MeridianLink Inc (MLNK) 2024 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the MeridianLink second-quarter 2024 earnings conference call. (Operator instructions) This call is being recorded on Thursday, August 8.

I would now like to turn the conference over to Gianna Rotellini. Please go ahead.

Good afternoon, and welcome to MeridianLink's second-quarter Fiscal Year 2024 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; and President and Chief Financial Officer, Larry Katz.

Before we begin, I'd like to remind you that today's conference call will include forward-looking statements based on the company's current expectations. These forward-looking statements are subject to a number of significant risks and uncertainties, and our actual results may differ materially. For a discussion of the risks, uncertainties and other factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release and the periodic reports and filings we file from time to time with the Securities and Exchange Commission.

All of our statements are made based on information available to us as of today, and except as required by law, we assume no obligation to update any such statements. Please note that other than revenue, all numbers in our remarks are on a non-GAAP basis unless otherwise stated. A reconciliation to comparable GAAP metrics can be found in today's earnings presentation, which is available on our Investor Relations website and as an exhibit to the Form 8-K furnished with the SEC just before this call.

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

Thank you, Giana. Good afternoon, everyone. Before speaking to our quarterly earnings, I want to start by commenting on our announcement earlier today that Chris Maloof, President of [go-to-market] has decided to leave the company to pursue another opportunity outside of our industry. I want to thank Chris for his contributions over these past five years.

He is helped build a highly capable go-to-market and product teams, but I am confident will lead the next chapter of MeridianLink's growth. I wish Chris well in his next chapter. I'm excited to announce that Larry Katz, our CFO, has been named President of MeridianLink. Larry's deep experience in banking and consumer lending as well as his years leading SaaS companies at scale gives me great confidence in his ability to lead our commercial efforts.

Larry has done an exceptional job integrating into our company, building confidence and trust with our team and our customers, and I'm excited to partner with him on our next leg of our journey. We also announced this morning that Elias Olmeta will be joining in late August as Chief Financial Officer. Elias has a proven CFO, having served as CFO of Mitchell International, a provider of SaaS solutions to the automotive and insurance industry.

And most recently at Vertis Worldwide, a subscription based professional services business. Elias currently serves on the Board of AutoCanada, Canada's largest automotive dealer group and public company. Elias and Larry work together in their careers at JPMorgan Chase, where they've gained deep understanding of our industry. Larry will continue to serve as Chief Financial Officer until Elias's start date.

I'm confident that with these changes, we continue to strengthen our management team with proven SaaS leaders. We have deep industry knowledge and have operated successfully at scale. I'm excited to partner with both Larry and Elias in their new roles.

With that, let's turn to our results. We delivered a strong second quarter against a continued challenging macro backdrop, achieving GAAP revenue of $78.7 million or 4% growth year-over-year and adjusted EBITDA of $31.8 million and a 40% EBITDA margin, meeting the high end of our guidance range for both metrics.

Our free cash flow was $12.4 million. As a leading vertical SaaS company, we continued to successfully execute our land and expand strategy while also generating strong profitability. Once again, this quarter, GAAP revenue and adjusted EBITDA grew in the face of continued market headwinds, including multi-year lows in auto lending and generational lows and mortgage.

Our performance highlights the resilience of our business model. The continued demand for MerdianLink One end-to-end lending platform and our disciplined execution. This demand comes from both new and existing customers who select MerdianLink to enable their digital progression journey to compete and win in this market.

I'd like to take a moment to comment on recent industry trends that highlight our customers' continued push to digital. Our strategic partner, Jack Henry, recent 2024 strategic priorities benchmark study show that 97% of financial institutions plan to enhance lending solutions and 80% plan to increase technology spend within the next two years.

Credit unions, in particular are bullish on technology budgets as a necessary investment to compete for the consumer's debt wallet in an increasingly digital world. Based on a recent report published by digital banking report.com, which offers insights on digital transformation trends in the banking industry, 19% of financial institutions plan to enable digital lending within one year. We too are seeing these trends in our strong sales activity as mid-market financial institutions continue to turn to MeridianLink as a trusted partner to execute their digital lending strategy.

With that, I would like to speak to our continued success expanding share of wallet within our existing customer base. Cross-sell continues to drive demand as our customers invest to further automate their lending capabilities with MeridianLink One. This quarter, we continued to see momentum cross selling consumer lending customers on MeridianLink mortgage.

This buying behavior highlights the trends we are seeing of customers leaning into digital mortgage transformation in anticipation of the market recovery. Among these cross-sell wins, a long-standing $3 billion AUM releveling consumer lending customers adopted MeridianLink mortgage, MeridianLink mortgage access, and their patented debt optimization solution.

