MLNK - NYSE

Ladies and gentlemen, thank you for standing by, and welcome to MeridianLink Fourth Quarter 2022 Earnings Call. [Operator Instructions] Please be advised that this conference is being recorded. I would now like to turn the conference over to your first speaker today, Erik Schneider. Erik, please go ahead.

Good afternoon, and welcome to MeridianLink's Fourth 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 bylaw, we assume no obligation to update any such statements. During the call, we will 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 our Investor Relations website. With that, let me turn the call over to Nicolaas.

Thanks, Erik, and good afternoon, everyone. Thank you for joining us today. 2022 was another successful year for the company. We executed well and closed the year strong with record software bookings both for Q4 and in MeridianLink's history. The powerful capabilities of our MeridianLink One platform drove new logo and cross-sell momentum, as we signed an impressive 10 existing MeridianLink consumer customers to our Meridian mortgage solution during Q4. We are proud of the many achievements from the quarter and year and are thrilled to see the consistent performance of the business. MeridianLink exceeded guidance in Q4, with GAAP revenue up 10% year-over-year to $70.6 million and 33% adjusted EBITDA margins. We continue to see notable strength in the consumer lending side of our business, up 23% year-over-year in the fourth quarter. Our business model remains resilient and our customer base continues to thrive. Today's lenders are more focused than ever on the need to digitally transform and offer frictionless lending experiences to their clients. We are proud of the fact that customers of our MeridianLink consumer platform are achieving nearly 20% fast of loan portfolio growth than their competitors. We've achieved healthy sales activity through the year that we expect to continue across 2023 as customers try to improve their client experience, as well as seek business efficiencies in an uncertain environment. We continue to pay close attention to external conditions and market expectations, but I want to be clear that so far this year, we have not seen slowing in deal time lines, order deduction and pipeline numbers. We remain laser-focused on delighting our customers, expanding capabilities across our platforms and ensuring our customers can efficiently serve more consumers, capturing more wallet share and outpacing the competition. In a few minutes, Sean will speak about our Q4 and full year financial performance and provide 2023 1st quarter and full year guidance. Before that, I will give several updates on our three areas of growth acceleration. 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. In Q4, we have refocused our company mission, vision and values to strengthen the culture of MeridianLink and catalyze the cascade of our objectives and key results throughout the business. Our mission to be the most trusted financial services technology platform speaks to our deep experience in the space and our relentless focus on creating better experiences for our customers' clients. Our vision to power life's important financial moments ensures our customers stand out amongst competitors by efficiently offering the best experiences for borrowers. Our values and objectives now represent how we are scaling our organization to meet customer needs in a digital era focused on fast, frictionless interactions with consumers. Our values also reinforce that customers are at the heart of everything we do, from a focus on daily improvement, being stronger together, delivering on our commitments and driving customer success, which in turn is our success. With those values in mind, we have completed a restructuring exercise that rightsized our cost profile and realigned our resources with a focus on customer-centric areas of the organization. This further enables near and long-term customer success. Cost savings, as a result of this restructuring, will help fund the investment in scaling initiatives, accelerating services, fueling go-to-market and enhancing product innovation, all areas of growth that we will review today. Sean will go into the financial implications momentarily, but I want to emphasize how committed we are to practicing cost discipline in the face of an uncertain environment while continuing to invest to meet our customers' needs. Part of this realignment also includes changes to our organizational structure. For one, we announced the retirement of our Chief Operating Officer and the transition of several responsibilities to other members of our senior leadership team. Before I speak more about our organizational changes, I want to wish Alan well in his retirement. We have had the opportunity to work together several times over the last 20 years and he was one of the first people brought in by Toma Bravo as MeridianLink transitioned into its second stage of growth. Alan's leadership with the foundation that we will build upon for years to come as we drive faster growth going forward. We also announced the creation of a new role, Chief Customer Officer, to lead our support, services and customer success teams and accelerate productivity and engagement across the board. We have also streamlined both leadership and their teams across the business with the aim to reduce operational complexity. In summary, this recalibration of our organization and cost profile positions MeridianLink to be laser-focused on strategic initiatives and serving more customers with greater efficiency in 2023. Turning to the go-to-market updates and wins for the fourth quarter. The foundation we set over the last year to build and operate an efficient and high-performing go-to-market engine continues to drive innovation, sales and growth. We are investing across the board in sales and marketing leadership and implemented team structures that contributed to the most robust pipeline we have seen to-date. As I mentioned, we hit record software bookings and propelled the cross-sell momentum of MeridianLinkOne, signing 10 consumer lending customers to our mortgage lending solution. We see these fantastic signals that our platform strategy and go-to-market is working. In addition, our cross-sell and upsell motion is a tremendous opportunity for MeridianLink, representing 60% of the bookings in the fourth quarter. We also continued to win new customers in the market, another key component of our growth algorithm. And finally, we are excited to add Suresh Balasubramanian to our executive leadership team as MeridianLink's new Chief Marketing Officer, with the added benefit of Suresh’s software experience and focus on demand generation, we will bolster our ability to capture more share in the market. Moving to high-value deals, we landed eight deals in the quarter that demonstrate the ongoing demand for our multiproduct platform, MeridianLink One. Around two-thirds of these deals were driven by new customers with the remainder driven by cross-sell and upsell opportunities. This is just the beginning of customers capturing the benefits of MeridianLink One. The platform breaks down the silos that separate lending lines of business in the market and as a result, our customers can make optimal lending decisions and integrate with the key functions and necessary data to accelerate growth. Our MeridianLink One offering also enables the power of platform bundling by better addressing consumer needs with connected solutions across the entire debt wallet. One case in point came from a credit union that's been serving its members for over 20 years. With more than 50,000 members and $1 billion in assets under management, the organization was looking for a digital lending platform to support the varied needs of its community. The credit union selected MeridianLink One, leveraging MeridianLink business in tandem with MeridianLink opening and consumer. This is a great example of how our platform is designed to capture more volume faster, resulting in more revenue for both the customer and MeridianLink. To conclude, we had a solid finish to the year and remain bullish on our pipeline health in 2023, which we expect will only improve as we have recalibrated the business to fuel the customer engagement necessary for our next phase of growth. Moving on to our second area of focus, expansion. 