Ladies and gentlemen, thank you for standing by, and welcome to MeridianLink's Second Quarter 2021 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, Erik Schneider, Head of Investor Relations. Erik, please go ahead. .

Good afternoon, and welcome to MeridianLink's Second Quarter 2021 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; and Chief Financial Officer, Chad Martin. .

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 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 a reconciliation of our GAAP to non-GAAP measures included in our press release, which is posted to the Investor Relations section of our website. .

With that, let me turn the call over to Nicolaas. .

Thank you, Erik, and good afternoon, everyone. Thank you all for joining us on our first earnings call as a public company. During today's call, Chad and I will provide details on our Q2 results as well as our Q3 and 2021 guidance.

We will also spend time covering the business, market and opportunity since many of you may be newer to the MeridianLink story but first, I'll kick this off with a few of the highlights of our financial results. .

As you can see, MeridianLink exhibited strong performance in Q2, which exceeded our previously communicated guidance, driven by continued growth in consumer lending volumes for our customers and high levels of mortgage activity, driven by still historically low interest rates.

I am pleased to report that Q2 GAAP revenue was $68.5 million, up 38% year-over-year, and we delivered this impressive growth while continuing to demonstrate our high levels of profitability with adjusted EBITDA margin in the quarter of 49%. I couldn't be prouder of these results, which showcase both our strong growth and best-in-class margins. .

I'm honored to be part of such a strong organization and leadership team. One of MeridianLink's clear differentiators is the passion and commitment of our people and our dynamic culture of acceleration and inclusion.

Many of our employees have 10 or more years in the lending marketplace, and it's their domain expertise that powers our industry-leading innovation and product development. I would like to acknowledge all MeridianLink employees for their performance in the first half of the year. .

MeridianLink is a leading provider of a cloud-based consumer lending platform for financial institutions, including banks, credit unions, mortgage lenders, specialty lending providers and consumer reporting agencies, and our platform is an important revenue and growth engine for our customers.

We are well positioned in our markets and have a strong growth trajectory. Our lending solutions include cloud-based consumer and mortgage loan origination, point-of-sale, account opening, collection and analytics software that simplifies the transfer of capital between consumers and financial institutions. .

Our solution is a leader in mid-market financial institutions. Our key customers are consumer lenders, mortgage lenders and consumer reporting agencies or CRAs. Our target financial institution customer has between $100 million and $10 billion of assets under management.

In total, we work with over 1,900 customers, including 63 of the leading 100 credit unions and over 50% of Forbes' 2020 best credit unions and banks. .

Our data verification software solutions include cloud-based platforms for powering credit reporting, employment and income verification, asset verification, fraud detection and background screening.

Our Mortgage Credit Link and TazWorks data verification products empower CRAs with an operational platform and data, and we are leaders within the CRA software market. .

We have a history of providing measurable ROI to our customers in the areas of revenue growth, cost reductions, the efficiency improvements and risk reduction decisioning. Together, our suite of mission-critical software solutions allows our customers to successfully compete against Tier 1 banks and large financial institutions.

We are a critical revenue and growth engine for our customers. And as our customers continue to grow and succeed, we do so alongside them. .

The financial services industry is in relatively early stages of digital transformation. The global pandemic accelerated financial institution's investment in digital lending software, and we believe our industry still has 5 to 10 years of digitalization ahead.

The United States is the largest consumer debt market in the world, and financial institutions in the U.S. are currently investing billions in software to compete for business.

Cornerstone Advisors independently estimates our domestic total addressable market at over $10 billion, and International Data Corporation estimates that SaaS spend from the banking sector will nearly double to $19 billion by 2024.

Our platform replaces outdated legacy products and less capable point solutions to enable more efficient account opening, loan origination, reporting and risk management from anywhere and at any time. .

We expect MeridianLink to continue to win in the market for 3 key reasons. First, our platform is comprehensive. Today, to many financial institutions struggle to keep up with increasing consumer experience expectations because they rely on numerous disparate legacy technologies that still permeate the industry.

In contrast, MeridianLink helps our customers compete and win by addressing nearly all consumer lending categories, including mortgage, credit card, personal, auto, home equity and small business loans.

By serving all these loan types, we accelerate our customers' digital transformation, and we remain the only mid-market complete unified lending solution originating consumer and mortgage loans. .

Second, our platform is efficient. Speed and intelligence matter, and our platform enables real-time decisioning and rapid access to data in a deeply complex market plagued with disorganization. Because our platform integrates a suite of solutions that span the digital lending journey, we can drive more meaningful and personalized interactions.

This is essential as consumers increasingly expect a more thoughtful and customized experience across their lending needs. .

Third, our platform is modular. Our clients can select 1 or many of our integrated products to facilitate growth as well as streamline processes. The extensive MeridianLink marketplace is a game changer for our customers as it allows our customers to extend our platform to meet their specific strategic requirements. .