With full debt wallet visibility of its borrowers, this credit unions loan officers are now equipped to offer fast, personalized services and support. Due to the power of our platform, our customers can increase acceptance rates, boost cross-sell opportunities and deepen client relationships, all of which drive engagement and revenue.

This quarter, we also continued to win high-value new logo deals. For example, we won a $2 billion AUM bank, who adopted our home equity and credit card modules through MeridianLink One. This was a big one, as this customer previously had an on-premise home equity solution from a core provider and referred all credit card inquiries to their competitors.

With MeridianLink One, the customer is now fully in the cloud and manages their own credit card program. Our platform generates immediate ROI upon go live, which made it an easy decision to go with MeridianLink to evolve their digital lending strategy.

Next, I want to further spotlight the ROI that our customers can achieve by implementing our platform. In Q2, Three Rivers Federal Credit Union went live with both MeridianLink access and opening and cut down loan application times from two days to approximately two hours. With these efficiencies, Three Rivers as improve the member experience while increasing completed application rates.

This is a significant achievement in today's challenging lending market and the further proof points that automation through MeridianLink One delivers strong returns. This quarter, we also enhanced our product capabilities through a new integration between MeridianLink inside, a business intelligence solution and MeridianLink collect our collections product.

With this new connectivity to Insight, customers can now access advanced analytics to run their businesses, including a new payment propensity index powered by AI that incorporates the probability of payment on delinquent loans. This is a great example of the differentiated capabilities MeridianLink offers, built on our deep experience and knowledge of our end markets.

Finally, we announced a partnership with some conductiv, a leader in providing missing permissioned data to meet underwriting guidelines. Through a preconfigured integration with MeridianLink One, our shared customers leverage AI for alternative decisioning, which allows them to approve more loans and serve more consumers quickly.

For example, due to this new integration, Everwise Credit Union has seen lenders achieve up to 47% lift in approval rates without increasing expected losses. Without extensive partner network available through the One platform, we are able to rapidly bring to market the most innovative capabilities that enhance customer lending processes.

Overall, these Q2 highlights reflect our continued success as the most trusted financial services technology platform for our customers, from automating their lending processes across different lines of business to adopting innovative capabilities such as AI to improve efficiency and customer experience. With over 25 years of in-depth expertise, we continue to differentiate ourselves as a leading vertical SaaS provider in the lending software industry.

With that, I'll turn the call over to Larry to take us through the financials and guidance.

Thank you, Nicolaas. I'm honored and humbled to take on the President role at MerdianLink. I appreciate your and the Board's confidence in me. I'm excited to continue to partner with Nicolaas and our leadership team to drive the next leg of MerdianLink's growth.

As I shared in last quarter's call, I'm here because I believe in the power of our platform to enable our customers to compete and win in the market. Over these past months, I have gained even greater excitement for the opportunity to grow this business organically and inorganically. There's a lot of opportunity here, and we are just getting started. I'm deeply committed to this mission and look forward to further engaging with our customers, partners and employees to help lead the next chapter of MerdianLink

I'm also excited to welcome Elias Olmeta as CFO. Elias as a proven SaaS CFO having successfully scaled SaaS and services businesses organically and through M&A. He is a smart analytical commercial leader, and we share the same vision and goals for the CFO role. I'm looking forward to partnering with him and the rest of the leadership team to drive commercial execution and operational excellence across this company.

Turning now to our results. MerdianLink demonstrated solid performance in Q2 in the face of continued macro headwinds. We generated GAAP revenue of $78.7 million, up 4% year-over-year, led by lending solutions revenue growth of 11%. Adjusted EBITDA was $31.8 million or 40% margin and grew 17% year- over-year.

Both GAAP revenue and adjusted EBITDA were in line with the high end of our guidance range. We generated $12.4 million of free cash flow and ended Q2 with $93 million of cash and cash equivalents. Total debt was $475.1 million and excluding debt issuance costs and cash, net debt was $377.8 million. The company executed several significant capital markets activities in the quarter.

In May, we took advantage of a favorable market window and successfully repriced our existing $426 million term loan, reducing interest expense by approximately 51 basis points. Due to strong institutional demand, the repricing was oversubscribed, and we were able to opportunistically raise a $50 million fungible add-on to the repriced term loan at par.

During the first half of 2024, we returned $74.3 million of capital via stock repurchases. We have $61.3 million of repurchase authorization remaining. The share buybacks are consistent with the capital allocation framework I articulated last quarter. As outlined, we will strategically repurchase our own shares when trading at a discount to intrinsic value.

