MERIDIANLINK: Management Discussion and Analysis of Financial Position and Results of Operations (Form 10-Q / A)


The following discussion and analysis of our financial condition and results of
operations should be read together with our condensed consolidated financial
statements and related notes appearing elsewhere in this Quarterly Report on
Form 10-Q.
The following discussion and analysis contains forward-looking statements that
involve risks and uncertainties. When reviewing the discussion below, you should
keep in mind the substantial risks and uncertainties that could impact our
business. In particular, we encourage you to review the risks and uncertainties
described in the section titled "Risk Factors" included elsewhere in this
Quarterly Report on Form
and our final prospectus, dated July 27, 2021, filed with the SEC pursuant to
Rule 424(b) under the Securities Act. These risks and uncertainties could cause
actual results to differ materially from those projected in forward-looking
statements contained in this report or implied by past results and trends. Our
fiscal year ends on December 31. Our historical results are not necessarily
indicative of the results that may be expected for any period in the future, and
our interim results are not necessarily indicative of the results we expect for
the full fiscal year or any other period.
We are a leading provider of cloud-based software solutions for financial
institutions, including banks, credit unions, mortgage lenders, specialty
lending providers, and consumer reporting agencies, or CRAs. Financial
institutions are undergoing digital transformation as they seek to transition
business models, create new revenue streams, and increase customer engagement.
We support our customers' digital transformations by helping them create a
superior consumer experience with our mission-critical loan origination
software, or LOS, digital lending platform, and data analytics. Our solutions
allow our customers to meet their clients' financial needs across the
institution, which enables improved client acquisition and retention.
Additionally, our solutions allow our customers to operate more efficiently by
enabling automated loan decisioning and enhanced risk management.
The effective delivery and management of secure and advanced digital solutions
in the complex and heavily regulated financial services industry requires
significant resources, personnel, and expertise. We provide digital solutions
that are designed to be highly configurable, scalable, and adaptable to the
specific needs of our customers. We design and develop our solutions with an
open platform approach intended to provide comprehensive integration among our
solution offerings and our customers' internal systems and third-party systems.
Our solutions are central to the financial institution's technology ecosystem
and help drive additional business volume for our customers both directly and
indirectly through our Partner Marketplace. Our omni-channel borrowing
experience seamlessly integrates all the touch points a borrower may have with
the financial institution (remote via the web or an app, in person at a branch,
or telephonically through an operator). In addition to our streamlined workflow,
which has been refined over twenty years with input from across our customer
base, our Partner Marketplace provides our customers optional integrations, the
collective capabilities of which we believe further distinguish our solution
from that of competitors.
The financial services sector is in the midst of a transition from offering
services to providing hybrid
and digital experiences for consumers. This transition has recently accelerated,
leading to increased investment in software that enables digital capabilities.
We are well-positioned to assist our customers to compete with tier 1 banks and
digital market entrants. We enable
financial institutions to leverage their cost of capital advantage and community
presence by allowing them to execute faster. With the digital edge we provide,
our customers can become more competitive in this evolving environment, which,
in turn, can drive further volume on our platform.
We deliver our solutions to the substantial majority of our customers using a
or SaaS, model under which our customers pay subscription fees for the use of
our solutions as well as transaction fees for transactions processed using our
solutions. Our subscription fees consist of revenues from software solutions
that are governed by pricing and terms contained in contracts between us and our
customers. The initial term of our contracts is typically three years, but may
range from one to seven years. Our customer contracts are typically not
cancellable without penalty. Our contracts almost always contain an evergreen
autorenewal term that is often for a
extension after the initial term, but can extend the autorenewal of the contract
up to the length of the original term. Our subscription fee revenues include
annual base fees, platform partner fees, and, depending on the product, fees per
search or per loan application or per closed loan (with contractual minimums
based on volume) that are charged on a monthly basis, which we refer to as
volume-based fees. We earn additional revenues based on the volume of loan
applications or closed loans processed above our customers' contractual
As a result of this pricing approach, our revenues from our customers grow as
our customers add additional transaction types, purchase more modules, utilize
more of our partner integrations, or see increased transaction volume. We
generally sell our solutions through our direct sales organization or channel
partners and recognize our subscription fee revenues over the terms of the
customer agreements.

