Alkami Technology, Inc. (ALKT) Earnings Call Transcript & Summary

Thank you everyone. I'm Scott Dworshak, I'm a Managing Director in our Technology Investment Banking practices at J.P. Morgan. Thank you everyone for joining our fireside chat today with Alkami. Alkami is a leading cloud-based digital banking software provider for financial institutions in the United States. Alkami helps clients transform through retail in business banking, digital account opening, loan origination and multi-payment fraud prevention solutions. Today, I'm pleased to be joined by the Alkami leadership team. We have here Alex Shootman, CEO; and Bryan Hill, CFO. Alex and Bryan, thank you for joining us today for our fireside chat.

Good to be here.

Alex, can you tell us what attracted you to Alkami when you joined in November.

It really was 3 things. First of all, there's a tremendous amount of change in innovation that's happening in the digital financial space. And Alkami's got a front door position. If you think about the digital banking platform and the relationship that we have with the financial institution, we see most of what's happening in terms of innovation and change that's occurring with the financial institution, being able to be present with that front door is pretty exciting. The second thing that was exciting to me about Alkami is when you're in a renewal business like Alkami or any SaaS company, you have to get your customers to agree to continue to do business with you, and that takes a great culture within a company. . And getting to Alkami, culture was part of the business strategy from the beginning, a culture of the kind of people that we hire, the innovation that we do, the time and care that we spend with our customers. And so that was important to me. And then finally, if you're like me and Bryan, CEO, CFO, you want to work for great ownership and the ownership of Alkami, the investors in Alkami have a very long-term view of the business. And I want to be able to participate in building a company for the long-term, and so the innovation, the culture and the long-term view of the business.

So maybe we can turn to financial performance a little bit and especially the last quarter that you guys announced. Alkami had an impressive Q1 quarter with 35% year-over-year revenue growth. Can you talk a little bit about the overall demand environment, what you're seeing for the digital banking solutions you provide to financial institutions?

Yes. Maybe one way to answer that is right before we announced our earnings, we had our annual customer meeting. First time we were able to get in real life back together with our customers, we had almost 500 folks attending from over 85% of our customers, and we had several prospects live as well. And it was really interesting listening to the customers. Because what they're really framing is that our ability to create a differentiated experience for our customers or our members is not an optional innovation for us. It's a mandatory innovation for us. So they're not deciding, should I invest in a modern digital experience? They're really deciding who am I going to invest in. And so for us, that's a pretty exciting place to be is we're not in a market that the demand drops from a day-to-day basis. We're in a market where there is consistent demand.

And maybe we could have the next question for Bryan. When you think about the revenue growth of the business, 35% year-over-year last quarter and the breakdown of that revenue growth, how is that breakdown between your FI customers, the number of live users that you have and average revenue per user?

Sure. Yes. I mean the revenue model at Alkami is actually pretty fantastic. I mean we have -- we benefit from some really, what I would say, best-in-class SaaS unit economics, long-term contracts. Our average contract life is 70 months. Our gross retention is 98%. And 96% of our revenue is subscription-based. So that affords us a significant amount of visibility into the future. And when we think about the longer-term sustainable growth rate, what we've provided investors and others is a 25% organic sustainable growth rate. And within that, about 20% we expect to come from digital users. Our revenue model is based on digital users, the contract construct is minimums that escalate each year as you progress through the contract. So there's some built-in NDR just in the contract structure. The 20% of our growth rate comes from digital users. Now we're also benefiting from a nice macro backdrop. 50% of our user growth is just our clients who tend to be more technology forward leaning. They're growing their user base between 13% to 15% a year with a backdrop of a market that's growing high single digits. So 50% of our user growth comes from new logos and 50% comes from our clients growing. The other 5%, again, when you back up 25% total organic growth, 20% coming from digital user growth, 5% from ARPU expansion. We have, on average, 11 products installed into our base out of our 32, 33 products that we offer. So this is a fairly significant land and expand opportunity. And within that is ARPU expansion over the longer term.

Got it. Maybe we could dig a little bit more into ARPU expansion. What are some of the things that you're doing and seeing in the business and driving ARPU and some of the cross-selling initiatives that you guys have?