Before going into more detail in Q2 results, I would like to share some context of the current macro environment. Today, we are managing our business through three headwinds, which we expect will normalize, but in the near term are impacting our customers and constraining our growth.

First, community banks and credit unions are facing lower deposit flows post COVID era (inaudible), which is weighing on loan volume growth. During those stimulus years, FIs benefited from strong deposit inflows and invested in yield generating assets, including auto loans. Deposit flows has since slowed due to both contracting monetary policy and the availability of higher-yielding alternatives such as money market funds.

Meanwhile, asset duration such as auto loans have extended. This has resulted in credit unions and community banks seem highly elevated loan to deposit ratios, which combined with weaker credit performance has led FIs to tighten credit and lower origination volumes. Owing captives have stepped into meet the auto financing gap in order to move inventory from dealer lots.

We view this shift as temporary, but to date, we have not seen our customers participate pro rata in the modest industry growth forecasted by industry sources. We expect that when rates start to come down with community banks and credit union balance sheets will normalize and unlock volume growth. We are starting to see early signs of improving quarter-to-quarter volume trends across our customer base.

Second, used car affordability has yet to normalize back to pre-pandemic levels. Affordability of used cars continues to be out of reach for many, due to higher prices and elevated financing rates. Higher used car prices have resulted from limited used car inventories post the COVID era spike and used car demand. We expect that as higher new current inventories work their way to used car lots, used car inventories will rise and prices will fall, though it may take several periods to see this impact on used car prices. We also expect affordability will improve with lower financing rates, but today, financing rates remain elevated.

Third, mortgage unit volumes continue to be a generational lows. We're beginning to see improving mortgage volumes consistent with MBA forecasts, but volumes are still roughly 50% below 25 year averages. We expect that mortgage volumes too, will improve with greater confidence and lower long-term rates.

Despite these macro headwinds, our business model has performed quite well and proven to be resilient in part due to our hybrid, minimum and consumption pricing model. We continue to manage what we can control, generating healthy demand from new and existing customers while proactively investing in advance of our return to stronger volumes.

Turning now back to our Q2 performance and starting with GAAP revenue. Looking first at revenue by source. Total GAAP revenue growth was 4% year-over-year, driven by 3% growth in subscription revenue, 6% growth in services revenue and 20% growth in other revenue. Subscription growth was positively impacted by a onetime reduction in Q2 '23 revenue of $2.3 million, which related to a commercial dispute of a contract acquired via a past acquisition.

Adjusting for this onetime revenue reduction in the prior year period, total GAAP revenue grew 1% year-over-year and subscription revenue was flat year-over-year. Subscription revenue, which accounts for 84% of total revenue included higher revenue from strong ACV release, offset by lower revenue from lower volumes.

Further breaking down total revenue by solution type. Total lending software revenue growth was 11% year- over-year and accounted for nearly 78% of revenue. Adjusting for the onetime revenue reduction in Q2 '23, lending software revenue growth was 6%. Non-mortgage lending revenue growth was 14% or 9% adjusting for the onetime Q2 '23 revenue reduction and accounted for 90% of lending software revenue.

This growth was largely attributable to strong ACV release from existing and new customers. Mortgage related revenue within lending software solutions declined 13% year-over-year and accounted for the remaining 10% of lending software revenue. This decline year-over-year is attributable to customer churn and strength in the year ago quarter. Mortgage volumes in the quarter were up year-over-year, but it will take time for volumes to push more customers above their committed minimum.

Turning to data verification software solutions. Revenue declined 13% year-over-year and accounted for 22% of total revenue. This decline was attributable to a 22% decrease in mortgage related revenue, which represented 55% of total verification software revenue in Q2. This decline in mortgage related data verification revenue was driven by the down-sell of a single large customer.

Moving to profitability. Adjusted gross profit was $56.8 million or a 72% margin. This represents 230 basis points of improvement in operating leverage year-over-year, driven by increased productivity of our services team.

Turning to operating expenses. Sales and marketing expense was $9.6 million, 12% of revenue, up 29% year-over-year. This increase is due to investment in our go-to-market team and higher costs for MerdianLink Live, our annual user event.

R&D expense was $7.2 million, 9% of revenue and declined 26% year-over-year, reflecting continued cost discipline, including lower staffing due to our previously announced restructuring. G&A expense increased 7% year-over-year to $9.8 million or 12% of revenue. Adjusted EBITDA was $31.8 million or a 40% margin. This represents 440 basis points of improvement in operating leverage year-over-year and reflects our continued cost discipline while strategically investing in our go-to-market team to drive growth.