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Our revenues per customer vary from period to period based on the length and
timing of customer implementations, sales of additional solutions to existing
customers, changes in the number of transactions processed (including impacts
from seasonality and cyclicality), and variations among existing customers and
new customers with respect to the mix of purchased solutions and related
We seek to strengthen and grow our customer relationships by providing
consistent, high-quality implementations, and customer support services, which
we believe drive higher customer retention and incremental sales opportunities
within our existing customer base. We plan to continue investing in migrating
our solutions onto a single platform resident in a public cloud and driving
product development to further increase customer cross-selling opportunities and
retention. We believe that our increased focus on our
strategy and strategic partnerships will drive incremental opportunities for
revenue and accelerate client cross-sell growth.
In addition, we believe there is untapped market potential in the loan
origination and digital banking markets. We believe significant opportunity for
additional customer acquisition and revenue growth exists as financial
institutions continue to adopt online lending and account opening practices and
require more efficient technologies. We believe there is significant demand for
consumer loan origination and digital banking capabilities given the average
consumer's total debt level reached $92,727 in 2020, according to research from
Experian. We provide these services to institutions of all sizes and
complexities, but currently focus on the middle market. By focusing on better
sales execution, providing and allocating resources where needed, and improving
marketing efforts, we are confident in our ability to expand our customer base
within our current target market.
Our current focus is on the middle market, catering largely to financial
institutions such as community banks and credit unions with assets under
management between $100 million and $10 billion. In recent years community banks
have continued to compete with their typically larger
bank competitors, and the FDIC recently reported that in 2019 net interest
income accounted for over 78 percent of community bank net operating revenues. A
large opportunity exists in expanding our target market to new customers with
less than $100 million or greater than $10 billion in assets under management.
In our down-market, smaller institutions commonly use spreadsheets or other
inexpensive alternatives. These companies have a smaller volume of loans per
month, but there is opportunity to alter our solutions to offer decreased
pricing and functionality in order to lower implementation fees.
We have continuously invested in expanding and improving our solutions since our
solutions were first introduced two decades ago, and we intend to continue
investing both organically and inorganically through acquisitions to expand our
portfolio. We are focused on introducing new solutions and enhancing services
and capabilities in areas including digital lending, data insights, and
collections to further expand our reach into the consumer lending markets. In
addition to developing our solutions organically, we may selectively pursue
acquisitions, joint ventures, or other strategic transactions that provide
additional capabilities or customers, or both. Acquisitions to date have
included CRIF Lending Solutions in June 2018, and Teledata Communications, Inc.,
or TCI, in November 2020. TCI is the creator of DecisionLender, a SaaS loan
origination solution first released in 1998. We believe that with the addition
of TCI, our position as a vendor of choice is enhanced among financial
institutions as a provider of solutions to manage their needs from initiation of
client relationships to facilitating the extension of credit to their clients.
In December 2020, we acquired all of the assets of TazWorks, LLC, or TazWorks.
TazWorks provides software and data solutions to CRAs focused on the employment
and tenant screening market, a market that is adjacent and complementary to our
current solutions for credit-focused CRAs. In April 2021, we acquired all of the
outstanding stock of Saylent Technologies, Inc., or Saylent. Saylent is a data
analytics and marketing solution that offers insights to financial institutions
that help drive account and credit and debit card usage and should allow us to
accelerate market availability of already planned product investments.

