Alkami Technology, Inc. (NASDAQ:ALKT) Q1 2024 Earnings Call Transcript

Alkami Technology, Inc. (NASDAQ:ALKT) Q1 2024 Earnings Call Transcript May 1, 2024

Alkami Technology, Inc. misses on earnings expectations. Reported EPS is $-0.11793 EPS, expectations were $0.02. ALKT isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, ladies and gentlemen, and welcome to the Alkami Technology First Quarter 2024 Financial Results Conference Call. [Operator Instructions]. I’d like to turn the conference over to Steve Calk, Vice President of Investor Relations. Steve, go ahead.

Steve Calk: 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 10-K entitled Risk Factors and Forward-looking Statements. Statements made during the call are being made as of today, and we undertake no obligation to update or revise these 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 the comparable GAAP financial measures can be found in our earnings press release and in our filings with the SEC. I now like to turn the call over to Alex.

Alex Shootman: Thank you, Steve, and thank you all for joining us today. I’m pleased to report a another quarter of strong performance. In the first quarter of 2024, we grew revenue 27% and delivered $3.8 million in adjusted EBITDA, both above the high end of our expectations. We ended Q1 with 18.1 million live registered users on the Alkami platform, up 3 million compared to Q1 2023. Our results are a combination of being in a vibrant market and continuing to execute on our priorities. Since our last earnings call, I’ve had 32 face-to-face client meetings in four different regions of the country and common themes emerged across those conversations. First, we are in a growth market. Second, our clients are seeing the benefits from our platform investments.

Third, there’s a large opportunity for our data platform to drive AI. And fourth, multiple opportunities exist long term for Alkami. Today, the average US adult has 1.9 financial accounts, which represents almost 480 million user accounts. That’s up from 1.65 accounts per adult or 370 million users at the time of our IPO. User accounts are growing and our clients have a growth mindset. Every client I’ve met with has a growth strategy. Some are growing geographically, similar establishing virtual beachheads, others are extending into commercial banking or building certain types of loan specialties. But they are all thinking about growing not playing defense. A lot gets written about the contraction of regional and community financial institutions.

But the reality is the number of FIs has contracted a consistent 3% per year over 30 years, which means there’ll still be over 6,000 institutions a decade from now. Our clients tend to be at the top of the food chain and are the ones consolidating. When a merger happens, they don’t merge with another FI who has the same customers as they do, so consolidation generally means seed growth for Alkami. Not only our user counts growing but in a steady Alkami commission through an independent third party in January, we found a number of FIs open to switch digital banking providers is up year over year. 58% of regional and community financial institutions say they are open to switching digital banking providers, that’s up from 52% in 2023. And this is a comparison among the regional and community financial institutions within our ideal client profile.

In addition, in that same study, 90% of banks and 89% of credit unions said they were optimistic about their financial future over the next 18 months, and 67% of banks and 72% of credit unions anticipate increases in their technology budgets in 2024. Our business is growing because we serve a market that is growing, with clients who have a growth mindset. Every client I met with recognizes we are making improvements in areas that are important to them through our platform investments. One of the most critical attributes of a digital banking platform is that it runs 24/7 and has amazing performance. Over the last year, we’ve improved uptime by over 50 hours, eliminated downtime for major releases, achieved over a 99% crash free rate on a mobile application, increased our quality by 17% and delivered a 4x improvement in application response time, all while growing our user count to over 18 million and reducing our cost per user.

But now, the fun really begins. With our platform investments, we were adding capabilities that will allow our clients to differentiate in their market. The Alkami platform will add broad-based observability, product usage, telemetry, new messaging architectures, timestamp data lake functionality, and an API centric developer mindset type of interoperability. We are going to deliver to our clients the type of platform that only major banks have been able to bring to market and we will do it while continuing to drive economics associated with our scale. In the majority of my client meetings, at some point in time, I got the question, hey Alex, what should we be doing with AI. I remind our clients that while really was exciting when Gen AI burst onto the scene at the end of 2022, they’ve been using AI for quite some time.

And in evaluating their AI strategy, they need to remember that AI is made up of two parts, data and models. Data is a fuel for AI and for AI to run well, data needs four characteristics. It must be cleansed, maintained, normalized, and curated. The Alkami data platform has these four characteristics at scale. Our data platform contains 29 million deposit accounts with 20 billion historical transactions and about 20 million new transactions are added each day. The nature and scale of our data platform allows our clients to apply AI in achieving their business outcomes. The performance of this part of our business, mirrors our search we’ve completed, which shows that siloed datasets ties as the top barrier to regional and community financial institutions adopting AI, along with security and regulatory concerns.