Several key initiatives drove the company's solid performance in Q2. Our 2021 Virtual User Forum for our lending clients took place in May and had a total of 80 sessions over 3 days. There were more than 2,100 unique attendees and over 13,000 cumulative attendees for all sessions to engage with and learn more about MeredianLink's offerings.

And when it comes to offerings, the company continues to expand. In fact, in April, the organization completed the acquisition of Saylent. Saylent contributes key data and marketing capabilities to our MeridianLink One platform, which we will continue to enhance and integrate.

And finally, the company had another strong quarter of new logo wins, including key signings in specialty lending, continued bank and credit union expansion and also several new customers for data verification solutions. .

We are proud of our recent growth and accomplishments, and even more excited about executing further on several key growth opportunities. We believe consumer lending will continue to grow. And as the volume of our customers' lending increases, we expect to share in that growth.

Given our position in the market, our operational execution and the positive market dynamics, we are confident in our growth trajectory. .

We see multiple growth vectors. First, expanding our target market. We have historically focused on the middle market, regional banks, community banks, credit unions, specialty lending providers.

However, our solutions also resonate well with larger and smaller financial institutions, and we believe we can successfully expand our target market to include both. Our newly packaged offering targeting smaller prospective customers has quickly gained traction. .

Second, adding new logos. Our high-power sales capabilities are built to acquire high-value new logo wins.

We are making investments in sales and marketing to continue securing new clients, particularly as financial institutions seek to digitally transform by purchasing more effective and scalable technologies, and our go-to-market team continues to win new customers in our target markets. .

Third, continuing to land and expand. The critical nature of our solutions facilitate exceptional retention and embedded cross-sell growth within our existing client base.

We have a demonstrated ability to both retain customers and to upsell and cross-sell more of the features and functionality we offer inside their existing installed products and new products.

As demonstrated by a record attendance at our recent user forum, there remains strong interest in our customer base to learn more about our additional integrated products and services. .

Fourth, monetizing our partner network. Our vibrant bottle marketplace provides our customers with the vendors and solutions of their choosing and offers us a substantial actionable monetization opportunity. Our solutions act as the gateway for our extensive network of third-party partners to access our financial institution and CRA customers.

We are able to capitalize on onetime service fees, annual integration fees and transaction-based revenue share income via the MeridianLink marketplace. We expect to work with current and new partners to enhance the opportunities for our customers to optimally position themselves in the market and when our customers win, we win. .

TCI, which improved our indirect lending offering; TazWorks, which established a leading position in adjacent areas of the CRA market; and Saylent, which brings data analytics and marketing capabilities in-house for our clients. .

I will now turn the call over to Chad to talk about our financial results. .

Thanks, Nicolaas, and thanks again to everyone for joining us today. Since this is our first earnings call, I'll start by providing a brief overview of our financial model, and then I'll go through our second quarter results in detail before moving on to guidance for the third quarter and full year 2021. .

As Nicolaas mentioned, in the second quarter, we generated total revenue of $68.5 million, up 38% year-over-year. 88% of our second quarter revenues were subscription fees, with the balance coming from the professional services and other. We have a usage-based SaaS recurring revenue model that drives our healthy financial position and growth profile.

It is resilient and provides visibility into our future financial performance. .

Our customers sign long-term contracts, usually 3 years that are not cancelable without penalty. Typically, customers commit to annual fees and monthly purchases of applications. In exchange for higher monthly commitments, they receive lower per application pricing. And any transaction over the monthly minimum commitment is an incremental charge.

Our platform's ability to make our customers more efficient and effective at lending, naturally drives more volume once it is installed and used. We like this model as we can grow with our customers, and we are aligned with their success..

We provide both lending software and data verification software solutions. In the second quarter, lending software solution revenues accounted for approximately 2/3 of our total revenue and grew 38% year-over-year.

The other 1/3 of our revenues comes from the data verification software solutions, which increased 39% year-over-year, largely due to a still heightened level of mortgage refinancing activity, including associated credit reports driven by lower interest rates. .

Second quarter revenues from the mortgage loan market generated 8% of our lending software solution revenues and 71% of our data verification software solution's revenues.

Of the 38 points of year-over-year revenue growth in the second quarter, 24 points were contributed by the acquisitions of TCI and TazWorks, while the remaining 14 points came primarily through the addition of new customers, increased module penetration of existing customers and increased volume from both new and existing customers.

Our strong unit economics continued in the second quarter as our gross margin was nearly 70%. .

We continue to invest in our sales and marketing and research and development efforts to drive organic growth acceleration. We are investing significantly to build robust sales and marketing capabilities. Compared to the second quarter last year, we spent 94% more in sales and marketing and 54% more in research and development.

Even with this additional spend, our adjusted EBITDA margin was 49%, and our adjusted EBITDA grew by approximately $7.6 million to $33.4 million. While we continue to invest for growth, we will also carefully control expenses and convert increased revenues into profit. .

Turning to the balance sheet and cash flow statement. We ended the second quarter with $29.2 million in unrestricted cash and cash equivalents, down $44.3 million from the end of the first quarter.