2022 was a monumental year for expanding our platform's capabilities, as we have completed the transition of our solutions from hosted environments to the public cloud. This is a prime example of how we have been investing heavily for the last few years to expand the innovative functionality of the MeridianLink One platform, bringing increased security, speed and scalability to our customer base. Since executing on the cloud transition, a full quarter early in Q3, we have continued to make significant improvements to our technology to ensure it is scaling for customer needs. Not only does the cloud allow a faster lending process for the customer, but it also provides a faster build process for us internally. We have been heavily focused on accelerating product build times, deploying features and functionality faster across our platform. Finally, through the public cloud infrastructure, we are able to complete our standard security testing more efficiently. The cloud transition is just one example of our commitment to product innovation, which has been a pillar of our success since inception and remains a driver of expanding our platform's capabilities to add value to customers today. In the fourth quarter, we completed enhancements to our marketing automation solution, MeridianLink Engage. These new features save valuable time in launching to marketing campaigns in many cases resulting in triple-digit ROI for the lender. We also recently launched our integrated business lending offering, MeridianLink business, building on the innovative functionality acquired through the StreetShares, Atlas Platform to address mid-market business lending needs. This new offering enables advanced decisioning capabilities through a lightweight digital lending solution that is up and running in 90 days or less. To further expand our business intelligence tool, MeridianLink Insight, we began piloting a new scorecard with customers in the fourth quarter. The scorecard provides customers with relative performance metrics against peers, unlocking the power of data to drive more competitive business decisions. By expanding our platform's capabilities as seen in each of these examples, we aim to attract new customers and drive cross-selling, which together drive more volumes and revenue for MeridianLink. Finally, MeridianLink empowers customers to compete, grow and succeed in the markets in which they participate. We have a track record of enabling customers to win more clients and capture a greater share of their client debt wallet. We do this by providing best-in-class capabilities powered by our solutions and integrations through our partner marketplace. Part of MeridianLink's value proposition is derived from having built an extensive network of hundreds of partners that help accelerate and differentiate customers on the digital lending process. I'd like to talk about a few of the new integrations and increased capabilities from this channel that we have announced in the fourth quarter. First, MeridianLink One is now integrated with the work number from Equifax, a partnership that provides a centralized commercial depository of income and employment data. Lending customers can now instantly leverage verifications, providing a more timely, well-informed lending process. This integration expands availability of the work number for MeridianLink mortgage customers to also those on MeridianLink consumer, supporting a streamlined lending experience across the MeridianLink One platform. Another partner highlight comes from the data verification part of the business. In the fourth quarter, we expanded our background screening capabilities for our CRA customers through an integration with leading social media background screening provider, Ferretly. This partnership gives TazWorks customers, the ability to screen social media, powered by AI or from within TazWorks platform. It demonstrates our continued expansion of capabilities within our data verification offerings through market-leading technology partners. And finally, as the nation saw increasing consumer interest in home equity lending, we announced an integration with FirstClose, a leading fintech provider of data and workflow solutions for mortgage and home equity lenders. According to FirstClose, by leveraging their one equity solution, MeridianLink consumer and decision lender customers can experience total time savings of over 75% and with 35% increases in online applications and 25% improvements in pull-through. These stats are proof points that our partnerships improve consumer experiences and therefore empower customer growth. Transitioning from how our partner integrations add to the customer's growth journey, I would now like to highlight examples of customers selecting MeridianLink as the key catalyst for improving functionality and taking share in the market. In the fourth quarter, we closed the deal with a $1 billion credit union customer, taking the opportunity from a well-known competitor with a global footprint. We won the sales process as a result of our indirect lending capabilities, strong customer references and product roadmaps that align well with the customers' lending growth strategy. Another new logo win from the quarter was a bank customer interested in MeridianLink entry opening and consumer products. After demoing the solution, the customer was blown away with the ease of use for their clients, which aligned with their main goal to break into the younger demographic and grow volume. This win demonstrates the flexibility of our offering to move down market, empowering smaller players with the best capabilities of the largest institutions. To end on a win that shows our ability to empower growth through product innovation, we signed an $8 billion credit union on our new advanced decisioning features that enables touchless lending. In this case, the customer is targeting over 70% auto decisioned applications, a level well above what most competitors perform in the market today. Higher automation results in faster funding and more revenue for the customer. Before I conclude, I'm very excited to welcome Mark Sachleben to the MeridianLink Board of Directors. As our Board Chair remarked, Mark's experience guiding innovative technology companies through impressive growth milestones, combined with his financial expertise makes him a perfect addition to our team as we continue our organizational transformation. I now want to emphasize again how MeridianLink continues to deliver consistent double-digit consumer lending growth and healthy profitability levels through a year of investing in our strategic initiatives. We benefit from having a high-quality, resilient customer base whose mission to create the best borrower experience is directly aligned with ours. We have a track record of intentional capital allocation, investing organically and inorganically in areas that provide value to customers and shareholders. In the face of uncertain macroeconomic conditions in 2023, we will continue executing well on what we can control as we did in 2022, staying highly focused on the three areas of growth that I laid out today. We will continue engaging with customers to meet and exceed the digital lending needs in part by prioritizing investments that expand our platform capabilities and revenue opportunity. Our silo starts with empowering our customers to compete and better serve their clients and communities. I am confident in our ability to drive this momentum forward kicking off the next phase of growth for MeridianLink. With that, I will now turn the call over to Sean to talk about our financial results and guidance.