Our clients recognize that good data drives good AI, which is driving growth for Alkami. From a model perspective, Alkami has a classification model that drives customer insights to build targeted list of account holders, in a predictive model which identifies daily shifts in financial patterns to predict account holders’ financial behaviors and needs. This predictive model is used by FIs to identify account holders most likely to stay, grow, and adopt new products. Customer insights and targeted offers consistently rank among the top digital banking AI use cases being activated in regional and community financial institutions today. This makes sense, given our research shows 44% of all digital banking users and 55% of millennials wish their financial provider offered a more personalized digital banking experience with half saying they’re comfortable with their data being processed by AI, if it gave them a better banking experience.

The clients I met with, agree that in the near term, the use cases they will pursue, will be models based upon transaction data for fraud and personalized offers, and models based upon text or other unstructured content for customer support and employee productivity. We believe the Alkami data platform is a differentiator and can become a major long-term growth contributor for Alkami. In addition to the clients I met within the spring, I got to see several hundred more at our annual conference held near Dallas, April 8 through the 10th. We had the largest event in our history, with over 800 attendees, which is a 26% increase over last year. As evidence, the digital banking is a strategic topic for financial institutions, 30% of client and prospect attendees were in executive roles, with 60% of these being business roles such as CEOs, CMOs, CFOs, the other 40% were in technical roles such as CIOs and Chief Technology Officers.

The strength of demand in our market was demonstrated by a 50% increase in qualified prospect pipeline at our conference compared to last year. A few exciting parts of the conference included our first ever hackathon where developers from our client and partner communities create new and innovative digital banking products and services over two days, demonstrating the investments we’re making in opening up our platform. We had a standing room only, women and banking event with close to a 150 attendees, and our marketing team pulled off an amazing celestial coordination as the skies over Dallas cleared out for an eclipse viewing event. In closing, all of the client interaction I have had over the last couple of months has reinforced my belief in the potential of our company to continue to grow at a healthy pace for many years.

Our clients like us as a company, they like our culture, and they like what our software does for their customers and members. They know there’s no turning back. Everything in their operation is up for reinventing, for digitizing and transforming, and they like to have a partner they can trust to work with. If we invest in broadening our product portfolio, they will give Alkami the opportunity to participate in areas beyond digital banking, which makes me very bullish on the long-term growth prospects for Alkami. To position ourselves for a long-term potential, in 2024, we’ll maintain our focus on the priorities I outlined at the beginning of the year. We’ll continue to invest in client satisfaction, we’ll build upon the momentum we’re experiencing banks.

We’ll maintain our excellence in launching new clients, and we will invest in the leadership infrastructure necessary to support our growth. It’s really exciting to start the year with a great quarter and get so much customer interaction that reinforces the strength of our market. And it’s reassuring to see the level of execution that’s happening across Alkami. Thank you to all, the Alkamist that keep our clients as the North Star. Thanks to our clients that trust us with their business. And thank you to our investors who continue to partner with Alkami as we build a great software company. We will keep putting in the work because this industry deserves to have good technology. I’ll now hand the call over to Brian.

Bryan Hill: Thank you, Alex, and good afternoon, everyone. During the first quarter of 2024, we continued to deliver strong financial results and continued to see healthy demand in our sales pipeline for both new clients and for additional products among our existing clients. For the first quarter of 2024, we achieved total revenue of $76.1 million, which represents year-over-year growth of 27%. Subscription revenue also grew 27% and represented approximately 96% of total revenue. We increased ARR by 26% and exited the quarter at $303 million. We currently have approximately $52 million of ARR in backlogs implementation, the majority of which will occur over the next 12 months. We implemented eight new clients in the quarter, bringing our digital banking platform client count to 244.

We now have 42 new clients that are implementation backlog, representing 1.3 million digital users. We exited the quarter with 18.1 million registered users live in our digital banking platform, 600,000 digital users higher than year-end 2023, and up 3 million or 20% compared to last year. Over the last 12 months, we implemented 38 financial institutions supporting 1.5 million digital users. In addition, our existing clients increased their digital user adoption by 1.5 million users. In terms of churn, we did not experience any digital banking client churn over the last 12 months, and we expect to lose three clients in 2024, representing less than 1% of ARR. This compares to our expected long-term average churn of 2% to 3%. We ended the quarter with an RPU of $16.71, which is 5% higher than last year, driven by add-on sales success and the addition of new clients who tend to onboard with a higher average RPU.

