Ladies and gentlemen, thank you for standing by and welcome to MeridianLink's Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded.
I would now like to turn the conference over to your first speaker today Gianna Rotellini. Gianna, please go ahead..
Good afternoon and welcome to MeridianLink's second quarter fiscal year 2023 earnings call. We will be discussing the results announced in our press release issued after the market closed today. With me today are MeridianLink's Chief Executive Officer, Nicolaas Vlok; Chief Financial Officer, Sean Blitchok; and President, Go-To-Market, Chris Maloof.
Before we begin, I'd like to remind you that today's conference call will include forward-looking statements, based on the company's current expectations. These forward-looking statements are subject to a number of significant risks and uncertainties and our actual results may differ materially.
For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release and the other reports and filings we file from time to time with the Securities and Exchange Commission.
All of our statements are made based on information available to us as of today, and except as required by law, we assume no obligation to update any such statements. During the call today, we will also refer to both GAAP and non-GAAP financial measures.
You can find the reconciliation of our GAAP to non-GAAP measures included in our press release, which is posted to the Investor Relations section of our website. With that, let me turn the call over to Nicolaas..
Thank you, Gianna. Good afternoon, everyone. Thank you all for joining us for our second quarter 2023 earnings call. I want to thank the entire MeridianLink team for delivering another solid quarter in the midst of the current macroeconomic backdrop.
We continue to see healthy demand for the MeridianLink One platform, demonstrated by the business highlights in the quarter. There are a few key areas that led to our results.
We are continuously improving our platform capabilities through product innovation and value-added partner integrations, and for another quarter, the powerful capabilities of the MeridianLink One platform continue to drive new logo and cross-sell momentum.
Our GAAP revenue grew 3% year-over-year to $75.4 million and an adjusted EBITDA margin of 36%, which is below the second quarter guidance range on revenue and at the bottom end of the range on EBITDA. This was due to a $2.3 million reduction in revenue related to a commercial dispute of contract acquired through a past acquisition.
Sean will provide more details on this shortly. Adjusted for this reduction, MeridianLink performed in line with our guidance at $77.7 million and grew 6% year-over-year and adjusted EBITDA margin of 38%.
This demonstrates another quarter of consistent growth and solid operating performance, which is a great achievement in the face of the current environment. On that note, I'd like to take a moment to touch on the macro trends that are impacting our business.
We continue to be in times of change and are witnessing the economy trying to find a more natural state. Consumer spending has remained reasonably healthy, however, we continue to see pressure on lending volumes as anticipated.
While we have seen positive signals on economic trends recently, interest rate levels are ultimately what drives our transaction-based business model. While there is economic uncertainty, we are continuing to focus on what we can control, executing well on our scaling initiatives and selling through the headwinds.
On a positive note, we continue to experience strong demand for our software solutions, finishing another quarter with solid bookings momentum and successful services delivery both in line with our strategic investments in our Go-To-Market Engine and Services capabilities.
It is the credit unions and community banks that we have seen remain resilient because of the innovative mindset and use of technology to quickly adapt to the evolving consumer lending needs that exist to date.
As the leading provider of a modern digital lending platform, we see customers continuing to choose MeridianLink One to best position their business to do exactly that. The health of our pipeline reinforces this view. Irrespective of the economic cycle, the market is undergoing increased digitalization and we believe MeridianLink is at its forefront.
Whether it's more competition, consolidation, or regulation, we expect that there will be pressure on financial institutions to automate their lending processes. In each of these scenarios, the surge in digital transactions will accrue to our benefit, because of our volume-based business model and the fact that we serve the mid-market.
As we wait for markets to normalize, we remain laser-focused on MeridianLink being the most trusted financial services technology platform, engaging with our customers the best position their businesses for resilient growth.
Whether that be through a one-stop shop for their lending needs or premium customer service, our goal is to optimize the success of our customers. We continue to realize our growth through their success. In a few minutes, Sean will speak about our Q2 financial performance and provide 2023 third quarter and full year guidance.
Before that, I would like to give several updates on our three areas of growth acceleration that fueled our performance. First, engaging more deeply with customers. Second, expanding the capabilities of the platform. And third, empowering customers to grow more quickly and better serve their communities.
Let's start with a few highlights that demonstrate the success we have had engaging with our customers across the organization. As I touched on briefly, bookings momentum was resilient in the second quarter with the majority driven by cross-sell and upsell. This is a great proof point of how we have deepened our engagement with customers.
Our teams are focused on working with them to optimize their use of MeridianLink One by increasing their module penetration. Let's look at a couple of cross-sell wins in the quarter that demonstrate our success. We signed 14 consumer lending customers onto our mortgage lending solution in the first half of the year.
This is the perfect cross-sell use case of MeridianLink One, as different buyers within the same organizations come together and make a strategic decision to provide better digital lending capabilities on a single platform to their clients. We see this as a fantastic signal that our platform strategy is working.
