Alkami Technology, Inc. (NASDAQ:ALKT) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Hello, and welcome to Alkami’s First Quarter 2023 Financial Results Conference Call. My name is Sarah, and I will be your operator for today’s call. All lines will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the call over to Andrew Vinas. Andrew, you may begin.

Andrew Vinas: Thank you, operator. With me on today’s call are Alex Shootman, Chief Executive Officer; and Bryan Hill, Chief Financial Officer. During today’s call, we may make forward-looking statements about guidance and other matters regarding our future performance. These statements are based on management’s current views and expectations and are subject to various risks and uncertainties. Our actual results may be materially different. For a summary of risk factors associated with our forward-looking statements, please refer to today’s press release and the sections in our latest Form 10-K entitled Risk Factors and Forward-Looking Statements. The statements made during the call are being made as of today, and we undertake no obligation to update or revise any forward-looking statements.

Also, unless otherwise stated, financial measures discussed on this call will be on a non-GAAP basis. We believe these measures are useful to investors in the understanding of our financial results. A reconciliation of comparable GAAP financial measures can be found in our earnings press release and in our filings with the SEC. I will now turn the call over to Alex.

Alex Shootman: Thank you, Andrew, and welcome, everyone. I am pleased to report another quarter of strong topline performance and continued progress towards profitability. In the first quarter of 2023, Alkami grew revenue 34%, once again ahead of our expectations. We exited the quarter with 15.1 million live registered users on the Alkami platform, up 2.3 million compared to the prior year. And we achieved a $2.9 million adjusted EBITDA loss, better than the high end of our guidance for the quarter. This result keeps us on track to adjusted EBITDA profitability, which we continue to expect by the end of this year. Let me start with a topic that I know is top of mind for investors since the recent failures of Silicon Valley Bank, Signature and First Republic, the macro environment for regional and community financial institutions.

Since the end of March, I’ve been in the offices of 13 different CEOs of banks and credit unions, and those conversations, along with the data we see in our own systems, tell the same story. Our client base and target market has not been impacted by these bank failures. In my conversations, clients described the bank collapses as driven by specific business models, risk management decisions and the resulting mix of assets and liabilities that are different from those of our clients. The CEOs told me their businesses are sound, they are well capitalized and they have low percentage of accounts above insured limits. Their focus is more upon the changing rate environment, they’re experiencing high loan demand and a shift in cost of deposits. In short, they are managing net interest margin in a dynamic environment.

Each of these CEOs have been through many economic cycles. They reacted calmly to the bank collapses and our business strategies to adjust to the current economic situation. Each also told me that digital banking remains critical as they attract deposits and create and deploy new products. Our data tells us the same story as the CEOs. As a reminder, because of the data architecture of our single code base, we can capture, store and monitor anonymized transaction data. Across all of Alkami’s clients, only 0.91% of Alkami digital banking users have any uninsured deposits, and an analysis of total deposits at Alkami customers shows that the percentage of uninsured deposits declined from 16.78% on March 16 to 16.51% in April. While at the same time, there was a 0.25% increase in overall deposits.

In summary, during a dynamic period for a few large superregional banks, Alkami’s target market remains stable. The CEO sentiment I’ve heard and the data from our system matches with the activity we’re seeing in our sales pipeline, which so far has continued to grow. We’re seeing normal sales cycles and have yet to encounter increased buyer uncertainty. In fact, as Bryan will detail later in the call, our add-on sales to existing clients outperformed our internal plans for the quarter. We see this as evidence for continued demand for Alkami’s digital banking technology. Another question we’ve heard from investors is whether consolidation within the roughly 9,500 banks and credit unions in the United States will impact our growth. As a reminder, our target market is the top 2,000 financial institutions outside the mega banks.

These are expansion-oriented institutions that see technology as critical to their growth strategy and are the primary acquirers in any industry consolidation. As an example, during the first quarter, one of our clients renewed their contract, adding approximately 190,000 users in connection with the merger of a related financial institution. We expect those additional users to be added to our platform during 2024 and will be added similar to a new logo implementation cycle. We cannot predict exactly when mergers or acquisitions like this will occur, but we expect to continue to benefit from industry consolidation as a result of our product and market focus. In addition to seeing 13 CEOs in their offices, I was able to see over 400 clients and prospects representing 191 financial institutions at our annual user conference in the Dallas area in April.

This was the largest in-person event in our history, reflecting continued interest in Alkami’s offerings. You’re welcome to review a recap on our website, but here are a couple of items we share with the attendees. First, we presented some new primary research by Alkami that shows consumers expect personalization and an increasingly digital experience. Some highlights from the research include 55% of consumers expect their preferred financial institution to know if they are under financial stress and proactively offer ways to help. 61% expect their preferred financial institution to use their income and purchasing data to provide custom information, advice and offers. And 44% prefer to open a checking or savings account completely online And 78% of mega bank customers would be open to switching their deposit accounts over to a local or regional financial institution that offered better interest rates and a five-minute digital account opening experience.