After the close of the quarter, we used $200 million of our IPO proceeds to pay down debt, extinguishing our second lien debt and reducing the first lien by $75 million and reducing our quarterly interest expense to around $5.9 million. As part of this paydown of debt in Q3, we incurred a debt extinguishment charge of $4.4 million. .

Operating cash flow in the second quarter was $21.2 million compared to $11.7 million a year ago. Free cash flow was $19.5 million in the second quarter, a 28% free cash flow margin compared to $9.8 million and a 20% free cash flow margin a year ago.

The 8% improvement in free cash flow margin was driven by converting incremental revenue into operating cash flow. .

I will now conclude the call by providing guidance for Q3 and for the full year of 2021. Overall, we continue to see strong business momentum, and our pipeline remains robust. For the third quarter, estimated total revenue is expected to be between $62.9 million and $63.5 million compared to $52.3 million for the same period in 2020.

This represents an estimated increase of 20% to 22% year-over-year. On a non-GAAP basis, our third quarter estimated adjusted EBITDA is expected to be between $25 million and $25.6 million, representing EBITDA margins of approximately 40% at the midpoint of the range. .

For the full year 2021, estimated total revenue is expected to be between $256.7 million and $257.9 million compared to $199.3 million for the same period in 2020. This represents an estimated increase of 29% year-over-year.

On a non-GAAP basis, our full year 2021 estimated adjusted EBITDA is expected to be between $112.3 million and $113.5 million, representing EBITDA margins of approximately 44% at the midpoint of the range. .

TCI and TazWorks are expected to continue contributing at levels in line with recent performance accounting for typical seasonality in both Q3 and the remainder of the year.

Lending software is expected to suffer a modest drag from slowing mortgage lending activity, while data verification will be facing difficult comps in the quarters ahead given the elevated mortgage refinancing activity in the year-ago quarters. .

With that, Nicolaas and I are happy to take any of your questions.

Operator?.

[Operator Instructions] Your first question comes from the line of Koji Ikeda from Bank of America. .

Congrats on the nice first quarter as a public company. A couple from me. Just to start off on the mortgage versus consumer mortgage now being 8% of lending software solutions.

Is that the right way to think about that mix going forward?.

Koji, appreciate the initial comments and the question.

Chad, why don't you respond to that for us, please?.

Sure. So we broke out the mortgage exposure for both the lending software solutions and the data verification software part of our solutions. So that was 8% on lending and 71% on data verification, 30% overall for the quarter.

And so that 8%, we think, as the market for mortgage renormalizes and as the market grows for the consumer side, will potentially come down through time based on just the overall market trend. .

Got it. Got it. Okay. And then looking at the mortgage software solutions revenue and the data verification software revenue for the mortgage market, both down sequentially. Overall rates have been holding pretty steady at low rates. And you did mention some commentary that there could be some gradual decline here.

I mean, is this really the indication that the refi tailwinds that your business saw in the past is mostly now behind and the decline in the refi volumes and the revenue model has really begun here?.

So the -- with the way we forecast our -- the impact of mortgage on our -- both basically the lending and the data verification side of the business, is we leverage kind of the third-party industry views on the market. So we don't have a team of economists.

So we're relying on the Mortgage Bankers Association, Fannie, Freddie, et cetera, to see what they're forecasting around the timing of the slowdown in refinancing activity. So our forecast, we believe, is in line with that view, obviously, as adjusted for how that forecast impacts kind of our stream of revenues. .

Got it. Got it. Okay. Last question from me. Just trying to work the math here. So with the TCI and TazWorks, 24 points of growth contribution, so that implies about $12 million in contribution from TCI and TazWorks.

Is that right? And that's all in consumer, correct?.

So both TCI and TazWorks aren't tied to mortgage. And yes, the math -- I presume you're doing your math right, 24% of the growth in the quarter, 24% up to 38% was tied to TazWorks and TCI. And neither of those are focused on mortgage. So yes, in terms of the breakdown, TCI is in our lending software solutions, and they focus on auto and indirect auto.

And TazWorks is in our data verification part of our business, and they're focused on employment and tenant screening. .

Got it. Got it. So backing that out of the consumer side, that does imply the consumer loan market grew about 15% organically. Is that in the ballpark? And I guess if it is, that's really great organic growth.

Can you talk a little bit about what's going on in the consumer side that's driving that mid-teens growth there?.

Yes. So what's driving growth on that part of the business is a combination of customers who are on our platform, who are utilizing more -- either more of the solution because we've cross-sold or upsold into them, other parts of the platform that we have. Or if you remember, we also have a volume-based pricing model.

So for those customers who are beyond their monthly commitment as they see additional volume on their -- in their institution, we participate in that.

And then obviously, we also have new customers who come on to the platform during the year, and that was kind of broken between growth from existing customers and growth from new customers combining to drive previse forward. .

Your next question comes from the line of Timothy Chiodo from Crédit Suisse. .

So similar, first, congratulations again on the first quarter as a public company. And also a similar question. So in our model, we tend to or attempt to back into the core consumer LOS business where we're backing out the mortgage, we're backing out acquisitions. And it does seem like it wasn't really just this quarter.