Our sales and services teams partner together to cross-sell the capabilities of the MeridianLink one platform to an existing indirect lending customer.
While the initial engagement was focused on direct auto lending, the customer also selected home equity lending and insight, a business intelligence tool, to gain visibility across the platform, improved workflow efficiencies, and scale their lending solutions.
As is often the case, when the customer engage with MeridianLink One module, they quickly saw the value and adopted multiple modules to help accelerate growth. We also deepened our partnership with an existing MeridianLink One customer, who turned to our team to deploy a more automated collections module.
By improving workflow efficiencies, the customer spends less time recovering late payments and more time maintaining positive client relationships. This points to our platforms focus on helping customers navigate the financial journey of their clients by providing an end-to-end digital solution.
In Q2, we also engaged with over 1,100 customers and partners for three days at our in-person user forum, breaking last year's record of attendance. The event led directly to significant pipeline creation for new logo, cross-sell, and partner integrations.
It also provided an opportunity to recognize 10 value of customers for their strategic thinking, innovation, and effective use of the MeridianLink One platform, with the first-ever ARC Awards. As the last point in our engagement efforts in the quarter, we made great progress in our services delivery capabilities.
Since Q1, our year-over-year services revenue growth has doubled, demonstrating the success of the structural changes we have made to increase productivity. A strong services quarter sets us up well for future growth.
Our customers remain the focal point of everything we do and our ongoing engagement across the customer-centric areas of the organization reflect this commitment. As we serve more customers with greater efficiency, we accelerate growth for the business.
Turning to our second area of growth acceleration, expanding the capabilities of the platform through product innovation and our partner network. Critical to our sales motion, we are focused on creating value through the connective capabilities of MeridianLink One.
First, we enhanced our platform's Advanced Decisioning capabilities to use a wider variety of customizable attributes in the loan decisioning process. With this automated logic, our customers price loans more effectively, increasing borrower satisfaction.
Customers can now move beyond traditional scoring methodologies and expand their reach to more creditworthy consumers faster while driving profitability. In addition, we automated the loan and account cross-selling workflows on the MeridianLink One platform, removing the need for the loan officer to intervene manually.
It's now effortless for our customers to increase cross-sell volumes as they deepen their visibility of demand versus use of the platform. We released the digital banking API for MeridianLink Engage, our marketing automation solution that enables customers to present personalized offers through online and mobile platforms.
This expands the customer's ability to reach target consumers through their preferred digital channel, ultimately increasing conversion rates. Ending on partner marketplace wins, we had a very successful quarter enabling partners and we want to highlight one.
In the quarter, we added an integration with PortX, a financial infrastructure and integration technology company. By combining the MeridianLink One platform with PortX's integration capabilities, we can rapidly integrate with other core providers.
This accelerates our customer's end-to-end lending process, driving automation for the lender, and faster decisioning for the consumer.
By expanding the platform's capabilities to create a seamless and personalized borrower experience, customers can now capture and retain more demand for their lending solutions, in turn increasing revenues for MeridianLink.
Turning to our third area of focus, 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's debt wallet.
Let's review a few Go-To-Market highlights in the quarter where the customer chose MeridianLink to empower the growth journey. For One, we were excited to announce the go-live of Space Coast Credit Union, the third largest credit union in Florida on MeridianLink Insight, our business intelligence tool.
As a result, instant approvals increased by over 25% and approximately 95% of all loan applications and our process and decided within one day. Space Coast's growth and improved member experience is a testament to their expanded use of the MeridianLink One platform. In addition, we achieved numerous high-value platform sale wins this quarter.
As we evolved our Go-To-Market motion to sell MeridianLink One, customers are increasingly seeing the benefits of signing up with a trusted partner that enables them to offer multiple differentiated lending capabilities.
For example, we won our largest new logo deal in the last year with a customer looking to transform their infrastructure into a growth driver. As part of the sales process, our consulting team engaged with the customer to accelerate growth across their portfolio of MeridianLink Consumer, opening auto, HELOC and business modules.
Another customer chose MeridianLink One platform for its consumer, home equity, and business lending capabilities. We won the deal based on our ability to automate the decisioning process and improve operational efficiencies across the lending workflow.
These improvements streamline the client experience from application to funding, sharpening the competitive edge our customers need in the market. I want to close where I began and thank the team. Their focus on customer success is a driving reason that MeridianLink continues to deliver consistent growth and healthy profitability levels.
We benefit from having a high-quality resilient customer base dedicated to contributing greater value to their clients through connected and integrated borrower experience. At MeridianLink providing a seamless innovative digital lending platform that enables our customers to deliver on that promise is center of the everything we do.
Facing the continued uncertainty through the remainder of the year, we are staying highly focused on executing our strategic initiatives. We will continue engaging with customers to meet and exceed their digital lending needs, in part by providing excellent customer support and innovating to expand our platform capabilities.
