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

Good morning, everyone. Thank you for joining us at Citi's FinTech Conference. My name is Andrew Schmidt. I'm an analyst on Citi's fintech research team, the focus on fintech software. It's my pleasure to host the Alkami management team, CEO, Alex Shootman, and CFO, Bryan Hill. Thank you both for joining us.

Thanks for having us. Thanks for joining us in the room. Appreciate it.

I think we'll start off with some level set questions, and we'll get to some more deeper kind of sales cycle questions, but it's good for people who are not familiar or less familiar with outcome we just started at a higher level. Maybe just provide us with a higher level, just overview of the business and the address market opportunity. And then which functionality within the FI tech stack you're focused on. Yes. Great.

How many of you all do business with one of the large banks like Citi or JPMorgan or Bank of America, right? There's about half a dozen mega banks that have about 150 million digital users. And then there's about 185 million digital users that are -- there's another 10,000 financial institutions in the United States, of which the top 2,000 have about 85% of the digital users. For those of you all that do business with a large bank like a Bank of America or a Citi, those institutions spend a lot of money building their digital platform. But the other 10,000 institutions can't afford to build their digital platform and make it as a competitive and offering as the large institutions. They white label Alkami. So that's the easiest way for me to explain Alkami to you as those other institutions, if they're going to have a digital offering, they would choose to white label Alkami or a competitor in the marketplace. That's -- and once again, the space itself, our target market is the top 2,000 of the financial institutions. There's about 185 million digital users, and we've got a lot of growth opportunity in front of us. We just reported north of 13 million live registered users on the Alkami platform.

That's helpful. And then I think there's a lot of other like players in the space, maybe just like how does your platform differ from others.

So if you think about the space itself, 100% of the customers that we go into, we are going to replace a platform. All right? So this is -- there's not a bank that we go to and the bank goes, "Oh, that's digital banking. That's an interesting thought. We should do that one of these days. But what -- and the market is basically bifurcated between legacy providers and then 2 larger disruptors. So you think about a market like Remedy and a ServiceNow or ServiceNow disrupted Remedy. There's several legacy providers like an FIS or Fiserv, and then there were 2 companies that became disruptors. One is Q2 that got their start more on the bank market. And then the other is Alkami that started a little later than Q2 and got it start more in the retail space. So legacy providers, getting disrupted, 2 main disruptors one in banks and one in retail and credit unions.

Helpful.

And Andrew, what separates us from many of the providers in the space is really our technology stack, right? I mean we are truly single code source, multi-tenant sign in public cloud. And you wouldn't think that we'd be talking about that as a competitive differentiator, but it truly is. And what that equates into is a company that can innovate and innovate very quickly, but more importantly, deliver the innovation to every single client if they choose to subscribe to those services. And this is a market where there's long-term contracts. So if you're in a financial institution, you're contemplating a change in your digital banking platform, you're coming off of a 5- or 6-year contract. So which means that the service provider that you engaged with, that was 5, 6 -- I mean it's 2017, 2018. And think of the change of a consumer and a business in terms of their digital experience and what they require now versus 6, 7 years ago. And that's what Alkami brings is that change. And not only that, but the ability to continue to move with the market and deliver the innovation as the market is changing.

Yes. That's helpful because I do talk a lot of software people. And I mentioned multi-tenant, sinkhole-based and they laugh, and they said, no, financial services, that is not table stakes.

Yes.

So it's still an advantage for sure. Maybe, Bryan, just following up with your market share, like what market share do you have today in total? And then if you break that down between CUs and banks.

Yes. So Alex mentioned that we predominantly started on the credit union side of the market. There's a reason for that. The capability was a lower hurdle to get over is first. And then second, when you focus on the retail side of the market, really what you're trying to capture are digital users. Our revenue model is completely driven by the number of digital users on the platform and the number of products that you take. So in terms of digital users, we're right under $14 million, and we are about 7% in terms of market share of the $185 million. But those are predominantly credit unions. A couple of years ago, many of our credit union clients started moving more into commercial banking. And as a result of that, we needed to have a viable commercial banking platform. Now that just doesn't lend itself to an advantage in the credit union side of the market. It also enables you to go after roughly half of our TAM, which are banks. And we've experienced a lot of success in the last 18 months and penetrating the bank side of the market.

But even with that 7%, we're still the -- we are the fourth largest provider in terms of number of digital seats. So it's a pretty fragmented -- one of the things that's attractive to us is it's a pretty fragmented market. So you've got a lot of headroom in terms of number of digital seats. We're one of the largest providers. We still only have 7% market share. Those are the kind of markets that you like to be in.