This is significant. Given a report from The Wall Street Journal that since 2014, Americans have forfeited $603 billion in interest by leaving their deposits in the five largest bank. Second, we outlined elements of our long-term product strategy, which is based upon consistent feedback from the market. Our target market wants to shrink the footprint of their core system to focus on their back office, and then they want a digital sales and service platform that integrates with their core and provides them the ability to personalize the customer or member experience. In response, the Alkami long-term product strategy is focused in three areas. The first is to continue to be a great digital banking application. The primary decision criteria for anyone selecting or remaining with the digital banking technology are user experience and reliability.

We continue to invest to make sure that our clients’ customers have a great experience by extending our user experience development efforts to even more of their journey. And in last quarter’s earnings call, I outlined the activities underway to make sure that the Alkami platform can continue to scale and deliver the reliability and performance expected out of an online banking application. The second part of our product strategy is to extend the notion of user experience to include making it easier for our clients’ customers to use innovation by extending Alkami’s platform capabilities. Since 2019, $742 billion has been invested in fintech, which has resulted in new capabilities of our clients’ customers desire. Alkami will continue to build out extensibility elements of our platform, such as our SDK and API, so that our customers can easily integrate new product offerings.

The third is to unleash the power of our clients’ data. Financial institution should be the best at creating individual experiences because their core and digital banking systems has the best data available to target and deliver content and measure the return on investment of their efforts. Alkami will deliver specialized data and marketing technology to make it easy for our clients to create personalized digital banking experiences. In closing, I’m enthusiastic about our opportunity. We continue to see healthy demand, and our target market is still in the early stage of digital innovation. Our clients require modern banking solutions, and they consider investments in Alkami to be mandatory innovation in their most important channel. As they see growth, they are investing in digital onboarding technologies and business banking to attract new customers.

And every client or prospect I talk with realizes their data will allow them to create personalized experience for their customers, and they are initiating their data strategies. Internally, we continue to build momentum on all of our key initiatives, and we continue to benefit from the scale built into our business. Altogether, this makes me confident in both our operational and financial objectives for 2023 and beyond. And now I’ll hand the call to Bryan to take us through the numbers.

Bryan Hill: Thanks, Alex, and good afternoon, everyone. During the first quarter of 2023, we continue to deliver strong financial results and experienced healthy demand for innovation from new logo opportunities and our existing client base. For the first quarter of 2023, we achieved revenue of $60 million, which outperforms the high end of our financial guidance and represents growth of 34%. This was driven by strong performance across our primary revenue drivers. We implemented seven new clients in the quarter, bringing our digital banking platform client count to 206. We now have 42 new clients in our implementation backlog representing 1.4 million digital users. We exited the quarter with 15.1 million registered users live in our digital banking platform, up $2.3 million or 18% compared to last year and up sequentially 583,000 digital users.

Over the last 12 months, digital user growth continues to be driven by two areas. First, we implemented 34 financial institutions supporting 1.4 million digital users. Second, our existing clients increased their digital user adoption by 1.3 million users. Offsetting digital user growth was churn of just over 300,000 digital users, of which the majority is represented by a single client that transitioned off our platform during the third quarter of 2022. We continue to maintain a very high gross retention rate of just over 97% measured in terms of ARR and digital users retained over the last 12 months. We ended the quarter with an RPU of $15.88, which is 15% higher than last year. This compares to our blended market opportunity of approximately $58 per user.

The Segmint acquisition contributed 7% of ARPU expansion, along with ARPU expansion of 8%, driven by add-on sales success and the addition of new clients who tend to onboard with a higher average ARPU. Subscription revenue grew 34% compared to the prior year quarter and represents approximately 96% of total revenue. We increased ARR by 36% and exited the first quarter at $240 million. In addition, we currently have approximately $48 million of ARR and backlog for implementation over the next 12 months. We continue to see healthy demand across our product portfolio. Our Q1 2023 new sales performance outpaced 2022 by over 40%. We signed six new digital banking platform clients for the first quarter, of which three are banks. Included as a new logo sale, during the first quarter, an existing client merged with a related financial institution, adding roughly 190,000 digital users.

This demonstrates our go-to-market advantage resulting from a focus on the top 2,000 financial institutions and how this segment of the market may benefit from market consolidation. Our add-on sales focus continues to yield returns, representing over 50% of new sales for Q1 2023 compared to 24% and 37% for the 2021 and 2022 full-year periods. In addition to add-on sales, our client sales team is responsible for client contract renewals. During Q1 2023, we renewed three client relationships where we raised the ARR run rate 9% through a combination of new product sales and higher minimum commitments. We expect to renew over 20 clients during 2023. Now turning to gross margin and profitability. For the first quarter of 2023, non-GAAP gross margin was 58.1%, slightly lower than the prior year quarter representing 20 basis points of contraction but 170 basis points higher than Q4 of 2022.