Yes. Well, first and foremost, in 2019, we created a client sales team. Prior to that, it was all about landing the new logo, a large contract. I mean our clients average $900,000 a year in ARR. So these are significant arrangements with our clients. And so historically, up until 2019, it was all about new logos. In 2019, we created and invested in a client sales team and the client sales team sole purpose is to expand within the base and then renew clients as the renewal opportunity surfaces. So from that point forward, now our client sales team is -- represents a significant amount of the TCV that's been originated. And I'll give you a couple of stats. In Q1, it was 40% of our total contract value that was originated. And in 2021, it was just over 20%. So we're seeing that investment starting to pay off. Combining with the investment just in people and sales reps, now we're investing a bit more in marketing to drive the demand within the base. But in terms of the products that we're seeing, where we're gaining traction, it's around money movement products, security products, financial wellness and some of what we call client service products, which include like chat bot and other type of products that allow the consumer or business of a financial institution to self-serve through their needs versus going into a branch or calling a contact center.

And maybe just building on that, we made an investment. We did not replace ahead of sales. We actually brought in an investment of a Chief Revenue Officer named Carl Cross. And one of the reasons why we did that is we've had a very strong, as Bryan mentioned, we've had a very strong sales motion in terms of new logo. But the ability to get an account management team, combined with a marketing team, you think about this, this is a pretty finite customer set. And so the motion of doing account-based marketing with the right specific messaging and incentives to an account to buy a new product from us was a new skill set for us. And so that's why we brought in Carl Cross to be able to work with the marketing team and build that add-on sales capability.

So on the recent earnings call, just to talk about new logo wins. You mentioned Alkami had 5 new logo wins last quarter, 4 were banks. What is Alkami doing to grow the number of banks that you currently serve?

Well, first of all, there are some things that are happening in the banks that help the market come our way. Alkami started on the retail side of the business. And because we started on the retail side of the business, we've always been focused on a great user experience. And that historically was really important to the retail side of the business. But increasingly, that's becoming important to a bank that has commercial customers. Those commercial customers are being influenced by the same thing that we're all being influenced by and they want a great user experience. So first of all, the market is kind of coming our way in terms of what's important to the market. But secondly, if you go back a few years, our largest credit union customers started bringing on businesses as their customers. And they started having a need for commercial type of capability, commercial cash management type of capability. So a few years ago, we started building that and investing basically in the product that a bank wants when a bank wants to attract a commercial account. And that's what we've now put into the market. And we feel like we're really competitive in this space. By the end of the year, we'll feel like we'll be able to serve a bank who wants to have a commercial customer who's all the way up to maybe $200 million of revenue, which is almost 99% of the businesses in the United States. So fundamentally great product investment, along with the bank market that's starting to want the user experience that we have.

And just a couple of more comments on the way we view the market in total. We focus on the top 2,000 financial institutions below the mega banks. There's 10,000 financial institutions in total, but we focus on the top 2,000. Roughly half of those are credit unions and half of those are banks. So that's why the bank side of the market is so important to us. As a result of the investments that we have been making leading into 2021, we started becoming a part of more bank deals. And then our sales pipeline started to really build as related to banks. We closed 5 bank logos in 2021. And as you mentioned, Scott, we closed 4 in the first quarter of 2022. So our view is today, we'll close between 30 and 40 new credit union new logos each year. In 2 to 3 years out, we'll close an equal number of banks. This year, somewhere in the neighborhood of 10 or maybe slightly more than 10. And that will slowly progress to where we're covering about half of the market as it relates to credit unions and bank and what coming up for renewal each year.

And maybe just to go on that vein, between credit unions and banks from a product perspective, what is -- what do you need to do differently to serve those 2 different constituents?

What we need to do, we have been doing. And so fundamentally, a bank who wants to have a commercial customer needs to have some complex cash management capabilities. And 3 or 4 years ago, we did not have those capabilities in our product, and that's what we've been building. The second thing that we've had to do is to bring into our -- when I say channel, think of that as sales and marketing, and our product team. So we brought in product managers that come out of banks to help us build the products. We brought marketers that come out of selling 2 banks. And salespeople. So from a product perspective, I was talking to one of our sales reps the other day who used to be a branch manager for Citibank. And his comment to me is, Alex, at this point in time, we have all the product that we need to be successful in banks. We have to learn to sell differently because selling into a credit union is a little bit different than selling into a bank. So I feel really good about the product part right now. I feel good about the people that we've put into the organization. And now it's a little bit of the execution of selling into a market that's a little bit different than we've sold into in the past.

So I think you touched a little bit about this, but you've highlighted in your earnings calls the importance of innovation in the business, and especially around things like user experience, security, data or even access. Can you talk about some of the recent investments you've been making in both the platform and the product?