It doesn't seem like that business has been growing mid- to high teens and maybe even higher in certain quarters depending on some of the assumptions we have in the back years of our model. It's been growing at a nice rate for some time now, and it's not really just a this quarter thing. .

I was hoping you could put some quantitative just a framework around the components of that. So you mentioned this year, right? There are new modules, there's new customers. There's maybe a little bit of churn. And then, of course, there's increasing usage, our underlying end market.

When we think about that growth going forward, what is the quantitative or growth algorithm that investors should think about for that business, which makes up on our estimates roughly 60% of total. .

Yes. Tim, good question. Similar to the conversation, they were just having around the growth. So I think of it in those pieces that you outlined, and it's not much more complex than that, right? We have existing customers, right? And we have a lot of our go-to-market activity is focused on selling back into that existing customer base.

Getting them to use more of the features and functions that we're selling [indiscernible] that we're prone to get more [indiscernible] solutions. .

Some of the solutions we've introduced, like collections, data analytics, account opening, the portal, point of sale to the existing customer base, which drives incremental revenue to us for using those additional modules. And then if there are [Audio Gap] account drives more loans to the [Audio Gap] institution.

Again, if they're above that you don't see the minimum, that incremental volume that the institution is seeing because they're leveraging more of the power of the platform, having a more better offering for their customers to go and lend against. So -- or they're seeking out lending solutions from our customers.

So the more that they have more volume, that accrues to us as well. And then there's price increases and other things on top of that from the existing customer base. .

And then yes, on the new customers, our new customer, the way we talk about it is net. But of course, there's churn, right, wish we kept every customer but don't.

But then on top of that, and as Nicolaas referred to in his remarks earlier, and he may want to jump in here and talk about kind of what we're doing on the sales side, but we're seeing success in adding new customers to the platform that really just kind of -- and again, they come in and then the same motion that we're doing into our existing customer base, we immediately start with those new customers, right, making sure that they're having -- getting all of the advantage of all the solutions we have on the platform.

And again, trying to get them to where they're seeing success in their solution and pushing their loan applications over and above their minimum volume. .

Excellent. [indiscernible]. Go ahead, please. .

Not to overstate here. But I think Chad answered it beautifully, but just think about the focus that we've created in the business and the go-to-market over the last 12, 18 months, there's a dedicated team of new logo individuals that's driving and focused on expanding our footprint. .

There's a team that's really focused on driving what we call cross-sell, upsell basically from an account management standpoint. And both those teams had a good quarter, and both those teams are accelerating. Couple that with real funnel management and on the marketing side, solid progress in kind of accelerating funnel progression.

And it's enabling the sales team to go into market more confidently. What we haven't spoken about on this call yet is also the partner marketplace, where we are enabling optionality and customized implementations for customers that really want to configure a specific environment or a specific integration.

And that part of marketplace is accelerating for us. We can kind of think roughly that out of $1 of new SaaS revenue there's about $0.25 of revenue associated with the partner marketplace, with I think in years to come, will be a great playbook for us to continue to build [indiscernible] and expand on as well. .

Excellent. My minor follow-up is, I believe, the first half contributions from TCI, TazWorks inorganic contributions was in the $22 million to $23 million and we just referenced that it was roughly $12 million or so during Q2. We have been modeling something in sort of the $35 million range for the full year.

And you mentioned earlier that you do expect those inorganic contributions to continue to perform in line, but along with their typical seasonality, should we still be thinking about a roughly $35 million figure? Or will that be slightly higher now for the full year, given maybe some of the strength in Q2?.

Yes, Tim, I'm not specific what you have in your model. I think you're kind of backing into where those [indiscernible] have been based upon the reports and the analysis we have.

And as I mentioned on the call, right, so we think they'll continue in kind of their current trajectory, but for the seasonality, right, which we expect to see kind of impacting in the fourth quarter. So that -- hopefully, that gives you some guidance there. .

Your next question comes from the line of Saket Kalia from Barclays. .

And I echo my congrats on becoming a public company. Nicolaas, maybe first for you. Just to zoom out a little bit.

I was wondering if you could just talk a little bit about the competitive environment in your lending solutions business, particularly that non-mortgage piece? Maybe it'd just be helpful since this is our first call, if you could just recap sort of the competitive backdrop there and how it's changed, if at all?.

Saket, and thank you for your congratulations to its pretty exciting being public here. Yes, not a whole lot has changed, but let's kind of look at MeridianLink's history a little bit and also when MeridianLink historically focused on where we're going.

We've always been focused on enabling the mid-market to compete more effective with large banks, large financial institutions in the field. And our solutions have been tailored. The platform that we've built, the integrations we've done really enabled the midmarket to punch well above their weight in lending. .

Over the last, call it, 2 years or so, we've seen ourselves getting into larger and larger transactions, where customers are not looking for full on customization, but configurability and the solution as well as the ability to integrate into our partner network and those partners that's part of the MeridianLink ecosystem.

