MeridianLink, Inc. (NYSE:MLNK) is a leading provider of secure, cloud-based software solutions for financial institutions, including banks, credit unions, mortgage lenders, specialty lending providers, and credit reporting agencies. The company has a strong track record of delivering innovative solutions that help its customers digitally transform their businesses and create new revenue streams.

Business Overview

MeridianLink's mission-critical loan origination system, digital lending platform, data verification solutions, and data analytics empower its customers to meet their clients' financial needs across the institution, enabling improved client acquisition and retention. The company's solutions are designed to be highly configurable, scalable, and adaptable to the specific needs of its customers, who operate in the complex and heavily regulated financial services industry.

MeridianLink delivers its solutions primarily through a software-as-a-service (SaaS) model, with customers paying subscription fees for the use of its solutions as well as fees for transactions processed using its solutions. The company's subscription fees include annual base fees, platform partner fees, and volume-based fees, such as application fees and per inquiry fees, which are charged on a monthly basis. This pricing approach allows MeridianLink's revenues from its customers to grow as they add additional transaction types, purchase more modules, utilize more of its partner integrations, or see increased transaction volume.

Financials

For the fiscal year ended December 31, 2023, MeridianLink reported annual revenue of $303,617,000 and a net loss of $42,539,000. The company's annual operating cash flow was $67,964,000, and its annual free cash flow was $57,771,000.

In the first quarter of 2024, MeridianLink generated revenue of $77,816,000, representing a 1% increase compared to the same period in the prior year. The company's gross profit margin was 66% on a GAAP basis and 74% on a non-GAAP basis, reflecting increased productivity of its services team. MeridianLink reported a net loss of $5,306,000 in the first quarter of 2024.

Liquidity

As of March 31, 2024, MeridianLink had $62,285,000 in cash and cash equivalents and $419,102,000 in long-term debt, net of debt issuance costs. The company's cash flow from operations was $29,038,000 in the first quarter of 2024, and its free cash flow was $27,100,000.

MeridianLink's capital allocation strategy focuses on investing in organic growth, pursuing strategic and accretive acquisitions, and repurchasing its own shares when trading at a discount to intrinsic value. In January 2024, the company's board of directors authorized a new stock repurchase program to acquire up to $125.0 million of its common stock, with no fixed expiration date and no requirement to purchase any minimum number of shares.

Outlook

For the second quarter of 2024, MeridianLink expects total revenue to be between $76 million and $79 million, representing an estimated year-over-year change of 1% to 5%. For the full year 2024, the company expects total revenue to be between $311 million and $319 million, an increase of 2% to 5% compared to 2023.

On a non-GAAP basis, MeridianLink expects adjusted EBITDA to be between $29 million and $32 million in the second quarter of 2024, representing adjusted EBITDA margins of approximately 39% at the midpoint. For the full year 2024, the company continues to expect adjusted EBITDA to be between $123 million and $130 million, representing adjusted EBITDA margins of approximately 40% at the midpoint.

Segmental Performance

MeridianLink operates in two primary business segments: Lending Software Solutions and Data Verification Software Solutions.

Lending Software Solutions:

In the first quarter of 2024, revenue from Lending Software Solutions grew 5% year-over-year and accounted for nearly 78% of total revenue. Non-mortgage lending revenue, which represented 89% of Lending Software Solutions revenue, grew 6% year-over-year, driven by solid annual contract value (ACV) release from existing and new customers, offset by lower volumes. Mortgage-related revenue within Lending Software Solutions declined 1% year-over-year and accounted for the remaining 11% of the segment's revenue.

Data Verification Software Solutions:

Revenue from Data Verification Software Solutions declined 12% year-over-year in the first quarter of 2024 and accounted for 22% of total revenue. This decline was primarily attributable to a 17% decrease in mortgage-related revenue, which represented 58% of total Data Verification Software Solutions revenue in the quarter. The decline in mortgage-related data verification revenue was driven by lower volumes, which were impacted by downsell of a single large customer.

Risks and Challenges

MeridianLink operates in a highly competitive and regulated industry, which exposes the company to various risks, including:

1. Macroeconomic factors: The lending market and the broader financial services industry in which MeridianLink's customers operate are subject to various economic factors, such as rising interest rates and inflation, which could directly affect the company's performance.

2. Technological requirements and innovation: Failure to innovate the company's platform and its capabilities, address technological requirements, or increase brand recognition may limit both growth and profitability.

3. Competitive landscape: Changing dynamics, such as pricing pressure, new entrants, and customer preferences, within the highly-fragmented and competitive landscape may adversely affect MeridianLink's operations.

4. Cybersecurity and data protection: Any disruption in the performance or delivery of the company's software solutions, whether due to security compromises, third-party providers, or other unforeseeable circumstances, could affect brand perception, decrease demand, and subject MeridianLink to substantial liability.

5. Regulatory compliance: Failure to comply with laws and regulations as a technology provider to its customers who operate in a highly regulated industry, as well as failure to create solutions that assist its customers to comply with their regulatory requirements, could disrupt the company's operations and result in significant expense.

Conclusion

Using the 2-stage Discounted Cash Flow to Equity model, we estimate MeridianLink's fair value to be $28.67 per share. The company's current share price of $21.34 suggests the stock is potentially 26% undervalued. This valuation is 43% higher than the analyst price target of $20.00 for MeridianLink.

While the company faces various risks and challenges, MeridianLink's strong market position, innovative solutions, and disciplined capital allocation strategy position it well to capitalize on the opportunities in the financial services technology market. With a healthy balance sheet, robust cash flow generation, and a focus on driving organic and inorganic growth, MeridianLink appears to be an attractive investment opportunity for long-term investors.