Absolutely. That makes a lot of sense. I think maybe just a little bit around like the average contact -- average contract length and kind of put to market cycle, things like that. So people get a good understanding for that.

Yes. So if you just think about the market, 5-year contracts, we focus on the top 2,000 of the 10,000 financial institutions that are below the megabanks. So 20% of the market is renewing a year, it's about 400, roughly half of those are banks, half of those are credit unions. And what we've been experiencing after this point is about 50% of the financial institutions that have a contract that are renewing, will go with a new provider and 50% will stay with the present provider. We think over time, as we continue to innovate the digital experience gap will be such that will more than 50% will probably make a decision to change. We're not seeing that dynamic really change at all today. So how we've performed within that is Alkami has been winning between 30 and 40 new logos a year that are credit unions. Typically, it's the larger credit unions because our average-size client in terms of users outpaces the rest of the market. We're over 60,000 digital users per client and the average is around 30,000. But what we're seeing now is progress on the bank side of the market. So through October, we have sold 11 new bank new logos, which is good. I mean our goal for this year was 10%, and now we have 11, we'll probably sign a few more between now and the end of the year. And then we'll continue to expand upon that in the future to where at some point, we would hope and -- we would hope that we would have roughly half of our new logos coming from credit unions and the other half coming from banks. But that's only part of the story because we land with about 16, 17 products out of 30 and on average in our installed base, we have about 11 products today installed for each client. So the expand side of go-to-market is really starting to gain some traction today as well. About 34% of our contract value sold this year has come from cross-sell. And while you might not think that's a good number. If you look back 2 years ago, it was only 17%. So we've doubled the amount of our ability to cross sell into our base.

What you drill down on that point for a minute in terms of cross-sell because I do think it's important. I think, Alex, one thing you did when you came and I think you said double down on kind of cross-selling. That's one of the points you made. I guess other than like headcount and sort of product breadth, what's driving kind of step-up in terms of cross-sell?

Well, the great thing about this market, and this is why we spend 16%, 17% of revenue on sales and marketing. We can continue to do that because the great thing about this market is you can be very, very targeted, right? There's a tremendous amount of information about the financial institutions, their asset size. There's reporting on what products that they use. And so what we've been doing within the base itself is creating a much better account-based marketing capability, where we know the white space of every single account. We've got history on accounts that look like this typically by this product. And so the working relationship between sales and marketing, in terms of this customer that's got this white space profile present this offer to this customer. We're getting better. I'd say we're still early innings on that capability. We probably went from the second inning to the fourth inning on that capability. So I'm pleased with it, but there's also a lot of room to roam in terms of getting better and better on cross-selling.

And Andrew, if you dig down into an implementation today to implement a new client, meaning converting off of one platform to a new platform, such as Alkami, that's about a 9 month, sometimes it could be at the 12-month process. So we oftentimes get asked the question, well, why don't your clients just by all 32, 33 of your products. And so if you go back 5 years, the back office integrations, there might have been something less than 10, 5 to 6 or so. Now the back office integration into other systems is more like 20. And so there is this -- there's only so much technology that a financial institution can absorb on that initial sale and then have a good experience to the implementation process, which then opens up the expansion part of land and expand in the future.

I mean the reality is we want to -- we recommend to a customer when they're buying -- this is the good starter set for you, right? So we don't really want to stuff all 30 products. They need to get their conversion done. They need to get successful with their platform.

Right. That makes sense. I think getting back to some of the overview questions, maybe just typical time frame for RFP sales cycle. Bryan, you mentioned kind of 9-month implementation. What about like just RFPs in the sales cycle in terms of just time frames generally speaking or Alex?

Yes, the time frame probably 6 to 9 months, right? But once again, these customers are -- these customers, if you kind of work backwards from I've got a contract expiration date with XYZ Company. I'm going to create a 14-month buffer, maybe even an 18-month buffer from the contract expiration date. And then I'm going to give myself 6 to 9 months to go through a buying cycle. Right? And the customer has to do that to make the conversion safe. So you kind of look at that, that is the entire cycle working backwards from a contract expiration date through the conversion through when they start investigating. But the sales cycle itself is about 6 to 9 months. We haven't seen that change at all. Your next question is going to be about demand.

About sales cycle.