And that helped us kind of keep winning larger and larger accounts. And we typically compete with competitors in that space that would be more focused on customization and custom development, which we don't do, but we recognize that there is a ceiling at some point, but we keep kind of moving up market with our new logo wins there. .

On the down market side, we tend to replace legacy solutions, point-to-point solutions and even in a rare instance at the real lower end, something that's even more manual than that. And how we go to market there is as much more of a prepackaged offering where our solution have a set implementation playbook.

The integrations are pretty much defined that we bring to market for those kind of lower-end institutions. And it's been great for us in terms of new logo wins, traction and even pipeline [growth]. .

So from our perspective, we haven't seen much change in the consumer lending side. Typically, you would expect on the higher end and then kind of more of the point solutions or more legacy, which are typically more electronic workflow approval than real integration, automated decisioning, what MeredianLink's platform bring to those institutions. .

Got it. That's very helpful. Chad, maybe just for my follow-up for you, we'll keep it to 2. And maybe just to switch gears a bit in [indiscernible]. I think EBITDA margins here, the first half at least have been sort of in that high 40s, almost 50%. I think the guide for Q3 is about 40%.

I imagine public company costs are at least a little bit of the culprit there. But you also talked a little bit about investing in sales and marketing.

Can you just talk a little bit about high level sort of how you think about some of the puts and takes to sort of that margin in the second half? Does that make sense?.

Sure. Yes. I referenced in -- earlier, we did accelerate our spend on a year-over-year basis for our sales and marketing and our R&D, right? As Nicolaas talked about kind of the success we've had in making those investments on the sales side. as well as continuing to invest in new products.

We expect to continue to see growth there and spend on a relative basis on -- versus prior years and prior quarters. .

And yes, there is additional kind of costs associated with going public that we're layering in both just kind of our cost of insurance and in platforms and technology and cost of persons who we've added to help us be a public company. And so layering those in, it's kind of pushing on the back end of the half -- back half of the year.

But over time, right, as we continue to grow the revenue, we're still comfortable with kind of the long-term margin guidance that we've provided previously. .

Your next question comes from the line of Andrew Schmidt from Citi. .

Nicolaas, Chad, Erik, congrats from me as well on the first quarter [indiscernible] good to see. I want to dig into the -- also the non-mortgage consumer side. I mean, I think a lot of the questions around this are just a function of to try to offset some of the pending mortgage hedges we're seeing to maintain or accelerate this line.

So I wanted to dig into your visibility in terms of maintaining or accelerating current rate of growth on the nonmortgage [consumer] side. It seems like, clearly, you've put a lot of emphasis on the go-to-market, a lot of investment there.

It seems like that should be showing up now, which can sort of sustain or improve the current levels of growth we're seeing to that in sort of the secular backdrop in the market.

So just curious to get your sense between sort of the sales pipeline and implementation pipeline, just confident in growth there?.

And I'll make some high-level remarks here, and Chad, if you have anything to add, please speak up when I'm done. But from a consumer lending standpoint, we we've seen real acceleration in the business over the last year, 1.5 years. And bookings in the company has been very strong.

We are the benefactor of a healthy backlog and a healthy pipeline to go and implement. And the team is really focused on doing so and scaling our services muscle in enabling those newly acquired customers and turning them on to our platform.

So I'm pretty excited about what we're taking with us into 2022 given the success we've seen in winning business so far in 2021. .

As it relates to what can you control, what can you not control? I don't really lose sleep over the world of supply chain, the world of factions and the possible issues in the Middle East or any other things we cannot control.

Myself, the leadership team and the employee base is very focused on delivering great products to our customers, turning our customers into real ambassadors of our solution and our products. That's focusing on delivering the best customer service we can. It's on winning the customers and the deals we are at. .

And from a consumer lending standpoint, I'm very buoyant. I'm excited to where the business is going and accelerating. And I feel we kind of -- on that acceleration curve where the sales team has really come through over the last year, 1.5 years, accelerating, building systems, processes, it's becoming predictable or repeatable.

We can see pipeline progression. We kind of really see that. It's now also turning on the rest of the organization coming behind our sales organization and supporting those clients, implementing those clients.

And I think 2022 is going to be a year for us kind of turning that into more of a reality as we've continued the winning streak we've had with bookings. .

Chad, anything you want to add to that?.

I would just add the point -- Andrew, thanks for the question. I would just add that the way our contracts are structured, our customers don't start paying us until they're implemented and go live and are using the solution.

So the bookings and kind of the sales success Nicolaas has talked about, kind of goes into our internal pipeline to then go get implemented. So the success today will turn into customers and revenue down the line.

And so obviously, we want to kind of get them online as soon as possible, but there's a lot of change management involved when you implement a solution like a loan origination system. And so that gives us the comfort. .

And then also once those customers come in, right, then they kind of start using more of a platform. And so we see growth from those future customers kind of again, growing through time as they take and use more of the system or turn on more loan types and put more volume on the platform. .

