interest margin today, we expect demand for our consumer lending business to remain strong as customers and prospects seek ways to more effectively engage with their customers across the entire array of loan types. We can see this momentum in our pipeline and successful bookings. Additionally, we continue to invest to capture a disproportionate share of our $10 billion TAM while maintaining best-in-class margins.
In particular, we believe the opportunity exists now to create a differentiated alternative to the current mortgage lending software market leader by providing more advanced, more open and more customer friendly capabilities. This is why we announced today the acquisition of OpenClose, a leader in mortgage lending technology, with a particular focus on supporting depository institutions. We will discuss this more in detail in a little bit. As we have outlined, we have three ongoing areas of specific focus to drive accelerated growth. First, engaging more deeply with our customers. Second, expanding the capabilities of our platform. And third, empowering our customers to grow more quickly and better serve their communities. Our top priority is engaging with our customers and prospects to ensure we can best serve our markets.
These conversations are an integral part of our go-to-market motion and we proactively facilitate them on an ongoing basis. This is why we can continue to invest in customer success as one of our priorities, and we are seeing the benefits as customers are increasingly turning to MeridianLink to provide their full consumer lending experience. A few recent ones include a longstanding credit union customer of our ML consumer modules with over 33,000 members decided to modernize their mortgage processes. They extended their footprint by adding MeridianLink Mortgage to take advantage of our patented debt optimization technology while benefiting from the increased synergies of a deeper integration and a better cross-selling functionality. In another example, one of the larger transactions in the quarter was with an existing DecisionLender customer.
As you know, we gained this leading indirect lending functionality as part of the TCI acquisition. This customer sold a new solution for direct consumer lending and account opening. Our multichannel functionality and integration won the day. These are just a couple of the many wins in the quarter. We continue to see that meaningful engagement with our customers provides both immediate and long-term value to the market. We have been investing heavily for the last few years to expand our platforms' capabilities with innovative functionality. As a prime example, we have been moving our solutions from hosted environments to the public cloud while updating the user experience to reflect modern design and workflow. We unveiled MeridianLink One in 2021 as our cloud-based multi-product platform standing the digital consumer learning journey from account opening through marketing loan origination and decisioning.
MeridianLink One breaks down the silos that originally separated the parts of our business and reflected the divisions we often see in the market. We are proud to announce a quarter ahead of schedule, the completed migration of the original MeridianLink One functionality entirely to the public cloud. We are excited to bring the cloud benefits of increased security, speed and scalability of deployment to our customers sooner than expected. By expanding our platforms' capabilities, we attract new logos and drive cross-selling, which together drive more volume and revenue for MeridianLink. Finally, MeridianLink empowers our customers to compete, grow and succeed in each market in which they participate. We have a track record of enabling our customers to win more clients and capture a greater share of their clients' wallet by providing best-in-class functionality, flexibility and automation.
While some of our customers are early in their digital transformation, others are looking to optimize their clients' journey to enable a touchless lending experience. In Q3, we saw both accelerating software module delivery to customers and increased uptake of the services and functions to more deeply automate lending processes. In particular services revenue hit a new high watermark as software projects delivered in the quarter were 50% higher than in Q1 of this year, and we delivered an integration with MX Technologies to provide for a more highly automated account opening process as our customers continue to see strong new account growth. Now I want to turn to our announced acquisition of OpenClose. I've had the opportunity to spend a good deal of time with the leadership team and I'm thrilled to be joining forces with such a knowledgeable and customer focused group.
With our complementary product strengths and customer basis, we expect current customers of both organizations to benefit from the combination in the short and long term. I know I have said this before, but I want to emphasize this point. The diversity of our business and strong unit economics enable sustained investment in critical growth and scale initiatives across the economic cycle. The OpenClose acquisition and integration will create a premier solution that will increase our win rate and drive cross-sell motion within the depository market. To conclude, Q3 was another strong quarter for MeridianLink. We accomplished several milestones and remain focused on engaging with customers to help prioritize investments that expand our platform capabilities and revenue opportunity.
MeridianLink is a customer focused business and our fly will start with a focus on empowering our customers to compete and better serve their clients and communities. We invest to serve our customers needs, which generate more revenue for us as those investments drive better solutions for their clients. Before turning the call over to Sean, I would like to recognize the MeridianLink team for achieving the Great Place to Work certification for the third year in a row. This award spotlights the culture and community at MeridianLink positioning us well for future success. Now Sean will review our financial results and guidance including near-term expectations for OpenClose.