Look, neither Bryan and I are a Nostradamus. But so far, we have not seen a change in demand signals. Kind of think about it this way, if you take a very large financial institution like a Bank of America, they might have a $4 billion to $5 billion IT budget. Citi might have a $4 billion to $5 billion IT budget. If smart CEOs at Citi or Bank of America are preparing for a downturn, they'll trim $4 billion to $5 billion, they'll trim spending within their IT budget. So now you turn around to a financial institution, this is their most important branch. Research that we've done and others have done show that the #1 criteria for a consumer making a new preferred financial institution decision is the quality of the digital experience. The #1 decision criteria when people pick Alkami is the user experience that we deliver to their members. These CEOs are not dumb people. So they're not saying to themselves, I'm trimming a $5 billion IT budget. So I'm going to not buy a digital banking platform. They're saying to themselves, the most important branch I have is a digital branch. I have to create the best experience. So to date, we haven't seen any slowdown in demand. It could happen. It could happen next week, it could happen next month. But our pipeline is as strong as it's ever been. It's about 2/3 credit unions, 1/3 bank, banks, which is up for us. So we're starting to get some traction in banks. But Brian and I, we're not trying to sound bullish. We're just trying to describe all the demand signals that we're seeing, which is, right now, we haven't seen to fall off.

And based on what Alex just explained, related to the sales cycle and the implementation cycle. Once I get into Q4 of the year, and I start approaching the end of the year, at that point, I pretty much know what's going to implement in the next 12 months. And we're building a very large implementation backlog based on the sales success that we've had. The other factor is the market itself in terms of digital users is growing between, call it, 5% and 8% a year. And it's not because there's more people. It's because more people want more choice, and they have multiple digital banking applications on their device. But our clients have been growing, call it, low teens. So I go into the year, I have a full year of new logo implementation in backlog. They're slotted. I know the date that they're going to go live.

And revenue doesn't start until they go live.

Revenue doesn't start until they go live. I can pretty much count on today that my installed base is going to grow their digital users kind of low double digits, so I had this macro tailwind that comes on at a lower ARPU, but it's still an ARR lift. And so then the next lever that we push is really expanding RPU through cross-sell. And when we sell an additional product, an add-on product, it can go live in 30 to 90 days depending on the product. So it's very quick to become a revenue-generating addition to the client's platform. So great visibility, long-term contracts, our gross retention rates, you won't believe me, if I told you so. I'll just won't tell everyone. But high 90s, 97%, 98% and then a macro tailwind where our clients are just growing themselves.

So sitting here today, thinking about FY '23 kind of looking -- using that as an example, the key variables might be cross-sell, which are still coming off a small base and then user growth and then the vast majority of your revenues from implementation is already like locked in at this point. What's the right way to think about.

We still need to execute in Q4 and have a good new sales quarter in Q4. But yes, I mean, we're going to be locked in. So 1 quarter out, I've got 98% visibility into my revenue.

Yes. That makes sense. And then...

And it's for a very relaxing...

'23.

I don't know that. It's always great when your CFO is relaxed.

Exactly. Obviously, it's really good to hear that the environment continues to be strong for you, not so much for some others, but for you to continue to be really good considering where you're positioning the product. But what if the environment, say, did go south and we saw sort of a pullback in bookings for whatever reason. What -- how are you positioned differently to continue to drive growth?

Well, I think -- I mean, one of the great things about Alkami is as opposed to other SaaS software companies where they're spending sales and marketing dollars to stimulate bookings, right? So your typical SaaS software company might be spending 30% to 40% of revenue on sales and marketing. We're spending 16% to 17% on sales and marketing. Most of our investment goes into R&D, right? And it goes into R&D because we think that the best product wins in our market. And so if demand fell off the planet, we're not in a situation where we're -- oh, my gosh, we got to cut back on a lot of sales and marketing. We're in a situation where we're looking at our product portfolio, and we're asking ourselves what new products do we want to keep building versus what new products would we just put on hold to make sure that -- because for us, managing the business is slowing investment as -- it would have to be a pretty dire situation for us to be cutting expenses. Mostly for us, it would be slowing our growth of the R&D expense itself. And then that just becomes a product portfolio congregation.

And Andrew, in the hypothetical that you provided. So what you're really saying is I, as a financial institution, installed a digital banking platform in 2016-2017. It was from a provider that's not single co-source, not multi-tenancy. And so I may or may not have received additional features over that time period. And so 5, 6 years later, based on all the changes and all the expectations that are changing in the marketplace and all the investment dollars that the mega banks are making, my platform is still good enough for me to survive. And this is the #1 channel for a financial institution. And so it's hard for us to conceive that in a tougher economic environment, there would be less dollars allocated to this channel. And if you're a financial institution with a growth strategy, you might even accelerate your spend during that time. You'll just move it from other projects within your technology budget. So we see that continuing to add new logos should be what would happen for us even in a tough environment. And then you have the fact that we're only 1/3 penetrated into our base. And so the cross-sell opportunity continues. So there's a lot of different levers that we can pull. We have good visibility and as we mentioned, 12 months out, but things happen. We all know that things happen.