Got it. Sounds very constructive. On the M&A strategy, done a good job recently of adding products on to the platform to cross-sell additional capabilities, data verification and the LOS side within direct lending and such.

But as we look at the pipeline today, is the strategy more of the same in terms of capability or product add-ons? Or are there larger more transformational opportunities that you see maybe towards commercial lending or something that could be a little bit larger in nature?.

Thank you for the question. And it's a really good question. Maybe take a step back, and I'll give you a 30-minute snapshot into what we did that late to the acquisitions.

About 1.5 years, close to 2 years ago now, we started a process in the business where we've developed a strategic plan with long-range planning and modeling that really was the basis of us making decisions for capital allocation in the business.

It also helped us to provide clarity as we onboarded Erik and started focusing on our M&A playbook and layering that M&A playbook over priorities that we've identified in our strategic plan. .

Our focus to date has been very much on, it needs to be strategic. It needs to add to the consumer landscape. And by that, I mean, we service the consumer either through consumer lending, mortgage lending or our data verification solutions. And it really needs to enable customers and the consumer to benefit from it.

If it's good for our customer base and it fits well into our platform and it's strategic to the business, it made sense. And the art in evaluating a lot of these transactions is actually saying no to deals, not saying yes, because there's significant deal flow, as you can imagine in the market. .

And we're really focused on continuing to look at opportunities that enable and help us drive our priorities. And we've made decisions in the business where capital allocation would go towards building or partnering and not buying or acquiring and buying when it makes sense from a strategic standpoint. .

We would like to think that the markets that we're looking at from an adjacent standpoint would really benefit our platform and our focus. I don't think we will go too far the field with what we're looking at.

If they are transformative place that would really change the landscape or the TAM or anything that we should be looking at and take a real hard look, we'll certainly do that. But typically transformative acquisitions don't come by frequent and often.

And I think we can certainly keep ourselves busy for a long time to come with platform additive, customer additive type of M&A activity. And that's the focus of the team. It needs to fit into our strategic plan. And we all need to stack hands and really see the benefit of it for our customers and our platform. .

Chad, I don't know if you want to add anything there. .

No. That's great. I agree 100%. .

Your next question comes from the line of Alex Sklar from Raymond James. .

Nicolaas, Chad, I want to follow up on the cross-sell opportunity. You've been talking about and seeing some improvements on already. But could you just talk about some of the steps that you've taken internally to really promote that cross-sell activity? And with that, I think you've talked about customers having on average 4 of your solutions.

Is there any commonality in terms of the customers that are taking higher number of solutions?.

Well, kind of starting with the question, we fairly early on realized as we were continuing to scale our go-to-market operation that we need to split the teams.

New logo motion, quite different from enabling customers to get more of the benefits of the platform, working with customers, showing partner integration opportunities, working with our customers kind of better and deeper understanding and use the platform. .

So the first step that I think was a significant step in our thinking was to create separate teams some time ago. We've continued to add to the cross-sell, upsell team in terms of headcount. We've continued to build out and enable the team with better understanding of our products.

And if you ask me where we're at today and where we want to be, I continue to say, it's the journey, it's not the destination. If we're never going to be at a place where we should be, totally content with what we've bought. We should continue to improve, we should continue to invest and enable. .

As we work through enabling the cross-sell, upsell team, I think there's opportunities to expand with an existing customers with tools, with modules that we've previously not done. I think we can continue to see growth in that 4. I'm hopeful that we're going to start pushing 5 here and in the not-too-distant future on average.

But also, there's a very sizable opportunity to better enable and better integrate our partner marketplace with our cross-sell, upsell team. And that's something we're pretty excited about thinking through how we want to start enabling that in 2022 and beyond. .

So from my perspective, I think we've built a great foundation. We've been able to create tech stack across our organization, which we continue to invest in better understanding our customers, how our customers are using our technologies, our platform.

And then which customers ultimately down the line will benefit the most from a specific product set given the data that we can analyze and also whether it's our product or a partner product. And I think that's another crank of the turn that we are starting to get our heads around for 2022. .

Okay. Great. That's really helpful color. And maybe my follow-up call kind of continues on that theme, but I wanted to ask about MeridianLink One and the early progress and feedback as it relates to your next-gen platform.

I know it's still early days, but anything you can tell us in terms of cross-sell or usage benefits from those early adopters? And anything in terms of goals in terms of what percent of your base you expect to have live before the end of the year?.

Yes. MeridianLink One is the collective term for our consumer lending, and I broadly define that by including our mortgage offering as well. And by saying that, we'll be the only consumer loan origination platform that includes mortgage in the market. And from a cross-sell, upsell standpoint, it's really a focus that we're driving into 2022.

We've got some early adopter clients that we're working with. So far, good feedback. Great feedback thinking through the feedback and how to adopt some of the feedback and bring it into the platform..

So from my perspective, very pleased with where we are. I think it's from a time line standpoint, I would say, an area of focus for '22, more than '21.

But what we're doing is to bring it all together, bringing the consumer lending offering altogether under MeridianLink One with the naming conventions that I think we've shared with you a little while ago. .