Thank you, Nicolaas, and thank you again to everyone for joining us on the call today. Before reviewing our financial results and guidance, I'd like to echo how impressed I am with the achievements in the fourth quarter and full year. Our results are a reflection of an impressive team effort and culture and for that, I want to first express my sincere gratitude. Since joining MeridianLink in June of last year, I have seen us put in place important structural changes to TS up to enter the next phase of growth and drive to $1 billion and beyond. In the face of uncertainty, we continue to execute well on what we can control, balancing cost discipline and strategic investments to accelerate growth. Near term, we're closely monitoring how macroeconomic conditions are affecting the market and are hyper-focused on providing transparency and predictability for our business. With that said, we are going to increase the frequency of reporting our annual KPIs of annual recurring revenue, net retention rate, customer count and organic growth rate that can be found in the 10-K. We believe that reporting these metrics on a quarterly basis going forward will allow more visibility into the growth drivers and scale of the business. We finished Q4 with annual recurring revenue, or ARR of $158.9 million and a net retention rate of 96%. Specifically, however, our lending software solutions finished the year stronger at 104% and excluding the impact from mortgage volumes, the net retention rate of our consumer lending revenue was 108%. 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 the customer base is, as the more automated and integrated their lending process becomes, the lower the probability for churn. As Nicolaas mentioned in his remarks, we also finished another quarter with an impressive luster of new logo wins. In the fourth quarter, we had 2,034 total customers using our software solutions. On an organic basis, total customers grew 2% year-over-year. This is not a departure of past periods and represents our ongoing go-to-market investments focused primarily on increased cross-sell and upsell into the installed base in the near term. 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. Now turning to our fourth quarter financials. We generated total revenue of $70.6 million, up 10% year-over-year, driven primarily by strength in our consumer lending transaction volumes, increased product bill lives and the acquisition of Open Close. We continue to report consistent growth across the business in the face of a declining mortgage lending market. The software solutions. Lending software revenue accounted for nearly 78% of total revenue and grew 26% year-over-year. Mortgage-related revenue within lending software solutions, inclusive of Open Close accounted for 10% of the total. Excluding that impact, consumer lending revenue grew 23% year-over-year, closing out the year with the fastest growth rate for any quarter in FY '22. Data verification software revenue accounted for nearly 22% of total revenue and declined 23% year-over-year. This was driven by the 34% decrease in mortgage-related revenue, which represents 59% of total data verification software solutions. As you can see in our results, total mortgage-related revenue was down 15% from last year and generated 21% of overall MeridianLink revenue. While the mortgage loan market continues to be a headwind, our focus remains on taking share in the market and adding capabilities to our solutions that enable customers to win wallet share through superior speed and client service. Moving to profitability, adjusted gross margin in Q4 was 70%. Accounting for stock-based compensation, GAAP gross margin was 62%. Non-GAAP operating income was $8.5 million and GAAP operating income was $0.6 million. On a GAAP basis, net loss was $5.5 million and adjusted EBITDA was $23.2 million, representing an EBITDA margin of 33%. Now breaking down our investments in the quarter, on a non-GAAP basis, we strategically invested 55% more in sales and marketing and 37% more in R&D, compared to the fourth quarter of last year. Turning to the balance sheet and cash flow statement. We ended the fourth quarter with $55.8 million in unrestricted cash and cash equivalents, down $60 million from the end of the third quarter, driven by the acquisition of Open Close. Operating cash flow in the fourth quarter was $7.4 million and free cash flow was $5.2 million or a 7% free cash flow margin. Now let's look at full year 2022 results. It's important to acknowledge the much stronger-than-anticipated headwinds we faced last year. For one, we entered the year with our mortgage-related revenue representing 30% of total revenue. The speed and the level of mortgage interest rate increases in the first half drove refinancing volumes down 85% and purchase volumes to drop approximately 40% of the market. While we were insulated by our customer mix, contract structure and ongoing new customer additions, we were not immune to the collapse in activity. For the full year 2022, we generated total revenue of $288 million, up 8% year-over-year, while we absorbed a $15 million headwind related to mortgage we still grew the business by $20 million, a great example of proper execution in the face of an unpredictable rate environment. For software solutions, lending software revenue accounted for nearly 72% of total revenue and grew 18% year-over-year. Mortgage-related revenue within Lending Software solutions, inclusive of Open Close accounted for 8% of the total. Excluding that impact, consumer lending revenue grew 20% year-over-year, representing the durability of our growth algorithm that is fueled by the areas outlined by Nicolaas today. Data verification software revenue accounted for nearly 28% of total revenue and declined 12% year-over-year. This was driven by mortgage-related revenue, which represents 64% of total data verification software solutions. However, we continue to outperform the market as a result of our cross-selling non-credit volume types into our CRA customers. Again, the mortgage headwinds were clear in our