By the way, I hate to take advantage of others misfortune, but one of the things that has helped us is when you are on a modern platform like we are, you do compete for some hard-to-get skills, going and finding people that understand Kubernetes and how to manage that in your environment, it's hard to get some of those skills. And so some of the dislocation that's happened in the tech market has been helpful for us in terms of going and getting skills at not a completely exorbitant price like it was maybe 9 months ago.

Labor market is a little bit better these days. Yes.

It's more realistic.

More realistic. Yes, good characterization. Bryan, I'm glad you mentioned the cross-sell and coming off of a smaller base, too, because I think that's important, especially because you're still undersized in the bank market. So that can be offset too in terms of growth. Yes. No, that's very helpful context. So I think as we think about backing up and thinking about more of the longer-term growth picture, and you mentioned a lot of these components: RPU, existing client growth, new clients. What's the right way to characterize the growth from each over the long term? How do you sort of think about the longer-term growth rate for the business?

Well, I mean, the math for us is pretty easy. It's number of users times RPU, right? And so we want to go after the biggest addressable market that we can. Once again, we've always been strong in credit union. So if you look at unaided awareness, so this is what we use a firm and we go to the credit union market and say, if you were going to make a change, who do you think about? That would be the unaided awareness. We're always #1, 2 or 3 in terms of unaided awareness in the credit union. We're up about #7 or 8 in the bank market. So first, for us from a growth perspective is maintain our competitiveness in the credit union market. As long as we do that, we're going to get invited to an opportunity but then become better known in the bank market. To become better known in the bank market, we don't need to put our name on a stadium. We know exactly the banks. We know who they are. We know what cores they have. We can target market those banks, continue to do a great job of add-on sales that is building out the product portfolio to make sure that selling to our base long term, we'd like it to be about 50% of the new contract value that we sign long term. But those are the 2 focus areas for us are stay competitive in credit unions, become better known in the bank market and then make sure that we've got the right product portfolio so that we can take advantage of an installed base that likes us. And so the number we did -- we just did a study around pricing and packaging and the #1 barrier for people buying more products from Alkami when they're existing customer was knowing that we had more products.

Our current, I would call it the medium-term objective is to grow organically about 25% a year, 25% plus. We've been outperforming that. Last quarter was 34%. They included some M&A activity. But even organically, we're at 30%. Roughly 2/3 of that comes from user growth and 1/3 comes from ARPU expansion. The user growth, again, that's new logo and the fact that our clients are growing. When our clients grow, it's at a lower RPU because they're bringing more scale to the platform. So that becomes a headwind to our ARPU expansion. ARPU expansion really comes from 2 areas as well, the cross-sell, which we've been talking a lot about, that's obviously an ARPU expansion proposition for us. But also over the last 3 years, our clients are taking more new product and a higher RPU on the initial order. So if we went back 3 years ago, 2 years ago, we would be averaging about $17 or so of ARPU within that cohort. In 2022, we're a little bit above 20% or $20 rather. So that shows you our ability as we have more products to sell. Our sales force is a bit better at selling a new product. But we keep in mind, as Alex mentioned earlier, we're trying to group those products in a way where it's consumable on that first order, and then we have the opportunity to cross-sell later.

Part of the ARPU, I think, expansion has also been part of it banks and then also the business, the sort of the business module expansion as well.

I think, look, what we're not doing in quality of new logo is stuffing a bunch of products. What's happened, if you think about all the innovation that's happened in and around fintech in the last 3 or 4 years, the institutions customers want more products. So the institution comes to us and says, "I have to deliver more capability to my member or my consumer, which is what's driving the 15, 16, 17 products instead of a couple of years ago when it was 12, 13 products. So it's a consumer choice that we're benefiting from. And we're betting frame from $200 billion spent on fintech innovation, and that creates products that are that our customers' customers want.

Yes. That makes sense. And then in terms of the bank market, so you've been making a very good progress actually ahead of, I think, your earlier projections and ahead of where you were at the same time with the credit union market. What are the -- what are sort of the next steps? Is it more integrations with digital core? Is it more functionality? What do you think our next thing is.