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We have designed our Partner Marketplace to act as the gateway for third parties
to access our customers, which allows our customers to leverage the capabilities
from these third parties to enable an accelerated loan process with improved
efficiency and reduced cost. We are able to capitalize on
service fees from our partners upon their integration into our Partner
Marketplace and a revenue share from our partners as they derive revenues from
our software solution. As we grow our business, we expect to add additional
vendor partners and drive additional monetization opportunities. We also intend
to cultivate and leverage existing and future partners to grow our market
We believe that delivery of consistent, high-quality implementations and
customer support services is a significant driver of purchasing and renewal
decisions of our prospects and customers. To develop and maintain a reputation
for high-quality service, we seek to build deep relationships with our customers
through our customer service organization, which we staff with personnel who are
motivated by our common mission of using technology to help our customers
succeed and who are knowledgeable with respect to the regulated and complex
nature of the financial services industry. As we grow our business, we intend to
continue to invest in and grow our services organization to support our
customers' needs and maintain our reputation.
Impact of the
Efforts to contain the spread of
in the United States (including in California where our corporate headquarters
are located) and abroad have included quarantines,
orders, and various other government restrictions in order to control the spread
of this virus.
We have been carefully monitoring the
pandemic as it continues to progress and its potential impact on our business.
We, like virtually all other companies, have suspended travel for employees,
temporarily closed our offices, and, since
2020, have required that most employees work remotely. We have been operating
effectively under our remote work model, which we anticipate continuing for the
foreseeable future to ensure the safety and well-being of our employees.
pandemic creates significant risks and uncertainties for our customers, their
clients, our partners and suppliers, our employees, and our business generally.
However, we believe that these events could accelerate the transition to digital
financial solutions and that our portfolio of digital financial services
solutions and our position and reputation in the market provide us with an
opportunity to continue to serve clients and grow our business. We are being
cautious as a result of the uncertainties and risks posed by the
pandemic, and in response to these uncertainties, we are actively monitoring the
impacts of
on our financial results and adjusting our hiring plans and investments
accordingly. Over the longer term, and subject to more certainty regarding the
pandemic, we remain committed to continuing to strategically invest across our
organization to position us to increase revenues and to improve operating
efficiencies. We are also considering how our physical facilities requirements
might change when we eventually return to increased onsite operations, including
the costs associated with ensuring a safe work environment and the likely
increased prevalence of working from home for many employees. The timing and
amount of these investments will vary based on the rate at which we expect to
add new customers or sell additional solutions to existing customers, our
customer retention rates, the implementation and support needs of our customers,
our software development plans, our technology and physical infrastructure
requirements, and changes thereto resulting from the
pandemic, and other needs of our organization (including needs resulting from
pandemic). Many of these investments will occur in advance of our realizing any
resultant benefit which may make it difficult to determine if we are effectively
allocating our resources.
Registered Equity Offering
On July 28, 2021, we completed a registered public offering of 14.4 million
shares of our common stock at a price of $26.00 per share, before underwriting
discounts and commissions. We sold 10.0 million of such shares and existing
stockholders sold an aggregate of 4.4 million of such shares, inclusive of the
underwriters' option to purchase additional shares that was partially exercised
in August 2021. The July 2021 common stock offering generated net proceeds to us
of approximately $241.5 million, after deducting $18.5 million in underwriting
discounts and commissions and offering costs, which have been recorded against
the proceeds received from the offering, which as of June 30, 2021, included
$0.3 million in unpaid offering costs.

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Components of Operating Results
We have one primary business activity and operate in a single operating and
reportable segment.
Our revenues consist of three components: subscription fees, professional
services and other revenues.
Subscription Fee Revenues
Our subscription fees consist of revenues from software solutions that are
governed by pricing and terms contained in contracts between us and our
customers. Our subscription fee revenues include annual base fees, platform
partner fees, and, depending on the solution, fees per search or per loan
application or per closed loan (with contractual minimums based on volume) that
are charged on a monthly basis, which we refer to as volume-based fees.
Our software solutions are hosted in either our data centers or cloud-based
hosting services and are generally available for use as hosted application
arrangements under subscription fee agreements. Subscription fees from these
applications are recognized over time on a ratable basis over the customer
agreement term beginning on the date our solution is made available to the
customer. Amounts that have been invoiced are recorded in accounts receivable
and deferred revenues or revenues, depending on whether the revenue recognition
criteria have been met. Additional fees for monthly usage above the levels
included in the standard subscription fee are recognized as revenue in the month
when the usage amounts are determined and reported.