results. But this portion of our revenue has come down meaningfully over the years, now generating 23% of overall MeridianLink revenue in 2022, compared to 30%in 2021 and 39% the year before. With our healthy pipeline and the inevitable normalization of the mortgage market, the momentum in our business remains strong. For profitability, adjusted gross margin for the full year was 70%. Accounting for stock-based compensation, GAAP gross margin was 63%. Non-GAAP operating income was $55.9 million and GAAP operating income was $28.6 million. On a GAAP basis, net income was $1.3 million and adjusted EBITDA was $111.2 million, representing an EBITDA margin of 39%. Our margin profile reflects our ongoing cost discipline, which allows us to invest in generating demand and delivering our product road map. Adjusted for stock-based compensation, we strategically invested 35% more in sales and marketing and 25% more in R&D, compared to the full year 2021. Both of these investments represent our delivery on the commitment we made at this time a year ago, which was focused on engaging more deeply with our customers through go-to-market and expanding our platform capabilities through innovation. We expect a strong long-term return on these investments, and we'll continue to examine each expenditure on its individual merits. Provide an update on our investment in services, software projects delivered in the quarter were again over 50% higher year-over-year. We also continue to see an improvement in ACV released. This progress will only compound going forward, accelerated by the realignment of our operations organization and the restructuring exercise that was designed to serve more customers with greater efficiency. Now turning to the cash flow statement for the full year 2022, operating cash flow was $74.6 million and free cash flow was $65.2 million or 23% free cash flow margin. MeridianLink'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 shareholders. I'll now pivot to guidance for Q1 and initial guidance for the full year 2023. We expect to continue adding new customers and increasing module penetration among existing customers at a level that more than offsets the remaining impact of the decline in the mortgage market volumes. It's worth noting that the sharp increase in mortgage interest rates occurred during the second quarter of 2022. So comps in the first half of the year will be the most challenging. For the first quarter, estimated total revenue is expected to be between $72 million and $75 million compared to $72.8 million for the same period in 2022. This represents an estimated year-over-year change of negative1% to 3%. For the full year 2023, we are expecting total revenue between $304 million and $310 million, compared to $288 million for the same period in 2022. This represents an estimated increase of 6% to 8% year-over-year. For the mortgage-related revenue, we expect the mortgage market to contribute approximately 25% of revenue for the first quarter of 2023 and anticipate that level to continue throughout the year. To provide more color around the growth drivers in our total revenue. We're expecting the momentum from cross-selling mortgage lending into our depository base to maintain through 2023 and accelerated by the capabilities of the MeridianLink One. Pairing this with the slight improvement on runrate volumes we've seen, we're expecting growth year-over-year of the mortgage-related lending revenue, excluding Open Close, which continues to contribute around $1 million per month. On the data verification side, we are expecting a continued decline in mortgage-related revenue given the anniversary impact of tough comps from the beginning of 2022. We expect revenue from non-mortgage-related data verification software solutions to be flat year-over-year as a result of headwinds in the employment screening market coming off of post-pandemic hiring highs. We break out these components to improve the level of transparency and setting expectations for the year. The guide implies that consumer lending growth will continue momentum this year. We are expecting more demand for consumer lending products as consumers better position themselves for an evolving financial landscape. There is ample opportunity to accelerate growth for the company by leveraging the differentiating cross-sell and upsell power of MeridianLink One. With the platform's innovative functionality and access to hundreds of partners will empower faster volume growth for our customers and for MeridianLink as a whole. Now turning to the EBITDA guide, on a non-GAAP basis, first quarter estimated adjusted EBITDA is expected to be between $23 million and $26 million representing EBITDA margins of approximately 33% at the midpoint. For the full year 2023, estimated adjusted EBITDA is expected to be between $109 million and$115 million, representing EBITDA margins of approximately 36% at the midpoint. Our EBITDA guide reflects the ongoing investment back into the business, focused on scaling, viewing go-to-market and enhancing product capabilities. To fund these investments, we are leveraging the savings from the restructuring. This is a strong example of our disciplined approach to capital allocation. We have thoroughly examined and are investing in areas that demonstrate great potential to propel MeridianLink forward into the next stage of growth. I'd like to end by reiterating the significant opportunities for MeridianLink as we enter 2023. We will optimize our return on invested capital and deliver on our value proposition to customers and shareholders. MeridianLink's track record of consistent profitability and growth demonstrates the resilience of our business model and superior quality of our customer base. At the end of the day, customers now more than ever need an efficient digital solution that is designed to accelerate growth. We have been the leader in providing that solution for decades and we will continue to deliver on that promise. With that, Nicolaas, Chris and I are happy to take any of your questions and I'll turn it back over to the operator.