The one that we are -- I'll cover 2. The first one, we're very excited about. So if you think about our customers, historically, more web application users than mobile application users. Certainly, there's beginning to be generational change within our customers' customers. And so now there's becoming a majority of the customers that are using the mobile application. Without boring you all, historically, we built an application for Android and we built an application for iOS. That was good. Those were the 2 major platforms, but we essentially were supporting building to 2 platforms. And so that can be a drag on your pace of innovation. What we did is we undertook a project to completely replatform our mobile application into one unified platform, which is a technology called Flutter, which now we can write once and basically run on both platforms. It does 2 things for us. The first is essentially doubling our productivity throughput, so we can be more innovative. But the second thing is it allowed us to create a much better software development kit, or SDK, for our customers. Because if you think about what they really want to do is kind of customize a little bit their mobile experience for their customers to create competitive advantage for themselves. So we just had our first, a brand-new customer, ORNL, go live 2 weeks ago on the platform. We had another customer go live last week, and we'll start moving our customers over to that new user experience. So that also allowed us to refresh the user experience as well. The second thing where we're spending a lot of time is on building our API capability so that the platform itself is API -- kind of an API-first platform. We have 2 different types of customers. If you think about it, 1 type of customer will say, Alkami, you're really smart, and you figured out the right security products for us to have, the right bill pay products, the right RDC products, and I want you to bundle all of that, and you provide the single point of contact to basically a completely bundled digital banking experience. Then we have another set of customers that are saying, hey, I'm I've got my own development team. I'm going to pick the fintech innovation that I put into the platform, and I really want to get that integrated into my digital banking platform. We've always been a very integration-forward platform. But now what we're doing is making the API itself a product. And so those are the 2 things that I'm interested in, and I know you've got 1 near and dear to your heart.

Yes. I mean, a couple of things that we've recently been able to achieve. From a product strategy perspective, we either organically develop a product, we partner and resell IP of third-party fintech solution providers through our platform, and there's deep integration involved in that. It's not just a single sign-on type of strategy. Or we acquire. And the partnership channel is also a source of acquisitions for us. And we've, over the last -- well, since our history, we've acquired 3 companies. But the 2 more recent ones, one was just a very early-stage technology, digital account opening. So think of that as kind of middle of the funnel for the client journey of a financial institution. The second is on top of that recently, we announced that we acquired a company called Segmint. And Segmint provides data analytic and managed marketing solutions. So huge consumers of data, and then taking that data and customizing marketing strategies down to the unit level or the consumer business level of a financial institution. So we're working our way around the client journey of a financial institution. So those are very exciting for us because they ultimately feed the digital banking, which is where our revenue model is driven from.

And that's a great segue to maybe talking a little bit about your most recent acquisition, which you just mentioned, which is Segmint. Some of the things you guys talked about was very exciting around data and analytic capabilities of business. And can you talk about what Segmint brings and what makes you excited about it?

If you think about the marketer in a bank, what they know is, first of all, they know that they have to create targeted personalized communications because their customers are expecting it, plus every marketer knows that targeting plus relevancy equals conversion, right? So if I can know my segment, my target market, I understand what they're interested in, and I create a communication that is tied to that, I'll get good conversion. Well, that's been really, really hard for banks. It's been hard for banks because think about where all the data is, the data is in the core application and the data is in the digital banking application. Segmint was exciting for us for a couple of reasons. Number one, it's on brand new infrastructure. So it's a completely brand-new data architecture itself. The team is really good at machine learning and artificial intelligence. And they're really good at coming up with these things called key lifestyle indicators. But it also is interesting because it takes the data out of the cores themselves. So now they're taking all the data out of the core that all the transactions that happen in the core. And then imagine, Alkami's taking all the data that's happening out of the digital banking application. And then think about this. And most of our customers, their customers are aggregating all of their credit cards, not just that institution's credit card, but all of their credit cards, they're aggregating in the digital banking application. So now we have this incredible data set from core transactions, the digital banking application, all the aggregated credit card spend and the Segmint team turns that into thousands of key lifestyle indicators, those key lifestyle indicators, then the financial institution uses to do their marketing, but it gets even cooler than that because where they actually want to place the communications is in what channel, is it in the digital banking channel, right? So now they're taking all of that content, they're creating their offers -- and then Alkami has the ability to take that and place that back in either the mobile application or in the web application. So it's actually really exciting. I think the way you think about Alkami long-term is, we've always had a digital banking application, right? And we're going to continue to have a great digital banking application. But you now start to see us be able to open up an aperture long-term in terms of, wow, there's an entire data business that we ought to be able to have. And in making the investments that we're making in the platform, there's also a financial platform business that we could have in the long term. So I'm not talking about the next 18 months, but long-term vision of Alkami is an application business, a financial data and analytics capability and a financial platform capability as well.