Professional Services Revenues
We offer implementation, configuration, consulting, and training services for
our software solutions and SaaS offerings. Revenues from services are recognized
in the period the services are performed, provided that revenue recognition
criteria have been met.
Other Revenues
We enter into referral and marketing agreements with various third parties, in
which revenues are primarily generated from transactions initiated by the third
parties' customers. We may introduce our customers to a referral partner or
offer additional services available from the referral partner via an integration
with our solutions. We market our partners' solutions to our customers as a way
to generate revenue, but also to ensure that our customers are leveraging the
full benefit of our solution, which includes the capabilities offered through
our partners. Revenues are recognized in the period the services are performed,
provided that collection of the related receivable is reasonably assured.
Cost of Revenues
Cost of revenues consists primarily of salaries and other personnel-related
costs, including employee benefits, bonuses, and unit-based compensation for
employees providing services to our customers. This includes the costs of our
implementation, customer support, data center, and customer training personnel,
as well as costs related to research and development personnel who perform
implementation and customer support services. Additional expenses include fees
paid to third party vendors in connection with delivering services to customers.
Cost of revenues also includes cloud-based hosting services, an allocation of
general overhead costs, and the amortization of developed technology. We
allocate general overhead expenses to all departments based on the number of
employees in each department, which we consider to be a fair and representative
means of allocation.

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We capitalize certain software development costs related to programmers,
software engineers, and quality control teams working on our software solutions.
We commence amortization of capitalized costs for solutions that have reached
general release. Capitalized software development costs are amortized to cost of
revenues over their estimated economic lives.
We intend to continue to increase our investments in our implementation and
customer support teams and technology infrastructure to serve our customers and
support our growth. We expect cost of revenues to continue to grow in absolute
dollars as we grow our business but to fluctuate as a percentage of revenues
based principally on the level and timing of implementation and support
activities and other related costs.
Gross Profit and Gross Margin
Gross profit is revenues less cost of revenues, and gross margin is gross profit
as a percentage of revenues. Gross profit has been and will continue to be
affected by various factors, including the mix of our subscription fees,
professional service and other revenues, the costs associated with our
personnel, third party vendors and cloud-based hosting services, and the extent
to which we expand our implementation and customer support services. We expect
that our gross margin will fluctuate from period to period depending on the
interplay of these various factors. Our gross margin was 69.2% and 71.2% for the
three months ended June 30, 2021 and 2020, respectively, and 70.2% and 70.5% for
the six months ended June 30, 2021 and 2020, respectively.
Operating Expenses
Operating expenses consist of sales and marketing, research and development, and
general and administrative expenses. They also include costs related to our
acquisitions and the resulting amortization of acquired intangible assets from
those acquisitions. We intend to continue to hire new employees and make other
investments to support our anticipated growth. As a result, we expect our
operating expenses to increase in absolute dollars and as a percentage of
revenue over time.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and other
personnel-related costs, including commissions, employee benefits, bonuses, and
unit-based compensation. Sales and marketing expenses also include expenses
related to advertising, lead generation, promotional event programs, corporate
communications, travel, and allocated overhead.
Sales and marketing expenses as a percentage of total revenues will change in
any given period based on several factors including the addition of newly-hired
sales professionals, the number and timing of newly-installed customers, and the
amount of sales commissions related to those customers. Commissions related to
software sales are generally capitalized and then amortized over the expected
period of customer benefit.
Sales and marketing expenses are also impacted by the timing of significant
marketing programs such as our annual client conference, which we typically hold
during the second quarter. We plan to continue investing in sales and marketing
by increasing our number of sales and marketing personnel and expanding our
sales and marketing activities. As a result, we expect our sales and marketing
expenses to increase in absolute dollars and as a percentage of revenues over
the long term as we scale the business and integrate our acquisitions. We
believe these investments will help us build brand awareness, add new customers,
and expand sales to our existing customers as they continue to buy more
solutions from us.