Finishing with cash flow and leverage. We ended the second quarter with cash and cash equivalents of $93 million, an increase of $30.7 million from Q1. This increase was driven by our term loan upsizing net of share repurchases. Total debt was $475.1 million, and excluding debt issuance costs and cash and cash equivalents, net debt was $377.8 million. Cash flow from operations was $14.4 million or 18% of revenue and free cash flow was $12.4 million or 16% of revenue.

I'll now turn to guidance for Q3 and updated guidance for the full year 2024. We are encouraged by our first half performance, which was driven by ACV release and disciplined execution, and we expect those to be the drivers of performance in the second half as well. Volumes were a headwind to growth in the first half and though the interest rate outlook is improving, we expect the impact of anticipated rate cuts on our second-half volumes and revenue to be gradual.

Our current consumer lending volume trends do not yet point to visible signs of higher growth. And in line with lower growth expectations across industry sources, we expect that it will take time for a series of rate cuts to accelerate growth. We view rate cuts as a leading indicator of higher consumer volumes. So as I discussed earlier, community bank and credit union loan to deposit ratios remain elevated and used auto affordability has not yet normalized.

Mortgage industry sources forecast volumes to improve in the second half, though more modestly than previously forecasted. In mortgage, we expect the impact of these higher volumes on revenue to be modest due to committed minimums. Within this macro, we're focused on the things within our control, including disciplined cost management and stockholder return. We continue to prioritize winning new logos and cross-sell mandates, releasing ACV to revenue and innovating MerdianLink One to meet evolving consumer lending needs.

With that, I'll share our updated guidance. For the third quarter, estimated total GAAP revenue is expected to be between $78million and $81 million compared to $76.5 million for the same period in 2023. This represents an estimated year-over-year change of 2% to 6%. For the full year 2024, we expect total GAAP revenue to be between $312 million and $318 million compared to $303.6 million for the full year 2023.

This represents an estimated increase of 3% to 5% year-over-year. We expect the mortgage market to contribute approximately 20% of GAAP revenue for the third quarter and for the full year 2024. To provide more color around the drivers of our total revenue, our mortgage-related revenue guidance includes declining year-over-year revenue despite improving volumes as it will take time for the recovery in volumes to push our customers above their committed minimums.

Additionally, we continue to realize the impacts of down-sell of a single large MCL customer and customer churn. For our non-mortgage related data verification software solutions, we expect to return to low single digit growth year-over-year as the employment screening market reacts to job openings and labor turnover. For non-mortgage lending revenue, we expect mid to high single digit growth year-over-year, driven primarily by ACV release.

Now focusing on our adjusted EBITDA guide. Third quarter estimated adjusted EBITDA is expected to be between $30 million and $33million, representing adjusted EBITDA margins of approximately 40% at the midpoint. For the full year 2024, we expect our adjusted EBITDA range to be between $123 million and $128 million, representing adjusted EBITDA margins of approximately 40% at the midpoint.

I'll finish where I started today. I'm very excited to take on the new challenge as President of the company and look forward to engaging with our customers and our partners to lead the next leg of MerdianLink growth.

With that, Nicolaas and I are happy to take any of your questions. I'll turn it over to the Operator.

(Operator instructions)

Andrew Schmidt, Citi.

Hey, guys. Thank you for taking my questions this evening. It's good to see the mid to upper-single digit outlook for the non-mortgage lending software solutions piece. And maybe just drill down a little bit on that. It sounds like a lot of that's driven by ACV release, which probably goes back to better implementation efficiency. But beyond that and any other drivers we should consider? And I think when we think about filling the tank in terms of bookings pipeline there, how should we think about that? Thank you guys.

Thanks, Andrew. It's Larry. So you're right. So ACV is driving that the second half non-lending mortgage, non-mortgage lending software growth, sorry, about that. It is, what's driving the growth is bookings, and we've had really strong pipeline and strong bookings through last year and through the beginning of this year and its release of that ACV.

There's a little bit of, as you said, services, executing services more efficiently and reducing lead times is a little bit of that, but it's really a function of our success on the go-to-market side and that translating from bookings through implementation and revenue. Offsetting that, of course, as I mentioned, is a little bit of volume headwinds, but that will, we're expecting that to gradually recover.

Got it. Thank you, Larry. And then maybe a switch to more of a product question. There is a real scarcity of account opening solutions out there and you have one of them. And as you articulated, deposit gathering is in high demand from FI. So maybe you could talk about demand trends that you're seeing there for account opening, and then if there's any additional investment that's going into that product to improve it. Thanks a lot, guys.