Improvement in our gross margin run rate compared to Q4 2022 results from leveraging prior implementation investment, improvement in our hosting cost unit economics, an improvement in third-party IP partner cost execution due to actions taken late last year. Our near-term target operating model is non-GAAP gross margin of 65% as we scale our revenue. We expect to achieve our target gross margin at a pace of roughly 200 basis points of expansion on average per year, reaching the 65% level by 2026. Also, we expect to achieve a gross margin above 60% during Q4 2023 as we exit the year. Moving to operating expenses. For the first quarter of 2023, non-GAAP R&D expense was $16.8 million or 28% of revenue, 60 basis points higher than the year-ago quarter.

Margin dilution was primarily driven by higher headcount as we’ve invested in our technology platform for scale. We expect R&D as a percentage of revenue to scale as we progress through 2023, especially in the back half of 2023. As a reminder, our target operating model is to leverage R&D to 20% of revenue while we continue to invest and expand our platform. We currently expect to achieve our objective during 2026. Non-GAAP sales and marketing expense were $9.3 million or 15% of revenue. In the prior year quarter, sales and marketing represented 16% of revenue. We expect to maintain or slightly improve our go-to-market efficiency as we scale the business and gain market share. In terms of the progression of sales and marketing expense throughout the year, bear in mind, April is when we held our annual client conference, which results in approximately $1.8 million of higher spend in our second quarter when compared to other quarters of the year.

Non-GAAP general and administrative expense was $12.4 million or 21% of revenue. In the prior year quarter, G&A was approximately 24% of revenue. The margin expansion is primarily attributable to revenue scale. We expect to leverage G&A expense as a percentage of revenue as we move towards our profitability objective with an expectation of 10% to 12% of revenue during 2026. Our adjusted EBITDA loss for the first quarter was $2.9 million, which is better than the high end of our expectations and 18% better than the prior year quarter. We expect to be adjusted EBITDA positive starting in Q4 2023. As a reminder, our target operating model is to exceed an adjusted EBITDA margin of 20%, which we expect to occur for the full-year of 2026, which coincides with the achievement of our 65% gross margin goal.

Now moving on to the balance sheet. We ended the quarter with just over $185 million of cash and marketable securities and just under $85 million of debt. We are comfortable with our net cash position as it represents several multiples of capital necessary to reach free cash flow positive, which we will achieve a few quarters after becoming adjusted EBITDA positive. Related to our liquidity and the recent bank failures, Alkami filed an 8-K on March 13 of this year, disclosing limited revenue and liquidity exposure with Silicon Valley Bank. This exposure was ultimately remedied by this First Citizens acquisition. Related to Signature Bank and more recently, First Republic Bank, Alkami possesses no revenue or liquidity exposure with these financial institutions.

Now turning to guidance. For the second quarter of 2023, we are providing guidance for revenue in the range of $62.5 million to $63.5 million, and an adjusted EBITDA loss of $4.5 million to $3.5 million. For the full-year of 2023, we are raising guidance for revenue to a range of $257 million to $261 million, representing revenue growth of 26% to 28%, and an adjusted EBITDA loss of $6 million to $3 million. Additionally, because the impact of expense timing, such as our client conference, as mentioned earlier, we expect the second quarter to be the high point of our adjusted EBITDA losses in 2023, modestly higher than the first quarter of the year. In closing, I’m very pleased with our continued execution, both operationally and financially.

We are demonstrating growing success in the market, continued discipline in our operating costs and our commitment to drive shareholder value through both revenue growth and margin expansion. We remain on track across over 65% gross margin and a 20% adjusted EBITDA margin objective in 2026, all while establishing Alkami as the premier digital banking provider in the marketplace. With that, I’ll hand the call to the operator for questions.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mayank Tandon with Needham. Please go ahead.

Operator: Our next question comes from Bob Napoli with William Blair. Please go ahead.

Operator: Our next question comes from Charles Nabhan with Stephens. Please go ahead. Question

Operator: Our next question comes from Patrick Walravens with JMP Securities. Please go ahead.

Operator: Our next question comes from Josh Beck with KeyBanc. Please go ahead.

Operator: Our next question comes from Andrew Schmidt with Citi. Please go ahead.

Operator: Our next question comes from Saket Kalia with Barclays. Please go ahead.

Operator: This concludes our question-and-answer session, and our conference has also now concluded. Thank you for attending today’s presentation. You may now disconnect.