Research and Development
Research and development expenses include salaries and personnel-related costs,
including employee benefits, bonuses, unit-based compensation, third-party
contractor expenses, software development costs, allocated overhead, and other
related expenses incurred in developing new solutions and enhancing existing

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Certain research and development costs that are related to our software
development, which include salaries and other personnel-related costs, including
employee benefits and bonuses attributed to programmers, software engineers, and
quality control teams working on our software solutions, are capitalized and are
included in intangible assets, net on the consolidated balance sheets.
We believe that continuing to improve and enhance our solutions is essential to
maintaining our reputation for innovation and growing our customer base and
revenues. We plan to continue investing in research and development by
increasing the number of our software developers. As a result, we expect our
research and development expenses to increase in absolute dollars and as a
percentage of revenues over the long term as we scale the business, including
through integration of our acquisitions.
General and Administrative
General and administrative expenses consist primarily of salaries and other
personnel-related costs, including employee benefits, bonuses, and unit-based
compensation, of our administrative, finance and accounting, information
systems, legal, and human resources employees. General and administrative
expenses also include consulting and professional fees, insurance, and travel.
General and administrative expenses include depreciation and amortization of
property and equipment and amortization of acquired intangibles. Depreciation of
fixed assets is computed on a straight-line basis over the estimated useful
lives of the assets, which range from three to five years for computer equipment
and software, three to seven years for office equipment and furniture, and
twenty-five years for buildings. Leasehold improvements are amortized on a
straight-line basis over the shorter of the term of the lease or the useful life
of the assets.
Identifiable intangible assets with finite lives, such as customer
relationships, trademarks, and
agreements, are amortized over their estimated useful lives on either a
straight-line or accelerated basis, depending on the nature of the intangible
We expect to continue to incur incremental expenses associated with the growth
of our business and to meet increased compliance requirements associated with
operating as a public company. These expenses include costs to comply with
Section 404 of the Sarbanes-Oxley Act and other regulations governing public
companies, increased costs of directors' and officers' liability insurance, and
investor relations activities, partially offset by the termination of
sponsor-related costs. As a result, we expect our general and administrative
expenses to increase in absolute dollars, but to decrease as a percentage of
revenues over the long term as we scale the business and adjust to being a
public reporting company.
Total Other (Income) Expense, Net
Other Income
Other income primarily consists of customer receipts that were paid as part of
settlements related to billing disputes or buyout of agreements for early
Interest Expense, net
Interest expense consists primarily of interest attributable to our credit
facilities, amortization of a financing obligation from a failed sale-leaseback
transaction during 2020, and amortization of lender-related fees and other
direct incremental costs of securing financing, partially offset by interest
income from our interest-bearing cash accounts.
Provision for Income Taxes
Our income tax expense, deferred tax assets and liabilities, and liabilities for
unrecognized tax benefits reflect management's best estimate of current and
future taxes to be paid. We are subject to federal income taxes in the United
States and numerous state jurisdictions. Significant judgments and estimates are
required in the determination of the consolidated income tax expense.

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We recognize deferred tax assets to the extent that these assets are more likely
than not to be realized. If they are not, deferred tax assets are reduced by a
valuation allowance. In making such a determination, all available positive and
negative evidence is considered, including future reversals of existing taxable
temporary differences, projected future taxable income,
strategies, and results of recent operations. If it is subsequently determined
that deferred tax assets would be more likely than not realized in the future,
in excess of their net recorded amount, an adjustment would be made to the
deferred tax asset valuation allowance, which would reduce the provision for
income taxes. After a review of the four sources of taxable income (as described
above), and after consideration of our continuing cumulative income position, as
of June 30, 2021, the Company has not recorded a valuation allowance on its
deferred tax assets.
We have recorded an uncertain tax position with respect to our R&D credits.
There are no penalties or interest recorded on these liabilities as the credits
have not yet been fully utilized, and therefore the uncertain tax position is
recorded primarily as a reduction of the deferred tax asset related to these
Results of Operations
Consolidated Statements of Operations
The following table sets forth our condensed consolidated statements of
operations data for each of the periods indicated:

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