Our flywheel starts with empowering our customers to grow as they automate the lending process and deepened visibility of demand with their use of MeridianLink One. We strive to be the most trusted financial services technology platform that positions our customers to succeed.
With that, I will now turn the call over to Sean to talk about our financial results and guidance..
Thank you, Nicolaas. Before diving in, I'd like to take a moment to echo my appreciation for the team's accomplishments this quarter. Our business highlights demonstrate great progress against our objectives across the organization.
We're operating in a period of transformation for the business and in the midst of that, we continue to execute well and empower our customer success. Nicolaas spoke about our achievements in the quarter and set the stage on the macro front. I will further review how those trends have been impacting the business.
We have a business model that continues to perform through macroeconomic headwinds. We are insulated by our contracted minimums and the majority of our non-mortgage lending customers continue to see volume growth above their commitments.
As anticipated, we continue to see a deceleration in that growth driven by the inverted yield curve and liquidity headwinds. Despite the unprecedented macroeconomic dynamics at play, there are a number of factors that give me great confidence in the business going forward.
First, we have an industry-leading solution that enables customers to perform through the economic cycle. Second, quarter-after-quarter we capture strong demand for the MeridianLink One platform, which will be a tailwind for the business. And third, we are seeing early indications of the anticipated normalization of the economy.
With that, we expect that there will be an upside to our total growth as lending volumes recover across the platform. While this recovery is happening, we continue to countercyclically and strategically invest to build the foundation for MeridianLink's next phase of growth. Now let's review our second quarter financial performance.
We generated total revenue of $75.4 million, up 3% year-over-year, which was below our second quarter guidance range of 4% to 8% year-over-year growth. As Nicolaas mentioned, this was due to a $2.3 million reduction in revenue related to a commercial dispute with the reseller that we acquired from our acquisition of StreetShares.
After further negotiations over the past quarter, we believe we have made the right business call to account for this accordingly, despite having satisfied our contractual obligation.
While immaterial in size, I want to provide transparency around the one-time nature of the impact, as it is not indicative of the true revenue or operating performance of the business.
Adjusted for this reduction, MeridianLink performed in line with our revenue guidance at $77.7 million, growing 6% year-over-year, and our adjusted EBITDA margin was 38% in line with the top end of our guidance range. As CFO, I'm dedicated to improving our accounting and M&A processes.
We accounted for this dispute in full in the quarter and have made great progress reshaping our company's financial processes and systems to support the business. We do not anticipate any further onetime M&A-related items from our past acquisitions.
Despite the revenue reduction, we completed our escrow obligation for the StreetShares transaction, which resulted in the release and receipt of the $30 million escrow back to the company. This will fuel our strategic allocation of capital, adding value to customers at the right price.
We will continue to scale organically and inorganically, as we believe that MeridianLink can become a $1 billion-plus business and we strive to be the go-to partner for digitalization for all financial institutions in our market. Now let's look at our software solutions revenue breakdown.
As the primary driver of our lending software solutions, non-mortgage lending revenue contributed 87% and grew 1% year-over-year. Adjusted from the $2.3 million in revenue reduction, non-mortgage lending revenue grew at 5% year-over-year.
Mortgage-related revenue within lending software solutions inclusive of OpenClose accounted for the remaining 13% of the total. Combining both mortgage and non-mortgage, total lending software revenue accounted for nearly 74% of total revenue and grew at 8% year-over-year.
Adjusted for the $2.3 million in revenue reduction, total lending software revenue grew at 12% year-over-year Turning to data verification software solutions, revenue accounted for nearly 26% of total revenue and declined 8% year-over-year.
This was driven by a 12% decrease in mortgage-related revenue, which represents 61% of total data verification software solutions. Staying on the topic of mortgage, I'd like to take a minute and acknowledge that the decline in our mortgage volumes appears to have hit a trough in Q1.
This quarter, total mortgage-related revenue was up 13% from last year and generated 26% of overall MeridianLink revenue, which is a continuation of the sequential improvement we have witnessed this year.
As the mortgage market begins to recover, we are staying focused on our platform strategy of cross-selling mortgage lending to our consumer lending depository customers.
We believe we continue to outperform the market because we've scaled our solutions to be on the offensive, taking more share, increasing use of MeridianLink One, and providing the fit-for-purpose capabilities that enable customers to win.
The other 74% of our business continues to grow, which is primarily led by the demand from existing depository customers for end-to-end consumer lending capabilities. This brings me right back to our value proposition. MeridianLink One enables customers to provide a frictionless lending process, improving the consumer's experience.
As a customer sign on more modules, they gain the ability to cross-sell different loans to the consumer. By turning to their trusted credit union or bank using MeridianLink One, consumers can fully optimize their debt wallet, a top-of-mind priority, especially in a high-interest rate environment.
Moving to profitability, accounting for stock-based compensation, GAAP gross margin was 62%. Adjusted gross margin in Q2 was 70%. Before turning to operating performance in the quarter, I'd like to break down the year-over-year increase in our operating expenses.