It sounds really exciting. Definitely, congrats on the acquisition. Maybe we could take a step back and talk about the competitive landscape a little bit. There's a lot going on in the market. You have some legacy players, you have next-gen players like yourself. In terms of a competitive moat, what differentiates Alkami from other players, why are you winning in the market? Why are you taking share what separates you guys from the pack?

Yes, I'll start. And I know that you've got some things to add, Bryan. But first of all, if you think about what gets us excited is there's a lot of runway. So Bryan earlier talked about our target market, not mega banks, but the institutions below that. So if you think about the institutions below that, just in the United States, there's about 180 million digital seats available. We are fourth in terms of number of seats, right? And the next up on the list is Q2, which is above us. And then DI and then Fiserv. But if you just look at Alkami in Q2, Alkami, 12 million, 13 million seats. I think Q2 might have 19 million seats. I could have that wrong, but let's say that's close enough. But just between those 2, if we're #3 and #4, there's a tremendous amount of runway that we have in front of us. So first of all, that's the market, that's exciting. So we get more focused on how do we capture from 12 million to 180 million. But in terms of the competitive space, it truly is -- it's a replacement market. right? I mean the majority of this -- nobody is buying -- nobody's never had digital banking for their customers. And so what customers have to have now is they have to have a great experience and they have to have the ability to plug financial innovation into their platform. And Alkami's winning formula has been we're the best at a user experience and we're the most open platform with the highest ability to do integration. And so we love the market. We love the runway in the market, and we kind of like our competitive position.

Yes. And I would add, in the future, what's also going to be a driver is the data element. So the Segmint acquisition complements what we were already doing from a data perspective and in some respects, it accelerates what we were doing. So it's user experience, it's the speed of which we can deliver innovation, the fact that we are the -- really the only multi-tenant continuous delivery offering in the space, combined with the data, and that will continue to differentiate for us. But we often get asked about Q2 and other specific competitors. And to Alex's point, we don't have to win against any one of those because it's a large market. There's a nice macro that's driving growth in the market, the 8% to 9% a year. And we're really at #4, a low penetration into that space. So it gives us lots of runway for user growth over the longer term.

That's fantastic. And I guess before we turn it over to Q&A, I'll ask one other question. There's been a focus on both growth and profitability, especially in the last in the last 6 months. What are you doing differently or not in terms of your strategy around how to think about continuing your fast growth, but also thinking about the long-term profitability of the business?

Yes. In some respects, we're just sticking to our current strategy, which we've had since we became public. And our view is we will be on a run rate basis, adjusted EBITDA positive or breakeven as we exit 2023. And we are fully funded on our balance sheet today to reach that. So from a capital perspective, we've really never been in a better position than we are today. So how we get there is through continued gross margin expansion in Q1. We expanded our gross margin 380 basis points. We're right under 60%, right at 58%. And our target operating model is at least at scale over the next several years to reach a 65% gross margin. We're extremely efficient in sales and marketing today. It's only 16% of revenue. Where we have invested a lot of our money, and quite honestly, I think it was the winning strategy was in the platform. Most SaaS companies our size, all of you know this better than I, really, where we're 27% of revenue for R&D and 16% for sales and marketing, most companies are flipped at this stage in their life cycle. But again, our investment in product has, in some respects, been our best sales and marketing investment as well. And then as it relates to G&A, it's just a matter of scale. I mean as we went from private to public, now we just need to scale those additional public company costs. And so over time, with the revenue growth, we'll scale that line as well.

Great.

And I would just say both Bryan and I have experiences running couple of hundred million dollar software companies that make money. And that's just kind of our philosophy is once you get to a certain size, you have to figure out how to make money. But we're not making any because of the shape of the income statement, we're not sitting here spending 50% of sales on sales and marketing, trying to acquire the last customer and trying to decide, should that be 50% or 40%. We're spending the money on the product and the platform and customer support, and we're building a franchise for the long term. And we're pretty comfortable with the shape of the income statement and the progress of the company.

Great. Maybe we could open up the floor to Q&A.

Just wanted to ask for any incremental color that you guys could provide on how the product is working at banks? Excitement for that amongst that product segment? And maybe coming to the ease of the sales process to banks [indiscernible] outside of core credit union.