Hi, Andrew, and thank you for the question. It's Nicolas. Yes, we've seen demand for account opening in our customer base and also in new logo. We have our own account opening solution, which we think is a good fit to the mid- market, and we continue to market it as a standalone, but more importantly, as a key component of MeridianLink One.

Because once you start using the platform, the consumer spans the whole platform and our philosophy as it starts for the onboarding at the account opening time frame. We also have account opening partnerships with folks out there that may have a more niche solution or a specific offering that a customer would like to implement or we offer integration into MeridianLink One through our APIs, which continues to expand our ecosystem and also have us participate that way.

In terms of product investments, we continue to invest in user experience and the digital front end, making it faster and easier to open up an account and also include partner integrations that would automate the process more, think of fraud, think of kind of ID verification. Any ability to tier up where there is not a lot of hands touching it, but becoming digital and touchless. And basically as a consumer and information, it becomes immediately verifiable. And when the button gets hit, it's not a long wait for the process to conclude.

So from our perspective, we think of our solution as a great fit combined with MeridianLink One. We also provide flexibility through our partner marketplace in our API set , and we continue to invest digital front in workflow, automation and partner integrations that would speed up the whole account opening process.

Super helpful. Thank you very much, Nicolaas.

Welcome.

Parker Lane, Stifel.

Hi, This is Matthew kicker on for Parker. Thanks a lot for taking my questions. I guess to start with the changes in the leadership that you announced this morning. Are there any expected changes to more than structure, specifically the go-to-market strategy moving forward?

Hi, there. This is Nicholas again, and thank you for the question. We don't anticipate any changes at where we are. Chris is one of those rare individuals that you work with in your career that excels a lot of things. And from a MeridianLink's standpoint, he put us on a great path with our road map, our products, our platform and our go-to-market organization.

With Larry's background and skill set in banking and SaaS enterprise businesses at scale, I feel it's a great time where Chris is spreading his wings and taking on a whole new challenge as the CEO of an unrelated industry. And we wish him well, but also we are well positioned with the leadership team in the go-to-market organization.

Now, I want to highlight, Larry's role is larger than just go-to-market. It's basically the whole commercial part of the business, which will include our services and support, customer success organizations. And the philosophy on the role that we've created is, it's a kind of a, the full customer journey, the whole commercial journey that the customer engages with MeridianLink on.

And we, as a team, have expected efficiency gains by doing that. We think we will see it. And at this point in time, with Larry taking on the broader role and Elias coming in and the experience that he brings to the table, I don't anticipate further change. We kind of at a place where we really have major changes. We've announced what we want to announce, and let's say it's done moving forward executing.

Understood. That sounds good. And then secondly, there's been a downtick in customer counts in the past couple of quarters. Wondering if you could give a little color on what the right mix is here going forward and how long you would expect these trends to continue?

Sure, Matt. It's Larry. So we had a little more net churn in the quarter. But as you can see, it's slowing and as I indicated last quarter, we expected it to slow and it slowed a little bit this quarter. If you look at the trailing 12 months, average net churn is about 14%, and this was net 11%. Still with the same concentration that we talked about last quarter, where it's heavily concentrated in the IMB's mortgage brokers, specialty finance, these are the smaller clients for whom sometimes maybe they have a little distress or maybe they are combining or maybe in some cases, MeridianLink's latent platform isn't the right fit for their needs, meaning we offer more capabilities than they're really able to take advantage of.

So it will continue to slow and over the coming quarters that will be lumpy. And one thing I might, in addition to customer count which is important to look like, look at, I'd also, I think it's also to look at important look at ARR per customer, and we disclose ARR, and we disclose customer counts. And as you look at that, the ARR per customer for lending solutions is up into the right, and it is for total as well.

And that's really a function of a couple of things. It's a part of our expansion strategy, right? So as we cross-sell additional modules, revenue goes up, that's also our target mix towards higher, the higher revenue customers, the larger customers. And it's also a function of some of the churn that we're talking about here.

That's, those are smaller customers and exiting the platform because they're not, they are smaller clients, they're not as strong a fit for our platform. So I think that's important way to think about it as well, ARR per customer.

(inaudible) Thank you very much.

Saket Kalia, Barclays.

Okay, great. Hey, Nicolaas. Hey, Larry, thanks for taking my questions here. Nicolaas, maybe the first question for you is, within the consumer lending part of the business, non-mortgage consumer lending. I think we've talked a lot about sort of used cars in the automotive market.