Compared to the second quarter of last year, G&A increased 17% on a GAAP basis and 4% on a non-GAAP basis. R&D increased 12% on a GAAP basis and 6% on a non-GAAP basis compared to the second quarter of last year.
On a GAAP basis, sales and marketing increased 57%, while on a non-GAAP basis sales and marketing increased 50% compared to the second quarter of last year. The growth across our non-GAAP operating expenses was primarily driven by additional headcount and increased compensation costs.
We continue to selectively invest in talent that supports our customer-centric areas of the business that accelerate growth. Now turning to our overall operating performance. GAAP operating income was $1.5 million and non-GAAP operating income was $11.9 million.
On a GAAP basis, our net loss was negative $5.2 million or a negative 7% margin, and adjusted EBITDA was $27.1 million, representing an adjusted EBITDA margin of 36%.
Highlighting the true operating performance of the business, adding back the $2.3 million of one-time revenue reduction, adjusted EBITDA was $29.4 million and an adjusted EBITDA margin of 38%, in line with the top end of our guide. Now turning to the balance sheet and cash flow statement.
We ended the second quarter with $108.9 million in unrestricted cash and cash equivalents, an increase of $31.1 million from the end of the first quarter, driven by the StreetShares escrow release.
In the last 12-month period ending in the second quarter, operating cash flow was $61.1 million or 21% cash flow margin, and free cash flow was $51.4 million or 17% 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 our shareholders. I'll now pivot to guidance for Q3 and update guidance for the full year of 2023.
We've been guiding to a second half recovery in mortgage-related revenue and are beginning to see a rebound in our volumes and through industry sources such as the Mortgage Bankers Association. However, this recovery is happening at a delayed pace, if we compare current forecast to beginning of the year forecast.
While we have been adding new customers, increasing cross-sell and accelerating ACV release, the one-time reduction in StreetShares revenue and this delayed recovery in mortgage volumes is substantial enough for us to lower our guidance range.
For the third quarter, estimated total revenue is expected to be between $76 million and $78 million, compared to $71.8 million for the same period in 2022. This represents an estimated year-over-year change of 6% to 9%.
For the full year 2023, we expect total revenue to be between $302 million and $306 million compared to $288 million for the same period in 2022. This represents an estimated increase of 5% to 6% year-over-year.
For the mortgage-related revenue, we expect the mortgage market to contribute approximately 23% of revenue for the third quarter of 2023, compared to 21% for the third quarter of 2022. As a result of the delay in the recovery of the mortgage market, we expect this level to continue through the year.
To provide more color around the growth drivers in our total revenue, the mortgage-related revenue guide implies a continued decline in data verification revenue given the impact of tough comparables in 2022.
With the inclusion of OpenClose, we expect our lending revenue will more than offset the data verification drag in 2023, ending the year with mid-single-digit growth in total mortgage-related revenue.
On the non-mortgage side, we continue to expect data verification revenue to be flat year-over-year as a result of headwinds in the employment screening market coming off post-pandemic hiring. Understanding these dynamics, we expect consumer lending will continue momentum in 2023, just at a slower pace compared to last year.
As used car prices appear to be softening according to industry sources, and our customers are weighted towards used auto lending, we expect an uplift in volumes in the back half of the year. Now turning to the adjusted EBITDA guide.
On a non-GAAP basis third quarter estimated adjusted EBITDA is expected to be between $27 million and $29 million, representing adjusted EBITDA margins of approximately 36% at the midpoint.
For the full year 2023, we expect our adjusted EBITDA range to be between $104 million and $108 million, representing adjusted EBITDA margins of approximately 35% at the midpoint. Our adjusted EBITDA guide reflects the continued operating discipline in areas that do not contribute meaningfully to growth acceleration.
Over the last year, we've made strategic investments to build the foundation for MeridianLink's next phase of growth. These investments have fueled our Go-To-Market engine, improved our platform capabilities, and enabled Services delivery, we're seeing great progress in each of these areas and expect that momentum to accelerate next year.
I'd like to end on what we believe is consistently proven out quarter-after-quarter. MeridianLink has a team that can execute well through market volatility. We also have a resilient customer base who is focused on investing in the lending capabilities needed to best serve their clients.
Our values of improving the borrower experience and being a trusted partner aligned with our customers. Those shared values underpin their success as well as ours. We will continue delivering on our mission to be the most trusted financial services technology platform, as the market embraces accelerated digitalization and eventual normalization.
With that Nicolaas, Chris, and I are happy to take all of your questions and I'll turn it over to the operator..
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Koji Ikeda from Bank of America. Please go ahead..
Hi, guys, thanks so much for taking the questions. A couple from me.
So the first one, just really thinking about the growth algorithm over the medium term, a meaningful piece of that formula is net new customers, and I know you guys talked about 14 new customers in the prepared remarks, but when we look at the kind of the metrics here in the financial supplement, it does show that lending software solutions customers declined here for the second straight quarter, down to 1,593 customers, so just can you help us - can you walk through that a little bit and help us understand the dynamics there and how we should be thinking about net new organic customer growth over the medium term?.