There were 3 things that we needed to be able to do to be successful in the bank market. The first is product. The second is integrations and the third is skills in the organization. We made a lot of progress on the product side. I mentioned this on the last call, I think we were really at the point in terms of our product build of thinking -- are we good enough? So we were a little bit defensive. We brought in several non-Alkami customers who are all banks that have very large commercial banking footprints. They spent 2 days looking at our product and giving us pretty unvarnished input. At the end of -- beginning of the 2 days, they started with, we have no idea who you are. Are you Akamai, are you CDN? Are you -- what are you. At the end of the 2 days, they said, look, you all need to -- you need to make more noise. You have a viable product, you've got the skills necessary, but you need to make yourself more well known. So our focus -- we believe we've got a great product. We've been adding banking skills. We've increased the number of cores that we're integrated into. Our focus has really got to be targeted marketing and selling to acquire the right customers that we can be successful with, which then if we do our job in the next couple of years, we'll have 50, 60 bank customers that are all really happy that are out representing Alkami in the market. That's our focus.

And today, about 10% of our clients under contracts are not [indiscernible] contractor banks -- on the digital banking platform. We completed an acquisition before we were a public company, a small company called ACH alert. They provide ACH and check positive pay functionality predominantly to banks. And some of their bank and they have about 200 clients. And some of their bank clients are very large banks like Regions Bank, Silicon Valley Bank and so -- which were some of the banks that we brought into this group that Alex was mentioning. And so as we've now built out that functionality, we do have some relationships with banks that we're going to be able to leverage in a more meaningful way now as a result of what we have and what we know.

Got it. Thank you for that. And just thinking about just the platform road map or the product road map, I think inorganically -- inorganically done a good job at rolling out products pretty consistently. Is a focus now kind of selling more products, obviously, it's a pull, not a push. Or is it also sort of developing new products.

So if you think about -- I'm fortunate that I've been able to see a lot of technology cycles. And so you start to get some pattern recognition. The most important technology platforms in enterprises go through 3 cycles. And Alkami is going to go through these 3 cycles, and we're going to invest in these 3 cycles. Everything starts as an application, right? So it's, hey, I understand a business problem or write an application, you do a good job of it. People like using the application and then they start saying, "Can I use that application for more things and that application starts taking on platform characteristics. So it starts to -- you start to invest in the ability for other products to connect into your platform because the customer wants to use your platform for more surface area within their organization, starting as an application, start making some platform investments. Then you wake up one day and you go holy cow, based upon all these integrations, look at all the data that this platform is collecting. How do we turn around and turn that data into a strategic advantage for our customers and so you start creating data capabilities. Alkami, over the planning horizon is going to go through that cycle, and we're making meaningful investments to make sure that we can go through that entire cycle. So there'll be capabilities that we add here there, it'll be a product that we add. Maybe we buy it, maybe we build a product. But think about Alkami as over the planning horizon being a great application that adds really, really good platform capability to allow other companies to integrate their products into Alkami, which then creates a great data asset, which then turns into a strategic capability for the customer. That's why we made the acquisition of segment. So we acquired segment now so that it can deliver that data and analytics capability in the future.

Yes, I like that framework a lot. That's a good one to keep in mind. We have a couple of minutes left. I want to make sure that we hit everything. Any closing remarks or anything that people should keep in mind [indiscernible] to you guys, I think we did hit on.

No. I mean I think you're covering it for Alchemy, we're still in an emerging company. We have pretty good line of sight to profitability, which is Q4 of 2023. We have nice gross margin expansion that's built into the business, and we think we can continue that. The demand, while others that are providing more cautionary statements about demand in the space, we're not seeing that today. That doesn't mean it doesn't change. But I think given the fact that we are an emerging company that gives us the ability to kind of fight through it, particularly on the bank side of the market. We're hitting all of our financial goals that we had established at IPO and doing a bit better, bringing some nice talent to help us in the future, and the market opportunity isn't getting smaller. It's only getting larger based on the number of digital users that are growing. So nice macro tailwind there as well.

I would just summarize. Great thing about Alkami, it is mandatory innovation. The market has to buy a digital banking platform. It's built on a modern technology stack, which allows us to move faster. And I know it's a little bit self-serving, but it's also got a management team that are adults and are used to operating in public markets and have a great deal of respect for investors and investor sentiment. So we'd love to have you all be interested in the company.

Great. Thank you, Alex. Thank you, Brian. Appreciate the time. Thanks, everyone, for joining. Appreciate it.