Can you just remind us how big of a portion of that business comes from kind of used cars? And then also what sort of the second and third largest chunks of volume that maybe we should be tracking to sort of see the upswing as rates go down? Does that make sense?

Hi, Saket. Yes, it does. So kind of just big picture first. The non-mortgage consumer lending component, auto lending is about half of the consumer lending business. Of that half, about 70% of the volume and revenue is tied to pre-owned, where 30% or so is tied to new vehicles. Cox Automotive, JD Power are great sources for data on both.

If you also look at Menin Index, you'll find good pre owned data around the Menin environment. You can find good information kind of the New York Federal Reserve in the past as published consumer data kind of with some focus on auto. You can also find in the credit bureaus like Experian. I know they have some data out there that's also quite interesting in terms of consumer sentiment, consumer behavior kind of what they see from a consumer credit standpoint tied to auto lending.

Those are all sort of I would point you to and which we also track and used for our own forecasting in the quarter. I think the next part of your question was volumes. Auto is clearly from a volume standpoint, a pretty big factor for us. Thereafter, it kind of breaks down somewhat more equally. There's not any consumer loan channel that I would say stand out with kind of the same light shined on it than auto.

You can, in our business, personal loans, credit cards, Helocs, are all pretty buoyant loan channels for us. There's less data around personal loans in the market. You would kind of need to look at through stage and some bank data that you need to track and follow.

Credit card, there's more data, generally speaking, also the credit bureaus publish data on kind of credit card, call it, metrics. And I would say you can find a decent amount of data around MBA and other mortgage industry forecasting environments.

Got it. (multiple speakers) Very appreciative, by the way. Larry, maybe for my follow-up for you, understanding that, and by the way, congrats on the transition. I mean maybe just focusing on the go-to-market part of the role, understanding that it's still very early days. What are some of the strengths and maybe opportunities that you think about within the go-to-market organization as you think about MeridianLink over the next three to five years?

Yes. Thank you. Chris built a really strong organization here with a great team. And so I think we've got the strategy pointed in the right direction. So I think the starting place is in a really, really good place. This is going to be the first time that we put all of the customer facing our teams, meaning sales and marketing and service and full customer care, the entire customer journey under one leadership.

And I think there's, I think that's important at this stage of growth. I think it sets us up for the right for the next next chapter here. Because I think it's really about, it's about delivery for the customer end-to-end and connecting all the way from marketing through delivery of services, and I think that's going to be a meaningful opportunity for us to set us up to scale and become more efficient and frankly, just deliver better customer experiences, and which drive ultimately better execution, better cross-sell revenue growth, et cetera.

So that's going to be a meaningful area of focus for me. And I think the connectivity that we have end-to-end business with growth Elias as well, is going to really be a great partnership to help drive that entire commercial execution to scale this business.

All super helpful. Thanks, guys.

Alex Sklar, Raymond James.

Great. Thank you. Larry, just following up on one of your answers earlier to Andrew's question around the success you're having on the go-to-market side. I just want to ask if you had to provide some more color in terms of what you're seeing from the sales force in terms of productivity and how you're viewing the opportunity to maybe invest more behind that success, or if you think the sales force is about the right size right now? Thanks.

Thanks for the question. So it's one of the areas I'm going to focus on. Today, we've got really strong sales efficiency. If you look at just look at our sales as a percentage of revenue compared to any metric, we're efficient. I think we've got a, we're well sized right now for our strategy. We are seeing a bit more with turning those of expectations around rates, there is a bit more of demand, of inbound demand as customers look at accelerated growth and kind of continue to open there, kind of get more excited about further investment in the business.

I do think there's a little bit more front end demand. But I think our team is well scaled at this point and we will want to look at balancing that across the various product groups and across new existing customers and things like that. But I think it's a very, my current view walking into the seat is that it's well sized, well scaled and we'll share more on future calls.

Okay, perfect. And then I don't know who wants to take this one, Nicolaas or Larry, but just in terms of the mortgage cross-sell in your consumer lending base? I know it's been a tough cross-sell booking for several quarters. Can you just talk about that penetration into the consumer base in terms of a logo or ARR opportunity? And then any commonality in what you're replacing? I know you called out the win this quarter, Nicolaas. Thanks.

Yes. We continue to see demand in our deposit retaking customer base. And we also are fairly deliberate in providing focus in that specific market segments. We view the cross-sell opportunity with MeridianLink One as the platform as significant. The debt wallet optimization playbook around that, we can have a holistic view across the consumers debt wallet and make decisions what's in the best interest of the whole data wallet is resonating with our customers.