Yes, hi, Koji, it's Sean. Thank you for the question. I think there's a couple of things interesting about the customer count and it's the algorithm, I wouldn't say necessarily has changed but the dynamic has changed.
So for example, we've seen more consumer-only customers go into consumer and mortgage, so the cross-sell motion is what we've been focused on a lot in the last couple of quarters and we're seeing success in that, so that's important. We are seeing new customer growth across all of our business, but we're also seeing that offset by primarily mortgage.
So if you think about mortgage, flashback a year ago, 18 months ago, we were heavily weighted towards IMBs in this space, call it 70% to 30% depository, and that has completely shifted. So we're shifting to a 70-30 model the other way.
There are customers who are in financial distress, bankruptcy, as you know very well, there's a lot of consolidation in the market in that space, and so we're seeing a lot of offset in our total customer count.
So I think the overall growth algorithm that we speak of is still holds true, but right now I think the cross-sell component is taking up more space than the new logo, and we're okay with that - we're okay with that, given the overall market dynamics..
Got it, that's super helpful. And just a follow-up here.
Sean, in your prepared remarks, you mentioned you're seeing a delayed recovery, but when we look at the forecast here for the mortgage side, the revisions have been pretty bullish upward from what we've seen so, why are you seeing a delayed recovery or maybe the better question, is what is it about the end market that is causing that delay? How long have you seen that delayed play out? And then are you also seeing a delay on the consumer side, I guess specifically what the more the consumer auto loan data that we've seen?.
So to answer the last question first, so, no, consumer, we see the same growth that we saw when we initially guided the year.
I think mortgage - if you look at the MBA forecast primarily, as well as other data sources, but they have continually rolled forward with the recovery, and so there has been and - when we initially guided the year there has been an 8% decline in that recovery and the combined to Q3 and Q4.
And we had predicted the decline largely for Q1 and Q2, we had anticipated a faster recovery starting in Q2 and going into Q3 and Q4, and that's just really, really slow.
So now, the - if I remember correctly it's negative 3% for Q3 and around 30% in Q4 growth from the MBA, that's not the numbers that we had initially modeled So while we do see recovery in Q2, and we will continue to see recovery, it's just not at the pace that we feel we can keep up with in the second half..
Got it. Thank you so much. Thanks for taking the questions..
Thank you, Koji..
Thank you. And your next question comes from the line of Bob Napoli from William Blair. Please go ahead..
Thank you. I'm sorry, I'm just a little confused by the guidance with the deceleration in the mortgage.
It looks like it declined [technical difficulty] here, but the non-mortgage growth rate decelerated significantly this quarter and I think that's built into your guidance, is that right or what am I missing?.
Considering - non-mortgage grew 5% in Q2. Non-mortgage for - as a total in the second half will grow high-single-digits, and so I'm not sure we'd have to get into the, what specifically is confusing, Bob..
Okay.
I guess how you go from the 5% to high-single digits?.
Just - I mean what we're modeling is a continued acceleration in auto. We're seeing account opening strength, credit cards is kind of moderate growth, low single digits, and personal loans has been very healthy as well. So Q2 has been - again consumer in total is - in Q2 was a good - a positive story for us. We expect more of the same in Q3 and Q4.
Certainly not, what we saw in FY '22 in terms of the growth rates, but we anticipated that. We have not come off of our guide for consumers since the beginning of the year..
Okay. And I know the backlog, can you give some color on the backlog? I know the big initiative was to accelerate onboarding of backlog, but how is the backlog overall trended and how have you progressed on accelerating, you referenced on accelerate onboarding..
Bob, this is Nicolaas. It's been going really well. If you look at our Service's results for the quarter, growth of 28%, is clearly showing progress made by Dean and the delivery team. It's one of our stronger quarters that had over the last few quarters.
We are seeing good progress made and we've seen accelerated ACV release Q2 over Q1, which means we impacting the backlog. So, pretty pleased with that progress and the results in Services.
Now keep in mind, once we've delivered a client and the client has made live, it's ramp cycle after that, so as we continue to release ACV and turn projects live with clients, they keep ramping for roughly 12 months or so after the project has been delivered. So from that perspective, pretty pleased with the progress made there..
Thank you.
If I could just sneak in one last one, just, as we think about 2024, the long-term, what is the right growth rate to think about, and the EBITDA margins, what is the right level to think about for MeridianLink as we think about '24, really the long-term?.
So I think it's important to step back and think about our strategic initiatives and our strategy overall. We - for the last year we've been saying, we can grow at a stronger pace. So I think 2024 guide will - I'm not guiding to 2024 right now, but I think that would be represented in the 2024 guide.
The macroeconomic conditions appear to be alleviating and so I think we'll talk more about that when we guide for FY '24, but not - the whole direction and the whole strategy of the company has been to increase our installed base and increased growth to get the rebound.