We continue to see healthy demand across our product portfolio. Our first quarter of 2024 new sales performance outpaced 2023 by over 20%. We signed six new digital banking platform clients and our add-on sales effort represented over 50% of new sales for the quarter. For the first quarter of 2024, our data insights and marketing, fraud protection, customer service, and financial wellness product categories, led adoption among our clients. In addition to add-on sales, our client sales team is responsible for client contract renewals. We expect to renew 30 or more client relationships in 2024. During the first quarter of 2024, we renewed six client relationships, including our largest client, a top 10 US credit union. And finally, our remaining purchase obligation reached $1.2 billion, representing 4 times our ARR and 32% higher than a year ago.

Now turning to gross margin. For the first quarter of 2024, non-GAAP gross margin was 61.7%, representing 360 basis points of expansion when compared to the prior year quarter. Gross margin expansion resulted from improvement in our hosting cost per registered user, combined with operating leverage across our post-sale operations. Moving to operating expenses. For the first quarter of 2024, operating expenses of $43.6 million or 57.3% of revenue, representing operating leverage of 680 basis points. Operating leverage was led by R&D and G&A, where we continue to realize operational scale. Related to R&D, we continue to invest in our platform while scaling this expense category. Investment focus areas include initiatives to drive quality and cost efficiency of the platform, expand our product offering, improve extensibility, and enhance the product market fit of our commercial banking offering.

As for non-GAAP sales and marketing expenses, we continue to achieve a high level of sales team productivity and go-to-market efficiency. For the last 12 months, we increased our ARR $63 million, while investing $44 million in sales and marketing, representing an efficiency ratio of 1.4:1 for ARR creation to sales and marketing investment. We believe this ranks among the best in SaaS in terms of sales and marketing efficiency. Moving to profitability. We are pleased with our progress since becoming adjusted EBITDA positive in the third quarter of 2023. Our adjusted EBITDA for the first quarter was $3.8 million, which is better than the high end of our expectations. Now moving to our balance sheet and liquidity. We ended the quarter with just under $90 million of cash and marketable securities.

Our revolving credit facility remains undrawn and provides $60 million of borrowing capacity. We produced positive operating cash flow that exceeded last year by approximately $11 million. Now turning to guidance. For the second quarter of 2024, we are providing guidance for revenue in the range of $80.5 million to $82 million, which represents 22% to 25% total revenue growth, and 26% to 28% subscription revenue growth. Related to adjusted EBITDA, we are providing guidance in the range of $2.8 million to $3.8 million. For full year 2024, we are providing guidance for revenue in the range of $328.5 million to $333 million, representing total revenue growth of 24% to 26%, and subscription revenue growth of 26% to 28%. We are also providing adjusted EBITDA guidance of $20.5 million to $23.5 million.

Because of the impact from expense timing such as our client conference, we expect the second quarter to be the low point of our adjusted EBITDA performance in 2024. In closing, I’m very pleased with our continued execution, both operationally and financially. We are demonstrating growing success in the market and continued discipline, managing our operating costs and investments. We remain on track to crossover our 65% gross margin and 20% adjusted EBITDA margin objectives in 2026, all while establishing Alkami as the premier digital banking provider in the marketplace. With that, I will now hand the call over to the operator for questions.

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Q&A Session

Operator: [Operator Instructions]. Your first question comes from the line of Patrick Walravens from Citizens JMP.

Patrick Walravens: Oh, great. Thank you very much. So, Alex, a question for you. Thank you so much for that introduction and the tone of business and what’s driving it, that was super helpful. One thing you — one comment you made kind of later in your remarks was about the investments that you’ve made to open up the platform. Can you talk about that a little bit more? What are they and what’s driving that?

Alex Shootman: Yes. Two things, Pat. Today, we have APIs into the platform and we have a software development kit or an SDK. And the feedback that we had gotten from our customers is they like being able to access the platform, both through the APIs and through the SDK. But they found that, the way that we supported the SDK was too fragmented for them across the company, and the process by which they would provision the SDK was challenging. And so we rebuilt the entire provisioning process of the SDK, and we built a developer site as well that’s got the consolidation of all of the ways that they would find code snippets, get access to help and support with respect to the SDK. And so that’s an area that we’ve worked on. We longer term from an API perspective, there’s things that we’re doing in the platform that will make the entire platform, more API centric.