The pipeline continues to build deal momentum from our perspective is solid. Part of the reason why we are engaging with our customers and seeing the success we're seeing there is, folks want to get in front of the expected mortgage volume return and they are retooling now, while it's still a slower period for them before they start seeing more activity.

We compete against a broad array of, I would say above us, you can see ICE Mortgage, which is old LME. And then there's probably a half dozen either point solutions, which is not integrated as a platform like we are. That varies from legacy more on-premise to cloud-based solutions. And then there's also some cores with, what I would call also more legacy base solutions in the mortgage space. So probably about a dozen or so competitors that you see in different segments or at different times, but none worth the platform approach across the full consumer debt wallet.

Okay. I appreciate that color, Nicolaas. Maybe just one clarification on that. And I think in the past, you've said like X percentage of your consumer customers take mortgage. Is that meaningfully marched up or is it still something that's well north of kind of 70-plus percent opportunity in Green Space. Thanks.

Alex. I don't recall the specific reference to 70%. But from my perspective, it's a real sweet spot and a sizable sweet spot in our customer base. If it goes towards the lower end, they tend to not be in mortgage. They need to have a little bit more of a balance sheet behind them to be in the mortgage business.

I would venture out to say somewhere between a third and a half of our customers have the right to play in the mortgage market based on my perspective, and we are seeing good engagement with that subset today.

All right. Great.

Koji Ikeda, Bank of America.

(inaudible) go to the back and move on to center.

(inaudible) BTIG.

Hey, guys. This is Spencer on for Matt (inaudible) from BTIG. I just had a couple of questions for you guys. You guys kind of hinted at earlier, you guys are expecting demand to obviously trend up with the rate cuts. But that breaks happen as soon as September, where should we expect benefit? Should we expect more of a benefit on the mortgage side of lending or the non-mortgage like auto and consumer? Thank you.

Thanks, Spencer for question. It's Larry. If I heard you right, you're asking where if rates come down, where are we going to see more of a benefit in the immediate term, whether it's some mortgage or auto. Look, I, we view rates as an early indicator of demand. It's not kind of 1:1 ratio of the impact. And it's, but it's clearly a leading indicator that volumes will come, and this is probably why we view it as more gradual gradual return based on rates.

I'd say in the auto business, rates are going to help with affordability, but truthfully, as rates have started to come down, we've not seen a change in affordability in our core market, meaning, in used car. And so that's driven by bunch of the dynamics that I shared in my prepared remarks. And that's going to be more a function of used car prices and rates and balance sheet, liquidity and community banks and credit unions.

So I think that as rates come down, it clearly will help. But I think it's going to take some time for that to kind of work its way through into real volume growth. And I think that's what you're seeing, both in our, in industry forecasts as well as in kind of our guide as well. On the mortgage side, on the other hand, we are seeing real responsiveness, to rates, and there was, I saw some articles today about how rates are at recent lows even today.

And you will see rates coming down and I think that will drive volume and we're starting to see some of that and you're seeing some of that growth in the mortgage business and the mortgage forecast. With that said, there's, if you look at kind of the distribution of mortgages out there by rate, we're not really going to see big pickup in volume on the refi side until you kind of get into the five handles or below.

That's where the real kind of the bulk of the book of the mortgages out there are. And you'll start to see some pickup in purchase perhaps as rates start to come down. But I think it's going to take some time until we'll start to see some acceleration, but I think it's really going to take some time for rates to be lower until we really see that reacceleration.

Yes, thank you so much for that response. I guess I just have one more question. If you guys can just provide some more color on how sales trends are differing, I guess for Sprinks versus credit unions and maybe also new customers versus existing customers? Thank you.

I apologize. The audio didn't come through very clearly. Can you just repeat that question.

You guys can hear me now or no?

Yes,

Can you just provide some color on how sales trends are differing with banks versus credit unions and also with existing customers versus new logos? Thank you.

Sounds good. Existing versus new, I think, is the best place to start. On the new logo side, it's a slower market from a enterprise sale deal closing cycle standpoint. And it has been, I would say, probably for over a year, year-and-a-half now. We are developing strong pipeline. We continue to build the book on new logos and new logo pipeline.

My expectation is we're going to see somewhat of an improvement in the back half of this year into '25 around new logo wins and new logo pipeline. On cross-sell, where existing customers continue to invest into MeridianLink One as a platform, that is strong, and I would say, strong to very strong as customers already made the investment and they now want to get more efficiency or more benefit from their investment into the platform.