[Operator Instructions] Your first question comes from Koji Ikeda of Bank of America. Please go ahead.

Hey guys. Thanks for taking the questions. Just a couple from me here. First question, wanted to ask about the guidance here for the first quarter and for the full year and really asking about the shape of revenue growth in 2023, specifically, should we be thinking about any sort of seasonality in the revenue growth that's embedded in the guidance for the full year? Thanks.

Hi, Koji, it's Sean. There definitely is seasonality, as you know, as we go quarter-to-quarter. I think the – a lot of it is yet to be seen with how the market does or doesn't trend up. But we will typically see a softer Q1 and Q4 than we do Q2 and Q3. So that's the answer to your question. Obviously, there is a lot of variables built in with our business model and how it trends with the overall macroeconomic environment.

Got it. Got it. And then, I wanted to ask a follow-up on the reorg news that you're talking about today. And really wanted to ask, was the reorganization just – is this the natural evolution of the business? I wanted to ask you that versus any sort of rightsizing of capacity given the period of uncertainty you're facing. Thanks guys. Thanks for taking the questions.

Yes, Sean again. I think it's a mixture of both, actually. When you say a natural evolution, we've been highly acquisitive in the past. And so there is some natural redundancy, operational efficiency, et cetera, that we needed to take action on. I also think this is a realignment, reorganization efforts to get better aligned to our customer. So if you take services, for example, this is an effort to accelerate the velocity on time to revenue. We've been talking about that for a long time. We've also taken this as an opportunity to refocus a lot of our product and development efforts towards things that matter to the customer, towards products that matter in the market and diverge away from products that aren't necessarily quite as lucrative. So, I think it's a mixture of both, but it was a necessary inflection point for us as a business.

Got it. Thanks guys. Thanks for taking the questions.

Thanks, Koji.

Thank you. The next question comes from Parker Lane of Stifel. Please go ahead.

Hi guys. Thanks for taking the questions and I appreciate all the new disclosures. In the context of the customer count, I am just wondering if you can give us a sense of what the unit sales and associated backlog look like in mortgage in the fourth quarter and what's contemplated in the 2023 guide? Thanks.

Parker, I apologize. Did he already drop? Can you repeat the question on units? I think I caught it unit sales as it relates to the mortgage.