So the question was around the length of the sales process and then the parts of the product that are exciting, is that -- the -- so if you think about what Bryan said earlier, it's a 5- to 7-year contract, right? So these are -- and this is the front door of the digital branch, right? So this is something that the financial institution goes through a considerable effort from a decision process. It's probably a 6-, 9-month, 10-month buying cycle. It involves the entire senior team of the organization. It usually involves that entire senior team making a trip to Plano and spending 2 days and meeting with every single function in our company. Because once they're buying a relationship that they hope is going to last for 15 years, right? Because they don't want to have to replace this again. So I would just say it's a very thoughtful buying cycle that the customer is truly evaluating whether or not the company can meet their needs. And once again, the needs that they have are around my customers are changing demographically, and I need to provide a friendly, intuitive digital-first experience for them for me to be able to attract and retain a customer. We did a study leading up to our conference on generational preferences for financial institutions, and we found some pretty interesting things. One is -- it was almost 60% of millennials had changed financial institutions because of a poor digital experience. And these are all really smart executives, and they get it. So number one, they need to deliver a great experience. And then number two, they stopped fighting fintech. And so they've started saying, you know what, I'm no longer -- fintechs no longer an enemy of mine. Fintech's creating some great products that I need to be able to offer my customers. I'll give you an example. We have a partnership with a company called BioCatch, which is a really cool security capability -- biometric security capability. And so rather than trying to compete with that, the financial institutions are just saying, let me adopt that and figure out how to plug it into the platform. Anything you want to add to that? Did that answer or -- okay. Cool.

You guys recently launched a new crypto product. Can you just give a little bit of color on how that's going and a little bit of color on the product as well.

No, that's a great example of a product where we're working with our clients to solve a problem for them. Mid-market financial institutions have been flushed with deposits coming out of the pandemic. And as a result of that, they have capital requirements and reserve requirements. And so their main problem has been or a main problem is they either need to have more loans and have more lending or I need to have a strategy for moving cash off of my balance sheet without losing those deposits. And so our crypto product, which is where we've partnered with a company called NYDIG, and they offer a Bitcoin solution. It allows for the consumer or customer of a financial institution to buy and settle crypto or Bitcoin, but it stays within the walls of the financial institution. So unlike if they were to open a wallet with Coinbase or if they were to use Robinhood or someone else, those funds are now outside of the financial institution. In some respects, they're gone. So we're helping them solve a problem with lowering their balance, but also lowering their deposit balances but then also keeping the capital within the walls of the financial institution. So it's not on the balance sheet of the financial institution. There's no reserve requirements. There's no regulatory issues with the financial institution as a result, but they still have line of sight into the capital.

Once again, in this study that we did, 62% of millennial and Gen-Zs said that in a retail environment in the next few years, retail environment will accept Bitcoin. So when they go to their financial institution, it's an expectation that this is a asset that they ought to be able to buy and sell. And our customers, we have one customer that had -- that I met with that in a quarterly, they had $40 million leave their institution and go out into Coinbase. So to Bryan's point, they're looking for ways to keep that within their institution.

Could you just zoom out and talk about macro for a second, lingering impact of COVID potential impact from higher interest rates and inflationary impacts on the sales pipeline?

From a customer perspective, the customers that I've met with were, their concern prior to probably the last 4 to 6 weeks was they had too many deposits, right? And they weren't making enough loans. So there's a little bit of a guarded optimism that maybe things balance out a bit. I think in terms of us specifically, I would say the only macro impact on our business is there's a couple of very specific technology skills that the inflation rate on wages has gotten pretty high. And so I would say that's the one thing that we've kind of managed both post COVID and in this environment. It's not across all the skills in the organization. But there's -- because what Bryan said earlier, is we're on a modern cloud-first platform. There's a lot of demand for those skills. And so there are some of those skills that there's a pretty high inflation pressure of...

Yes. And then from a demand perspective, the end market is still extremely healthy. We saw a bit of deferring decisions early on in the pandemic. And so as a result of that, the new opportunities that we were creating, feeding into a 6- to 9-month sales cycle actually had some softness in new sales in the first half of last year. But what we're experiencing now is our sales pipeline is double of what it was a year ago. So that same trend or that trend line from 2021, we do not expect to occur in 2022. I mean the end market is very strong. And then particularly, 40% of our sales pipeline is represented by banks. So again, some of the investments that we've made in the platform, some of the investments we've made on the marketing side of our business is resulting in generating even significant demand on the bank side of the market.

Well, thank you. Thank you guys for joining today. Appreciate it.