Between credit unions and banks, credit unions today roughly makes up two-thirds of our depository taking customer base and banks one-third. There's probably a somewhat larger new logo opportunity just purely based on those numbers and size. But I would say outside of, I can't really say there's a significant difference in what they are buying or how they are buying. I think, it's more based on the solution that they are looking at and what they are solving, and there's more similarities between the two than differences.

I think maybe on the banking side, I can highlight compliance. I think there's more conversations with banking prospects and banking clients on uncertain compliance requirements. But outside of that, I think both are starting to improve and they expect both new logos to continue on bank and credit union side to strengthen back half this year into next year.

Thank you very much.

Chris Kennedy, William Blair.

Yes, good afternoon and thanks for taking the question. I mean, clearly, the macro has been a headwind over the last 18 months or so. But when you think about a more normalized environment, what type of growth profile do you think MeridianLink has?

Hey, Chris, it's Larry, thanks for the question. Look, I start by, in the past, we've talked about our growth algorithm of roughly at an uptick kind of mid teens growth. And I think that's about right, and I'll just kind of bridge from where we are to how we get there. As I said, we've got kind of mid to high single digits ACV release based on bookings, and that's both new and cross-sell.

And that's kind of where we're seeing and where we're guiding to. Price and churn are roughly offsetting each other and maybe there's a little bit of opportunity there to net positive. And the real headwind right now is volumes, as we talked about, right, that's a negative today. And as that flips towards the positive and then gets back towards kind of more, what I'd call normalized volume growth, which is historically I know in kind of the mid to mid high single digits, you can really see a path to a mid teens grower.

And so the delta from here to there is really it's volumes right? And the way that I, we've talked about this in the past in terms of a coil spring, but I think the macro is really the drivers and the headwinds that I was talking about really points to those elements of the coiled spring, right?

We're laying the foundation with additional ACV. But as long as those respective headwinds, meaning liquidity and used car affordability and mortgage volumes start to return, it's been really, it's going to, we will see acceleration and growth, and that's how we'll get back towards our targeted growth algorithm.

Great. Thanks for taking the questions.

Thanks, Chris.

(Operator instructions)

Koji Ikeda, Bank of America.

Yes, hey, guys. Thanks for taking my questions here. I wanted to circle back to that down-sell of that more data verification services customer. And just, I told you that there was a downside there and that's totally understandable, but wanted to ask if there's other customers in that segment that are of similar size and just trying to think of the potential risk of another one, either down selling or is this really just a one-off mega type customer in that category?

Hi, Koji. We did hear from you now. This is Nicolas. First of all, it's a unique situation. We, which is not normal course of business and the downs and it's a top five DBS customer, but it's not, we don't expect the situation to repeat itself, and it's also, from a event perspective, more one-off. So from my standpoint, I don't expect a continuation of it, and I also don't expect the repeat of it for us.

Okay. hat's helpful. And in the answer to a prior question, there is the average interest rate of the high five handle. It needs to get lower than that for things to really kind of start churn, I am not sure and churn is the wrong word, but really move in on the volume side perspective. And so I just wanted to try and to ask you a question of, have you thought about what that demand curve begins to look like?

Is it pretty linear once you hit that 5% mark? Or does it really start to hockey stick at a certain level? Maybe below that? I mean just trying to understand how you guys are thinking about our modeling where volumes could go once it breaks that special lower?

Hey, Koji, it's Larry. Look, there's a lot of, there's a bunch of forces at play there, and there's a lot of opportunity as our rates come down to those kind of levels, right? And there's, and so I wouldn't guide towards a true sensitivity, but we will see as we have seen, even in the recent, even in the recent rate environment with rate expectations coming down, some increase in mortgage volumes in line with the MBA, and that's starting to tip customers above their contracts above their minimums.

And so we will continue to see that translate into revenue and growth. And I think there's quite a bit, there can be quite a bit of opportunity as rates get down into those 5s and 4s and folks refi and can unlock some of that trapped value that they have in their home, both through refinance through purchase volumes that have been, would have been constrained due to the lock-in effect.

Got it. Thank you. Thanks so much for taking the questions.

And there are no further questions at this time. I will turn the call back over to Nicolaas Vlok, CEO for closing remarks.

Thank you. As we wrap up, I want to extend my deepest gratitude to our incredible team for their unwavering dedication and hard work in delivering a solid Q2 performance. I'm excited to partner with Larry in his role as President, and welcome Elias later this month to MeridianLink., I also want to acknowledge our valued customers for placing their trust in us and our partners for their ongoing collaboration and support.

By working closely together, we continue to deliver innovative solutions that drive value and growth. We look forward to speaking with you again soon and enjoy the rest of your day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.