Yes, yes, on the mortgage business itself, I was curious if you can give us a sense of how unit sales, new customer additions have trended there and the associated backlog and what you're contemplating in 2023.

Yes. So I mean I can give you that in Q4, for example, mortgages from a lending perspective was, in my script was at 20%. There is a huge data component of that as well. It will grow seasonally in Q1 and throughout '23 but some of that is related to Open Close. As we've disclosed prior, that's about $1 million a month and so that will be fully contemplated in 2023 and is incorporated into our guidance. And as you see kind of middle of Q2, Q2 come to an end, the comps will become a lot easier as we saw the second half of FY '22 mortgage kind of in a complete free fall and so, I think there will be growth associated with mortgage from that as well. And hopefully, that answers your question.

I have a little add to that on the sales front. So note that we have an expanded sales team now that we acquired Open close. And the biggest dynamic shift you're going to see is the acceleration of sales on the depository front and the increased focus on selling the platform, which is also referenced in Nicolaas' discussion where we saw ten cross-sell deals for mortgage into the consumer base. And we are going to put more investment on that as referenced in our increased sales investment to accelerate that going through the year.

But I think, Chris, I think it's also fair to say that Q4 has been our most successful mortgage bookings or by new customers.

Got it. Okay. Appreciate the color on that. And then maybe just a quick follow-up here. I was curious if you can give us a sense of some of the additive features that you're bringing to the table with the launch of MeridianLink business and what the near-term opportunity is to unlock more value inside of the existing customer base there? Thanks.

Happy to answer that and talk a little bit about the interest in the customer base. TPP really showcased to these middle-market institutions the demand of small businesses and their ability to service the demand and the opportunity to serve that demand of small business. So StreetShares and this is part of our investment thesis in StreetShares. Now as we built up our cross-sell motion, we're combining with what we already had in a business account opening with what StreetShares have prior to acquisition from business lending and further invested to business credit cards to provide a broader package for these institutions to serve a market that they previously hadn't invested as heavily in. So it's a great opportunity for them to grow their business and for us to help them do it.

Great. Thanks again for taking the questions.

Thanks, Parker.

Thank you. The next question comes from Scott Wartell [Ph]of Wolfe Research. Please go ahead.

Hey, good afternoon guys and thanks for taking my questions. Just going back to the restructuring and – just wanted to understand in terms of where you're sort of reallocating some of those dollars that you're saving from the workforce reduction? Thanks.

Yes, Scott, Sean. Be happy to answer that. I think it's pretty clear in the script what we're focused on, but very specifically around scaling I think automation technology initiatives. We are heavily focused on getting services right. So there will be investment dollars there. We continue to invest in go-to-market and the broad go-to-market, meaning not just sales, but revenue operations and streamlining the go-to-market processes as well as product innovation. And so there's R&D dollars that we have allocated even though we're being more tightly focused on those dollars. There will be investment there as well. And this isn't just a – you'll notice this isn't just a – take the restructuring dollars and use only the restructuring dollars. We had already planned to continue investing. So I think that this isn't just a cost play. This is an initiative that really reshapes the business and get more clarity and more focus in the business as we go forward.

Got it. And then just a quick follow-up on free cash flow. I mean, looking at sort of the conversion and or margin, however you want to look at it, down year-over-year in the quarter and for the year. So I'm just wondering if you can give a little bit of color on how we should think about free cash flow going into 2023.

Yes, this is Sean again. Free cash flow in Q4 was a little bit light. There is a mix of reasons for that, deferred income taxes. We had some customers that had – how do I say, more generous payment terms, so they had some deductions as well as some other various things. That is not what we typically put out in terms of operating cash or free cash flow. So we're very focused on cash flow and would expect similar, if not better, results for FY '23.

Got it. Thank you guys.

Yes, thank you.

Thank you. The next question comes from Alex Sklar of Raymond James. Please go ahead.

Yeah, thanks. I wanted to ask about the underlying strength in your consumer non-mortgage lending solutions. I think growth accelerated as the year progressed. Can you just talk about what's driving the higher volumes? And just a quick clarification on that was that all organic? Or did open close up any non-mortgage contribution? Thanks.

Well, I can start. And hi, Alex, this is Sean. There is no non-mortgage from the acquisition of Open Close. So that's as a starting point. The strength for consumer, I think, has continued throughout the year. We relied on the same data sources as a lot of the analysts do whether it's Kona, whether it's – if we're looking at auto, sources, etcetera. So we actually expect the growth to slow in 2023. Now we still think it's going to grow. It's the basis of our growth story going forward. But we don't expect in 2023 the same levels of growth. Hopefully, I am incorrect on that, but that's not what we see in the market right now.