Your next question comes from the line of Matt VanVliet from BTIG. .

Nice job in the quarter. Congrats on the IPO. I guess as you mentioned, your user conference a little bit earlier in the year really showed a lot of success.

Maybe just help us out in terms of any specific areas or segments of the market that were sort of surprising there or provided more upside than you're anticipating? And then how has that event differed from different iterations in the past? How much more successful or pipeline build or deals specifically closed coming out of that did you see this year?.

That's a good question. The evolution over the last, say, 3 years, started with much more breakout sessions, much more focused on specific offerings, user stories, where users have been successful in working with us and enabling a solution for the market. .

It continues to be a great lead generator for us. We think to showcase products, new functionality, kind of get ahead of the market in terms of where the platform is going. And that always cultivates a lot of discussion, great interaction with clients. And from a lead gen pipeline perspective, we've seen a great pipeline built.

We've seen deals close already. So even with it being virtual for the second time in a row, it hasn't slowed down or changed anything meaningfully in terms of the benefits from it. In fact, I would say it's probably accelerated some even with the switch the year before and this year still being a virtual event. .

I would say customers tend to ask when we will be in person again. Hopefully, we can do that soon because I think we missed out on the networking opportunities that exist in kind of the social setting and where customers kind of engage with each other.

But given what we had to do and deal with from a virtual standpoint, I would say I was very pleased with the outcome, the results and the subsequent benefits in pipeline and in deals already closed. .

Great.

And then quickly, Chad, can you just remind us where you're at in terms of whether, I guess, growth in quota-carrying headcount on the sales front, especially on the new logo team? And then how much of the increased investments are around sales support and building out some of that cross-sell team versus adding new quota-carrying heads?.

Yes. So we don't break out specific quota-carrying reps, but you talk about continuing to add to that team. And yes, you're correct.

And one of the ways we think about it is not just adding more reps, but really building the team around the reps and our CRO, Brian Klann, talks about, right, not just having 1 picture through the whole game, but really having the rotation and the depth and the folks on the -- for their specialists.

So you have presales, you have people who set up leads then you take them to demo that then leads to a closer. And so we're really focusing on both the process and technology that the teams are using. And Nicolaas talked about basically seeing faster conversion of opportunities in the pipeline.

But then actually then having really great kind of tools and technology to help stand up a new rep when they come on board, so that we can see them be successful. .

Your next question comes from the line of Tom Roderick from Stifel. .

And again, congratulations on the results of the recent IPO.

This is going to build a little bit on Matt VanVliet's question, but I think it's a good one relative to not just the pace of transactional volume that you're seeing from existing customers, but what it's taking new customers to kind of get across the goal line? And on one hand, it seems to have been a challenging environment for some of your peers out there convincing fintechs -- or I'm sorry, convincing actual banks and credit unions to upgrade their legacy technology set.

On the other hand, you're kind of looking at a customer base that is being forced to change given the volumes that are taking place on the platforms out there.

So would love to hear from your perspective, what's happening with new logo wins, what the urgency is for selection and how that plays into perhaps seasonality in terms of when you actually see those new customers come on the platform?.

Yes. Happy to go there, and I think it's a good question. Actually makes me pause and think for a second. And here's my perspective on it. We are living in the earlier stages of a digital transformation in the mid market. A lot of the larger institutions started earlier, and they've probably invested more in digitalization than the mid-market.

And the pandemic was a real catalyst, kind of forcing folks to start thinking about their business model, their business strategy, serving their customers and what's different.

What we're looking at is a mid-market that is ready and ripe for transformation, ready and ripe and the type of customer that we would love to find as an opportunity to engage with is folks who's in the business, who's been using a [indiscernible] that they're struggling with serving and meeting consumer expectations, that is anywhere, any time kind of on more of a single platform and not a point solution, which is hard to integrate.

And that's where MeridianLink excels. .

And from my perspective, I can't speak to the folks that you mentioned that are struggling to kind of move legacy solutions.

But what I can tell you in our experiences, where it relates to the consumer, our mid-market customers are actively interested in bettering what they have, improving their level of service and offering and have the ability to make better and faster decisions on a much more real-time basis. And that's where MeridianLink's platform really excels.

And some of the acquisitions that we've done kind of ties it better together from an overall standpoint where we have access to information, where we have the ability to kind of make better real-time decisions. .

The type of customer we find have a legacy solution which don't have the level of integration, which lacks the level of automated decisioning in most cases. And we enable these mid-market institutions to effectively and better compete with their peers who has made an investment into digitalization or larger institutions.

So from my perspective, I don't find it as really selling against kind of legacy or the hesitancy to shift, its finding those customers with ready and who wants to make the investment. And I always say to our sales team, we're not a back-office solution. .

I think it's more challenging to kind of engage in today's time if you're investing in back-office solutions or in branch solutions. We integrate with back-office solutions, but we are an enabler of customers interactions, digital interactions with the institution. And my view is, it's a little bit different than our peers.