So when the rebound happens, we get kind of the effect of that through our volume channels. So, I would expect a higher growth rate in 2024..
Great. Thank you very much. Appreciate it..
Thanks, Bob. Appreciate it..
Thank you. And your next question comes from the line of Matt VanVliet from BTIG. Please go ahead..
Hi, good afternoon. Thanks for taking the question.
I guess if you look back over the history of the company, obviously, there's not a lot of times where interest rates have been quite this high, but when we've seen movement like we have over the last several quarters, where do you feel like there's maybe an upper bound of consumer, I guess - elasticity to responding negatively towards rates continuing to go higher.
So, how should we think about, if there are any additional rate hikes, how that could impact the various consumer areas?.
Hi, Matt, Sean. So it's a great question. If you look back at the data, the last time that we saw our non-growth in consumer was 2008-2009 and it was a blip for one quarter. So I think things have to be pretty dire for consumer not to grow. It's a matter of how much it grows.
The interest rate environment is the single most important factor for both consumer and mortgage for us, but I think, I'm old enough to remember when 7% rates were not that big of a deal.
So, there was a normalization process that I think, we're undergoing now as well, where the rates - the Fed will do what the Fed will do, but the rates themselves will become more normalized with either a mortgage or the consumer.
I don't - even if the Fed decides to raise again, I think the spread for example in mortgage between mortgage rates and the Fed rate provides enough cushion where we'll see. I think, we're going to see a little bit of a leveling off in terms of the deceleration going forward.
You asked about consumer, so I think I've got a little bit out over my skis, but hopefully that helped a little bit..
That's great. Thank you. And then so, go ahead....
Yes, maybe something to add there to Sean's question as well is, consumers are still spending, but the type of spending that where it's coming from, is still from savings and checking accounts. If you look at pre-pandemic levels the data shows is about 10% to 15% more in bank accounts now than pre-pandemic.
What we are seeing is - and it's kind of been a consistent process that's started probably late Q1 or so. There is a continued tightening of credit happening and we are certainly seeing higher numbers of loans being rejected. And it's one of the highest levels of loan rejections in five years or so.
And I think what we are seeing happening at this stage is, the consumer is not engaging as much in lending given the rates and credit tightening and using cash flow, some of the purchases that they're doing at this point in time with an expectation that there's going to be some level of normalization.
And in my opinion, we kind of living through that, and the guide that Sean discussed is reflective of us expecting the back half of the year being softer, specifically, if you look at the data around mortgage with MBA. MBA kept pushing out, pushing out their recovery on mortgage volumes and it has pushed into '24 and that's reflected in our guide..
Okay, very helpful.
And then, you talked about growing success on the upsell, cross-sell, can you give us a sense of whether it's a snapshot now or kind of what the forward outlook? Looks like in terms of the mix of customers on the consumer lending side that already have mortgage, so kind of how long is the runway there? And then maybe a bigger picture maybe - any kind of update you can share in terms of the total number of loan types, that the average customer has versus maybe what that number is for some of your largest most penetrated customers, to give us a sense of how much kind of dry powder is out there, just in the installed base?.
Yes, this is Chris. Thank you. I'd like to go back to our call that we gave on the upswing and the early indication of success we're having in cross-sell, contained within last quarter's earnings.
Really what we're seeing now is a continued trend along that trajectory, all tied as a derivative to that investment we made last year in go-to-market and our ability to drive cross-sell. You brought up the mortgage part, but it's really all of our products, that we're building this cross-sell motion around.
And what we're seeing, and benefiting from now is that early traction where we're showing that we can build new products, we can buy products in the M&A realm, integrate into our product suite and then bring it to our clients in a situation where they see one plus one equals more than two, because that's the only way that type of motion is successful, particularly in an environment where you brought up mortgage where there are different, different buyers within the financial institution.
So I remain - I remain bullish on our capabilities there and the track record to come. Now that your final - your follow-on questions from a mortgage perspective as well as cross-sell as, we're in the early stages of our penetration and our time spent in that motion.
I mean, if you even go back to the history of MeridianLink when it started, the mortgage and consumer divisions a decade ago were largely separate, and over the last 10 years we have meaningfully brought them together from all aspects of the organization and now we're seeing that benefit come to bear..
Great. Thank you..
And Matt, just one last comment if you think about cross-sell, in Q2 alone we saw mid-single-digit growth from cross-sell, so it's something that not only are we focused on, we're already proving out to be successful..
Great. Appreciate it..
Thank you. And your next question comes from the line of Scott Wurtzel from Wolfe Research. Please go ahead..
Hi, good afternoon, guys, and thanks for taking my questions.
The first one on the consumer lending side, wondering if you can maybe parse out some of the performance you saw with your clients sort of by loan type between whether it's auto, credit card, personal loans, and how those performed this quarter relative to your expectations?.