So rather than just having a set of APIs that you can use, the APIs would allow for more access into the application to allow customers to do various different things that they’d like to do. So think of the second piece is a final transformation of Alkami into an API centric platform.

Patrick Walravens: Right. Okay, great. Thank you. And then Brian can ask you, so 600,000 net adds in Q1, how should we think about that throughout the rest of the year?

Bryan Hill: Yeah. You should think about user growth in 2024 to be reflective of the same user growth that we had in 2023 in terms of the quarters. Across Q2, Q3, and Q4, it will be a little bit lower in the second quarter compared to Q3 and Q4. And then Q3, Q4, be somewhat even. But for the full year, we’ll have user growth in terms of implementations comparable to what we had in 2023.

Operator: Your next question comes from the line of Mayank Tandon from Needham.

Mayank Tandon: Thank you. Good evening, Alex and Brian. Congrats on the quarter. So Alex, I think the slide on page 5 is very helpful. I just wanted to dive into that a little bit more. So as we look at that base of 210 million users with the legacy providers, how fast would you expect to capture that market? And realistically, do you have a number in your mind that you could share with us in terms of how much you think you can penetrate the portfolio that you have today with your products?

Bryan Hill: Yes. So the way that we think about our growth algorithm is we expect to grow users between 18% and 20% a year and user growth is the result of 50% coming from implementation, so new client sales, and the remaining 50% coming from our existing base. Our existing base today is growing about 10%. And then the other side of our growth algorithm is RPU expansion. And RPU expansion is occurring from us, bringing on new clients with more products and a richer RPU as well as cross-selling into our base additional products. Because today, our clients only possess about 13 products on average when we have 32 products to sell them. So you should expect between 5% and 7% RPU expansion from quarter to quarter.

Mayank Tandon: Great. Thanks for that Brian. And then as quick follow-up, I wanted to just get an update on your success in the bank space. I think in the past, you’ve shared some metrics around your pipeline, how much of that breaks down between banks versus credit unions? So if you could give us an update on your progression there and if that’s resulted in any kind of change to your go-to-market strategy to drive that success?

Bryan Hill: No. So our sales force, the way that were arranged go-to-market, is our sales reps are really pretty strong and adept at selling both into a credit union as well into a bank client. So at this point, our go-to-market rhythm, there’s no change in that. But just to step back as it relates to banks, there’s really four areas that we’re focused on. The first area is we need to ensure that we have strong product market fit. And as we mentioned on our last quarter call, we had a third party come in and evaluate our product against the market. And the view was that we could cover 92% of the businesses in the United States that are utilizing a treasury management platform. So we have pretty strong product market fit. The second area is around core integrations.

And today we have 16 clients and backlog that are banks. We have 15 that are live and they represent about 7 core integration. So by the end of the year, in 2024, we’re going to implement in total 13 banks, and we’ll have multiple core integrations with each core that we integrate into. So that’s a proof point for us as well. Third, we need market awareness. We need greater brand recognition as it relates to commercial banking in this space. And if you look back over the last 12 months, we’ve competed in about 70 commercial bank RFPs and our win rate is in you called the mid-teens as it relates. So we’re making progress and being out in the number of deals that are being presented in the market now. It’s a push to use core integrations and product market fit to drive a higher win rate.

And then finally, it’s about having additional resources internally at Alkami from a product, from a client success, from an implementation perspective, that truly you’ll move well and interact well with commercial banks because we have a legacy and a history of credit unions. And we have a couple of new hires that we’ll be announcing over the next 30 to 45 days for individuals who have exec positions that will help. When we announce those roles, it will evidence our commitment and investment in the space. So we feel like we’re making a lot of progress on those 4 foundational areas that will ultimately result in our goal of having about 50% of the new clients we win each year, coming from banks by 2026.

Operator: Your next question comes from the line of Jacob Stephan from Lake Street.

Jacob Stephan: Yeah. Hey, guys. Congrats on the quarter. Maybe just touching on kind of that win rate that you referenced. I think last quarter — last call you had mentioned that kind of came down as a result of taking more shots on goal. But maybe you could just kind of give us a sense for how that’s been trending kind of since the last call here and in I guess into 2024?