Okay. Great. And then, I just want to follow up on your – this came up in the prepared remarks and your answer to one of the earlier questions. But what exactly is changing as a result of the reorganization in terms of the service team? And specifically, talking to one of your initiatives around accelerating time to revenue, kind of curious to some of the moving parts there. And any stats to date in terms of improvement in that regard?

Sure. This is Nicolaas, and let me double-click on that a little bit. We had our services organization more structured to be doing handoffs in functional areas, delivering on a project. And part of the restructuring we're doing is just moving to practice – services practices where a project will basically live with the services practice from cradle to grave and the handoff of the training will all be part of that practice. It minimizes the handoffs between teams. It's more efficient between handouts and hand backs and we feel and see the scalability of our solution and building knowledge for specific integrations or types of implementation within practice areas to be the future foundation of scaling services to the next level. It also positions you better to – in the future to build out relationships with partners that can complement practice areas, specifically on the implementation or resources located elsewhere. So from that perspective, it's kind of – we got to a point where size became a gating factor in the number of head count and we wanted to become more efficient in, let's say for future growth.

Yes. And Alex, you heard me say a little earlier. I just want to reiterate this point. This is a very good example of continuous improvement, right? So year-over-year for both Q3 and Q4, we were 50% better in terms of ACV release. And so, we are doing well in service. We're doing better in services. But this reorganization is just the next step in the evolution to get us more efficient to drive faster time to revenue. We've quoted in the past 6 to 9 months to get a project live on average. We've reduced that to 6 to 7 months on average and I think you and I have talked personally, I really hope that that continues to go down and hopefully dramatically over time.

Okay. Great for the great color.

Yes.

And maybe before we move on, one last comment from Nicolaas here is we also set up two lines of business in services. One is our professional services organization that would typically take on 95% of the implementations from a, kind of a standard implementation cycle and then the second is our consulting and managed services practice that's being run by two leaders in the business today. We are ready for the next question, operator.

Thank you. The next question comes from Matt VanVliet of BTIG. Please go ahead.

Hey, good evening. Thanks for taking the question. I guess, as you look towards '23 and Sean, you mentioned maybe projections for slower growth in the consumer lending side of it, I guess from a go-to-market perspective then, are you leaning in on maybe some more of the additive functionality in MeridianLink One, whether it's around some of the marketing automation or some of the Insights products that can help the financial institutions maybe better target potential borrowers and things from that nature to maybe drive demand when it's not just kind of falling into their laps like it maybe was a couple of years ago?

Yes, thank you for the question, and happy to answer. One thing I'd like to know real quick is, well, consumer lending is slowing compared to historic growth levels, I'd argue that it remains healthy when looking at the economist's forecasts. Now to your question about what we can do about it. One thing I love about the MeridianLink platform is that it's broad enough and flexible enough where we can help our customers in a variety of economic situations. So an example of how we're helping our clients right now is as credit unions look to build up more deposits so that they can lend profitably and expand our lending base, we're bringing together both our Engage or marketing automation solution and leveraging that deep connective tissue with our opening solution to help them market to consumers out in the world and grow their base effectively and efficiently and we're – we'll continue to fall in place like that going forward as we continue to invest in our cross-sell motion.

Hey Matt, it's Sean. Just to add, demand doesn't equal revenue either, right? So, when I was talking about revenue, we still see a very healthy demand environment. It's really from that from the transaction perspective, where that's really going to be a macroeconomic tie back, right? And so, if we start to see an upswing, downswing et cetera, we're exposed at some level to that transaction level, demand has been healthy for the last couple quarters. We will, as Chris mentioned, we're looking for new opportunities always to increase that pipeline and increase the backlog and that will continue.

Okay. Very helpful. And I guess on some of the successes that you've talked about cross-selling mortgage into existing customers maybe I wanted to dig in a little deeper there. How much – or how many of those deals do you attribute to some of the added functionality from Open Close versus maybe some customers realizing that not only has your product expanded and grown and the functionality is on par with some of the competitors. But by bundling it together, they can have a more efficient and cost-effective system and maybe a ripping out older, bigger, more expensive systems time when demand is a little lower than it has been.

This is Chris. Thank you for the question. On the Open Close element, I think we're yet to see, at least from a Q4 perspective, the benefits of that acquisition from a cross-sell, we completed that late in the year. That said, when we look at those 10, when I was speaking with those customers, what I consistently heard was the story resonating on how power solution helps bridge functional silos within the FI that are required from a regulatory perspective to create bespoke experiences for consumers. And we have Nicolaas in the past has talked about our debt optimization feature where we help consumers refinance other aspects of their debt wallet to qualify for a mortgage loan and/or to increase their financial spending capabilities and the clients are bought into the vision of that we will continue to invest in that connective tissue between our relative loan types to expand that value for their end customers.