Sorry, Scott, Sean. I haven't learned how to hit the unmute button. I talked about it a little bit earlier, but I think the first comment I'll make is overall growth for consumer was as anticipated as forecasted. If you look at the different loan types, strong in account opening, very strong in personal loans, so think non-asset-based loans.
Vehicle was a headwind for us a little bit, but we expect that to turn around in half two. And good growth in all other loan types, including cards and so - but those would be the ones that I would call out as really good growth and just a little bit of an offset model..
Got it, got it. That's helpful.
And then maybe just a follow-up on margins, looking at the updated guide, it looks like the guide down on revenue was flowed through into the guide down on EBITDA, and I understand that you're continuing to invest - for future growth, but just kind of wondering if we were to see kind of a further slowdown in lending volumes and potentially impacting revenue, how are you guys could flex some of your expense levers to maybe preserve margins? Thanks..
Yes, so that's correct. We are - I mean we're - doing two things at once. I think the important part of the story. We're investing in growth, but we are also rightsizing, restructuring the company as well. So, we've diverted a lot of our, spend towards customer-facing, customer-engaging, parts of the business to accelerate that piece.
Our overall headcount has come down and so, we are keeping pace from a margin profile perspective. I could paint a picture where revenue does something where we either have to relook at our cost structure or it's going to impact the bottom line, but we don't see that right now.
I think within - we thought very carefully about this guide, and the EBITDA I think is on pace. And so, we'll continue to operate the business, are there levers, sure. There are always levers to pull. There are levers that I think as a management team, we're comfortable with where we're at right now.
We believe that we have the right team going forward, positioned correctly around the customer, and so, we'll continue down that path until something purchase otherwise..
Got it. That's helpful, thanks, guys..
Thank you. And your next question comes from the line of Alex Sklar from Raymond James. Please go ahead..
Thanks. Nicolaas, I wanted to dig in more into the idea of auto decisioning as it relates to consumer lending, you spoke to the bunch in the prepared remarks.
I know that you've got some partnerships in place that are assisting with the workflows, but can you just talk about - are you now enabling a full touchless lending process? And with that, what percent of your base do you think ready to actually implement those types of auto-decisioning processes?.
Hi, there. I think it's a fast-growing group of clients that is paying attention to auto decisioning and also integrating third-party datasets that you can argue is introducing a score that is artificially kind of incubated and developed and enriched. What we are seeing is more customers are asking for the ability to do that.
We've released an enhanced auto-decisioning module that our customers have started using and larger customers and customers who is dealing with higher volumes has shown more interest in.
But I would tell you, it's probably - I would say if the question is ready that's a hard one to answer, but it's probably less than a third that I would say ready, ready. But it's a fast-growing subsection.
And my expectation would be in a couple of years, if you don't do order decisioning and you don't have a touch those lending playbook that is meaningful, and substantial in your business. You will miss out on engaging with your customer and closing the loan.
Some of our larger customers are very focused on it, we spoke about Space Coast Credit Union who improved their touchless and order decisioning and meaningfully was our technology that they implemented and we are engaging and working with multiples of others in the same rehab.
But my view is, it's probably going to be one of the bigger initiatives that our customers will have and will invest in here in the foreseeable future..
That's great color. And Sean maybe just want to follow-up on your answer to Koji and a couple of other questions earlier, but the mortgage outlook for the second half of the year.
I can appreciate given how we've seen the industry forecast walk down from the start of the year, want to be conservative there, but you just had mortgage and I think it was about 26% of revenue this quarter.
And I think you said it would only contribute 23% of revenue the rest of the year, can you just kind of help, bridge why mortgage, should drop off in terms of its total contribution to revenue versus the second quarter levels?.
Yes, so the 26% is 25.5%, and I say so it's a net, but I think it's important. I do think it drops off -- not, I mean when we say mortgage, there is a combination of lending and MCL in there as well. We've seen continued drag from MCL, which is part of the walk down. And I just - the rest of the business's growth is the other component.
So, I just think as a percent of total those numbers are pretty easy to get to. If you want to talk about numbers, we're talking about $3.5 million of revenue coming out of the mortgage guide and it's a combination of both lending and DBS.
So, I know we have a call later, we can talk in detail more, but it's really just the recovery - the delayed recovery is really the primary reason. I mean that's just, it's not going to happen fast enough for us to recover, especially around MCL and the lending solutions as well.
And keep in mind that too, that the growth, for example, in Q2 we saw good growth in OpenClose, which it - I don't want to say it skews the number, but it definitely, when we talk about mortgage growth being in the double digits, that's part of the story as well.
And so we have to look at the OpenClose acquisition and how it's going to perform in half two as well..
Okay, thanks for the color there..
Thank you. And your next question comes from the line of Andrew Schmidt from Citi. Please go ahead..
Hi, guys, thanks for taking my questions and appreciate all the detail here. I wanted to dig in just to the question on cross-sell versus net new.