We tend to enable revenue growth. We tend to see our customers who transition from a legacy solution grow faster than their peers, and they tend to be more efficient and generate some cost savings along the way. .

So from my perspective, it's a little bit different than struggling to sell up from a legacy solution. I think the market is accelerating into it and it's a tailwind that we are benefiting from. .

Yes. Outstanding. That's really good color. Chad, quick follow-up for you. I really appreciate all of the detail on the contribution from the mortgage side of the business. And I think everyone probably understands the challenge of those compares year-on-year.

So I won't belabor that, but I think that's great detail to sort of understand how we measure up on those compares. .

Would love to hear a little bit more detail on the auto lending side of your business. I mean, that was a business that was probably pretty tough from a transactional framework last year, but probably pretty robust this year.

Can you just give a little bit more color as to how that segment of the business is impacting your growth and how we might think about when compares get tough on that? Or are those -- is that a pretty steady book of business as you look out over the last 3, 4, 5 years?.

Yes. So auto is one component of lending on the consumer side. And we don't break out or segment report the various loan types. So to that end, we -- and it is just one of the loan types in the system.

And as I've talked about, like when the volume of a customer exceeds their commitment, right? And it's the volume across all of the loan types that they're processing, opening accounts, credit cards, auto, direct, indirect, et cetera. So we end up kind of looking at their holistic level of business.

And anything that's kind of moving up or down in any period, there's often a corresponding offset from another loan type.

So nothing that we're seeing as we kind of look at that everything -- I would say, everything in the volume of loans that we're expecting and forecasting kind of tied to, again, the industry outlook from [ CUNA ] and others as to what's going on in the market and what we're seeing generally in our own volumes. .

Your next question comes from the line of Bob Napoli from William Blair. .

And congratulations on the [indiscernible] congratulations. So great to see, well earned. So I guess, Nicolaas, you talked a lot about the sales and the increased investment in sales.

On the R&D side, it seems like since this management team has come in since [Bravo's] has become involved, there's been more investment in R&D and the product has probably improved a lot.

So [Audio Gap] the tech stack and the product set?.

Bob, this is Nicolaas.

I don't know if it was my phone or your phone, but it cut out a large portion of your question, and I'm -- I hope it's not offensive, I ask -- to ask you to repeat the question?.

Not at all. Just we talked a lot about sales, but it seems that it's been critical to the company. You've really improved the product set since Thoma Bravo was brought in the management team.

What has been the most important upgrades and where -- with your current investment, what is the most critical to the continuous improvement that you need to make that's continued the momentum you have?.

That's a really good question, and you're right. The investments we're making in product will benefit us in future years. We've made a number of investments in the product. We've invested quite heavily in the migration to cloud.

And that's -- we would like to get the scalability and the benefits and what comes with a cloud -- public cloud environment from a security and everything standpoint. But our customers are starting to ask it as well. And we've made that decision to start investing 2 years ago, and we're well into our journey with cloud. .

But also, we've invested in new user interfaces for our products, which brings it much better together. That's been another work stream that has been in high demand, high requests from our customers. We are investing in, call it, enhanced decisioning for our product.

As we move upmarket, we would like to remain competitive on that front with our offerings. .

And then also on the mortgage side, we continue to invest, and we had a big round of investment going into our mortgage product over the last 12, 18 months. So from my perspective, you can always do more. There's always an opportunity to kind of continue to look at.

But we've made some really good decisions in what's going to benefit the company for the long term. What's going to benefit our clients for the long-term and also focus on enabling functionality that I think benefits large groups of our customer base. .

And where to from here? I think we've been speaking about -- we're excited about enhancing our front end technology, doing deeper integrations with a number of our partners and continue to really get the company ready to accelerate to the next level with automation and deeper decisioning technologies. .

And just a follow-up on the mortgage investment, if you would. So I think your data verification business is pretty unique versus a number of players in the market.

Are you investing more in that? Or are you investing in the LOS or the POS? And there's a lot of confusion around the LOS versus -- who's the LOS versus who's the POS competitively in the market.

So what areas are you investing in mortgage?.

In mortgage, we are investing in the LOS. We have POS partners that we partner with in the marketplace. .

Okay.

And the verification, the data verification piece?.

And the data verification on the mortgage side, we work with a number of CRAs, mostly the CRAs who do not run their own custom platform and system. That is a focus for us in years to come to continue to invest in the front end, but it's in a non threatening way to the LOS or the POS. .

There are no further questions on queue. I will now turn the call back to our CEO, Nicolaas Vlok. Sir, please go ahead. .

And folks, I just want to thank you for joining us on our first public company call. I've never been more optimistic about the opportunity ahead of us and the future of MeridianLink. And I'd just like to say on a personal note, this has been an incredible journey.

And I want to send our sincere gratitude to all of our employees, our customers, our partners for getting us here. And then for you on the call, thank you for all your interest in MeridianLink. And I'm really looking forward to talking to you on our next earnings call. Have a great evening. Thank you. .

Thank you. This concludes today's conference call. Thank you all for participating. You may now disconnect..