Great. Thanks for taking my questions.

Thanks, Matt.

Thank you. The next question comes from Pat [Indiscernible] of Credit Suisse. Please go ahead.

This is Pat is from Tim Chiodo's team. Thanks for taking my question I wanted to ask what MeridianLink is assuming for lending volumes in the general macro environment in 2023, I believe in last quarter, you mentioned some unpredictability in lending volumes despite a healthy pipeline.

Hey Pat, it's Sean. I don't – I mean for – for 2023, the assumption is fairly the same as what we saw in 2022 in terms of the split of consumer and mortgage. And then, as we break down consumer into auto, personal credit cards, et cetera, there has been no material change in that split from Q3 to Q4. We talked about that a lot in Q4. We didn't see a lot of change from Q3 to Q4. So I don't expect to see material change going into '23, as well.

Thanks.

Thank you. The next question comes from Bob Napoli of William Blair. Please go ahead.

Thank you for the question. Appreciate it. Thank you for the disclosures. That's really, really helpful, the final disclosures. The – you mentioned the record software bookings in the fourth quarter. Maybe a little more color on why you had a record maybe to break out or just some color around that those bookings and then maybe any color on the pipeline where the pipeline stands versus, say a year ago would be helpful.

Thank you for the question. This is Chris. I am looking at it in two ways. One is, year-over-year, we continue to increase the sales capacity of our organization responsibly. We continue to look at ways for us to attack new markets to feed that ultimate capacity. So I'd say this is in line with our year-to-year plan. So that's one aspect. And then the second is – and we talked about this with our investment in the sales in general. It's really about building that foundation for scale. So we're already starting to reap the benefits of some of the sales training and increased onboarding and thus, the success working with clients to introduce them to our solutions. So that's why we're seeing the growth in Q4. It's more about quarter-over-quarter continued execution and a continuous improvement that Sean laid out. And then as far as looking forward, our pipeline – we continue to work on our pipeline in line with supporting the guidance that Sean has just provided.

Great. And then, the – I mean, 10 cross-sells, MeridianLink One, how important – what is your outlook for – are cross-sells becoming more important or and maybe what percentage of your bookings are from cross-sells? And how is MeridianLink One contributing to the ability to cross-sell?

So I believe in Nicolaas' script, it laid out that 60% of bookings were up selling into our customer base, right? I'd like to see that maintain and us expand. We'll continue to invest heavily in new logo, which then continues to invest that opportunity in customer sales. By taking a step back, our average customer leverage is 4.5 out of 13 modules for ML One, so this is a tremendous opportunity for the business and we're investing across the various functional areas accelerate our ability to execute in those areas. So that includes from an R&D perspective, improving the connective tissue between loan types to increase the value to our customers, as well as what I just talked about from sales training and our focus on platform selling with MeridianLink One going forward. So in summary, MeridianLink One and bring that all together is tremendously valuable to achieve our customer promise and which will then result in the financials of the business.

Thank you. Appreciated.

Thanks, Bob.

Thank you. [Operator Instructions] The next question comes from Andrew Schmidt of Citi Global Markets. Please go ahead.

This is David Wilczynski [Ph] on for Andrew Schmidt. I'd like to know more on the competitive and white space environment, how that's evolving for consumer LS and mortgage?

I'd say from about quarter-over-quarter or even year-over-year perspective, it's been fairly consistent on the established players and where it has changed is over the last three years when money was cheaper, and we saw heavy investments in startups, we're starting to see a lot of competition point solution perspective, I'm seeing less and less of that as those organizations look to right size their business and conserve cash flow and avoid down roads.

Thank you. And then, I have a follow-up regarding the cost savings and continuous improvement. Where should we expect to see efficiencies between gross margin and OpEx in 2023?

Yeah, thank you, it's Sean. I think it's going to be – it will be mixed because we have efficiencies across the entire company, right? So whether you are thinking about cost of goods, services or support or you're thinking about functions inside of G&A or some of our other OpEx functions, I think it will be mixed. My guess is that it will be primarily from OpEx categories as opposed to cost of goods, just because of the data migration story, the public cloud story, et cetera and we are fixing services to go faster. So it is an efficiency story in the short term but we – those we will reinvest to go faster. So I think that ultimately, it will be more heavily weighted towards the OpEx and cost of goods.

Understood. Thank you.

Thanks, Dave.

Thank you. There are no further questions at this time. I'll turn the conference back to Nicolaas for any closing remarks.

Thank you, operator. And I'd like to close by thanking the entire MeridianLink team. Their commitment to our customers, partners and each other is heartening. I look forward to speaking with you again about what we're accomplishing together here next quarter. Thank you for attending today. We appreciate your support and have a great rest of your week. Thank you, operator.