Obviously, the investments in cross-sell bearing fruit, seeing a lot of momentum there, there's a lot of wood to chop, but do you feel like more investment is needed on the net new side to drive growth there or are there other reasons, whether it's market maturity, where we're in the cycle, things like that, that making more comfortable with where you're at in terms of the just the net new kind of sales resources.
Thanks a lot, guys..
This is Chris. Thank you for the question. The two biggest dynamics you're seeing in play are, our mortgage team predominantly used to go after independent mortgage banks, so all those were classified as new logos. Now that team is directed almost exclusively at cross-sell into depositories, which is not reflecting in the new logos.
What I would argue though is in that scenario, the long-term value of those clients is higher. Their staying power is stronger. It's tied directly into the retention capabilities of the broader platform, so that's one - that's one aspect.
And then, Sean brought up the other element as well, where we are seeing some - you are seeing some independent mortgage banks facing difficulties that are impacting our numbers as well..
Yes, and Andrew, you used the word cycle, I do think it's important to key in on that. It's not to say that we haven't invested in new logo. We have a new logo team with a very good leader in place, who is focused on new logo.
I think there is a cycle - a pipeline build of new logo that is very healthy and we'll start to see the payoff of the new logos down the road. And I don't mean far down the road, but for right now, I think the dynamic with mortgage is offsetting even the new logos that we do see, so just as an added narrative..
Got it. Thank you, Chris. Thank you, Sean. Maybe I could ask about the back half pickup in consumer LOS, the non-mortgage piece. I know it's been asked a couple times, so I'll take another shot at it.
Just in terms of the drivers there, is it purely there or I shouldn't say primarily volume base in terms of the expectations of re-acceleration or is there also kind of cross-sell or net new implementation that's driving that? And then I've a follow-up, but it's good place to start..
I mean, to be quite honest, it's simply - not simply, it's primarily driven by volumes - by volume pickup. And even though we've talked about the components of consumer and still seeing growth in Q2, we do think that the volumes will pick up further and particularly around in auto..
Got it. Okay, thank you for that. And then just last kind of follow-up to that.
What - I guess is that directionally consistent with what you're seeing, the obvious question is just confidence in that pickup in - do you feel like - I think we've done a good job of forecasting so far, but do you feel like this is derisked or I guess the question is what's the visibility on the pick-up in terms of volumes? Thanks a lot..
Andrew, I'm always confident in our forecast until I'm not. So we use multiple data sources, Cox being the primary, our - and most of our base is - we have roughly 70-30 split on used, so you're seeing good headlines around new inventory, good headlines around new sales, we think that has a downstream impact on used as well, that is very positive.
But for use as an example, the number I think is minus 2% year-over-year for used sales from Cox. So we have anticipated that and we think that we can do better than that. And so all data sources are being considered in the forecast is what I would say, and I am confident in the half-two forecast as it relates to the different loan types..
Got it. Thank you very much, Sean, I appreciate the commentary..
Yes..
Thank you. And your next question comes from the line of Parker Lane from Stifel. Please go ahead..
Hi, thanks, guys. I'll ask one in the interest of time here. Nicolaas, you guys announced a few interesting partnerships with AI providers during the quarter, and I was hoping to hear a little bit more about where in the platform and what problems you think AI can be thrown at today, and where the industry is as far as embracing more automation..
Yes, thanks for the question. This is Chris. Today, we're seeing the greatest pick up in AI in this industry around decisioning or specifically around decisioning scores. Now there has been some hesitancy in its adoption due to the potential impacts around fair lending.
That's something we work with our customers and our partners and to help them cross that bridge.
Going forward, I think across all industries is a lot of areas where AI has the application and specifically looking at this, you could have ways to accelerate how member service representatives are engaging with consumers in person online in the call center.
We already have solutions within our product that makes recommendations on how our clients provide promotional offers to drive credit card usage, deposit behavior, as well as lending behavior, all based on highest propensity to take that action.
So it's front and center now, the biggest difference in this industry versus others is the regulatory nature that we need to be very cautious about and thoughtful as we rollout of solutions to our customers and we'll do that as a combination of our own and partners as we do today..
Understood, thanks for the color, Chris..
Thanks, Parker..
Thank you. And your next question comes from the line of Saket Kalia from Barclays. Please go ahead..
Awesome, hi, guys, thanks for taking my question here. I will also keep it to one and apologies in advance, I joined late, so hopefully this question hasn't been asked yet.
But Sean, maybe for you, just high level, I think the revision to this year's guide on revenue was about $5 million to $7 million, how much of that is from the one-time customer item, and is that just in this quarter and how much of it is from the revised view on the mortgage market..
Well, $2.3 million of it was from the dispute with the reseller and the balance of it is due to the mortgage pressure, i.e., the delay in recovery in mortgage..
Got it. Very helpful, thank you..
Yes, thanks, Saket..
Thank you. There are no further questions at this time. Please proceed..
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Back to you, operator..
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may all disconnect..