Sean Blitchok: Thanks, Nicolaas, and thank you again to everyone for joining us on the call today. I'd like to start by echoing the comments made by Nicolaas. MeridianLink has before a largely untapped market opportunity to drive to $1 billion and beyond. We continue to balance cost discipline and strategic investments. Near-term we're closely monitoring how macroeconomic conditions are affecting the market. We will continue to tightly control what we can while providing transparency and predictability for our business. As for third quarter results, we generated total revenue of $71.8 million, up 7% year-over-year, driven primarily by increased consumer lending transaction volumes and product go-lives. This is in line with the reported overall growth last quarter despite the continued decline of mortgage market lending.
And the mortgage loan market continues to be a headwind. Down 22% from last year, it accounted for 21% of overall MeridianLink revenue in the quarter roughly in line with our expectations. More specifically, mortgage related revenue in the quarter accounted for 6% of our lending software solutions and 62% of our data verification solutions. Lending software revenue accounted for nearly 73% of our total revenue and grew 17% year-over-year. Excluding the impact from the greater than anticipated slowdown in mortgage related revenue, our Lending Software Solutions grew 20% year-over-year, our highest rate in FY 2022. Adjusted gross margin in Q3 was 69% in line with expectations. Accounting for stock-based compensation, GAAP gross margin was 61%, our non-GAAP operating income was $12.1 million and our GAAP operating income was $4.5 million.
Adjusted EBITDA for the quarter was $25.9 million, representing an EBITDA margin of 36%. This reflects ongoing cost structure discipline, which allows us to focus spending growth on generating demand and delivering our product roadmap. We strategically invested 38% more in sales and marketing and 28% more in R&D compared to the third quarter of last year adjusted for stock-based compensation. We expect a strong long-term return on these investments, but continue to examine each expenditure on its individual merits. Now turning to the balance sheet and cash flow statement. We ended the third quarter with $115.8 million in unrestricted cash and cash equivalents, up $15.5 million from the end of the second quarter. Operating cash flow in the third quarter was $19.6 million and free cash flow was $16.9 million, or 24% free cash flow margin.
In the trailing 12 month period ending in the third quarter, operating cash flow was $88.1 million and free cash flow was $79.4 million, or a 28% free cash flow margin. MeridianLink's current cash position and ongoing cash generation provide protection in this period of uncertainty while enabling targeted investments for us to build value for our customers and shareholders. I'll now pivot to guidance for Q4 and an update for the full year of 2022. Despite strong momentum in our pipeline and consumer volumes, we saw a mix shift in our volumes that created a top-line headwind for the business in the second half. For the fourth quarter, estimated total revenue excluding the acquisition of OpenClose is expected to be between $65 million and $67 million compared to $64 million for the same period in 2021.
This represents an estimated increase of 2% to 5% year-over-year. For the full year 2022, we are expecting total revenue between $282.5 million and $284.5 million compared to $267.7 million for the same period in 2021. This represents an estimated increase of 6% year-over-year. We are continuing to add new customers in increased module penetration among our existing customers at a new level that more than offsets the historic decline in mortgage market volumes. Calling short-term moves in the mortgage market precisely is difficult. Yet we have reflected an incremental decline of the mortgage market in our guidance. We expect the mortgage market to contribute approximately 18% of revenue for the fourth quarter of 2022 as rates continue to rise across the third and into the fourth quarter.
I would be remiss if I didn't welcome our colleagues at OpenClose. This combination is extremely exciting and reflects our confidence and driving value in the mortgage lending market. Currently, OpenClose delivers approximately $1 million per month in revenue and has been growing at a high-teens rate throughout this year. On a standalone basis, the company is slightly better than EBITDA neutral and we intend to reinvest synergies into building a robust market solution for the future. On a non-GAAP basis, our fourth quarter estimated adjusted EBITDA is expected to be between $19 million and $21 million, representing EBITDA margins of approximately 30% at the midpoint. Our first quarter is typically a seasonal low in both platform volumes and new customer go-lives, both of which will affect our reported EBITDA in the quarter.
For the full year 2022, our estimated adjusted EBITDA is expected to be between $107 million and $109 million representing EBITDA margins of approximately 38% at the midpoint. With that, Nicolaas, Chris and I are happy to take any of your questions and I'll turn it back over to the operator.
Q - Bob Napoli: Thank you and good afternoon. I guess trying to just understand whether or not there's any market share in your guidance. Obviously the mortgage market has slowed down, but how much different is the mortgage market and is your market share in mortgage and your other products has that held?
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