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

Yes. When we announced the acquisition, we stated that we thought it added $1 billion to our TAM. And -- but my view is over time, this could be as big for Alkami as its core banking platform. Once again, if you think about the size of the market for various different types of marketing platforms, this could be a pretty large opportunity for us.

Understood. And just changing gears slightly. Obviously, your bread-and-butter business for many years has been credit unions. Now the focus is more on banking clients. So could you maybe talk about some of the products that you're adding and some of the differentiating factors that you've strengthened your platform with recently?

Yes. Let me make a couple of general comments, and I'll let you kind of share the progress that we're making. Really, the best way to think about the market is you have a retail financial institution and a commercial financial institution. And Alkami's product has always been great for a retail financial institution. That's a financial institution that's pursuing an individual account. And our bread and butter has always been to create a great digital user experience, which serves a retail account very well. Several years ago, we had a few of our credit union customers, one of which is the largest originator of SBA loans, say to us, "Hey, we have commercial accounts. Can you build some capability for commercial accounts?" And so we started building the capability for commercial accounts, which includes things like treasury management or more fine-grain administration capabilities. And now we believe we have a very competitive product that's allowing us to win more of those commercial type of accounts. I'll kind of let you share some of the progress that we've made.

Yes. So we actually made a lot of headway in penetrating the banks out of the market. Today, we have about 240 clients under contract and of those, about 206 are live. But of the 240 under contract, between 7% and 8% of those are now banks. In 2022, we signed 11 bank new logos. And 1/3 or roughly more than 1/3 of our sales pipeline is now represented by banks. So we feel that as we continue to make headway, as we continue to really -- it's share of voice, it's marketing. It's just being recognized more as a digital banking provider to the bank side of the market since the product now is ready to take to market. We feel by 2025, 2026, roughly half of the new logos that we originate will be banks, and the other half would be credit unions. I mean, it's equally as important for us to maintain our focus on credit union. So as we're doing this journey, it's not that we're now focused more on banks. It's -- we're going after the full market, and credit unions remain extremely important for our revenue model.

Just one more thing building on what Bryan said. Today, we have either #1 or #2 unaided awareness in credit unions, and we're #7 unaided awareness in banks. And so to Bryan's point, we now have the product. A lot of our focus starts to become more on the sales capability and the marketing awareness in that segment of the market.

And when those financial institutions in the U.S. are looking to replace their existing provider -- service provider, what are those decision-makers looking for in their future partner?

Yes, the 2 primary decision criteria when somebody is selecting or staying with a digital banking platform is #1, user experience. And #2 is reliability and performance. Why user experience? The -- as Bryan talked about earlier, the mega banks have very large IT budgets. And with those very large IT budgets, they have created a good digital experience. It's now the #1 criteria when somebody selects a new primary financial institution is what's the quality of the digital experience. And so the regional bank -- I was at a bank in Seattle on Thursday talking to the CEO, and he said, "My competition is not the bank down the street. My competition is Bank of America or Capital One." And so they need to have a digital experience that rivals the digital experience of a mega bank. So those are the 2 primary decision criteria. And then what the executives want to see is, can you reduce my risk of doing a conversion? And the way that we -- anybody would reduce the risk of doing a conversion is by having experience doing integrations into the back-end core applications. So in the bank market, we're now making progress in terms of integrating into the most popular back-end core applications. By the end of this year, we'll have the majority of the Bancorp integrations completed through customer projects. So in summary, evaluating performance, user experience, but it is a heart transplant, so they want to have reduced risk in doing the conversion. And you overcome that risk by having experience doing integrations into the core processors.

And Bryan, Alex earlier in the discussion touched upon how Alkami gross margins are different from some of the software peers, obviously highlighting very high retention rates. So could you maybe talk about the characteristics of your OpEx? And what EBITDA margins do you think Alkami could achieve longer term?

Yes. In Q1 of this year, so when we were announcing our 2022 financial results, Alex and I laid out a longer-term perspective on scaling our business and profitability. And in that, there were a couple of milestones. The first one is, we will be adjusted EBITDA-positive in Q4 of this year. Those are the statements that we've made. And then we reiterated those statements in our most recent earnings call. And in doing that, we expect that our gross margin will be 60% or more, which will be -- and that's in Q4 of 2023. And that's a 350, 400 basis points improvement over 2022. But as we move to a more profitable profile by 2026 with an adjusted EBITDA of around 20%, we would expect our gross margin to be around 65% at that point. Alex touched based on some of the drivers of why we're not an 85% gross margin business. But it's predominantly because the implementation lift, which we think we can leverage and improve upon. But then also there's some other characteristics in our financial model where we resell third-party IP that's tightly integrated into our platform, and there's a revenue share associated with that. So that's a bit of a gross margin headwind. But we still think we can leverage that and improve our gross margin on that revenue as well. And then we've made quite a few investments in our platform for scalability that will ultimately drive down the unit cost of hosting. So those are kind of the primary areas that will take us from a 60% gross margin to a 65% gross margin. Now in that, beneath the gross margin line for OpEx, there's really a couple of areas of focus. It's R&D, which today is around 27%, 28% of revenue. And by 2026, we'll scale our R&D line to 20% of revenue. I mean, today, we're 100% domestic in terms of our engineering staff. And there are some projects underway where we'll likely start leveraging resources in other parts of the world to help leverage the R&D line, but that's even outside of achieving our adjusted EBITDA goal. So that's kind of an incremental item for us. And then in G&A, today, we're a little over 20% of revenue. We've made all of our public company investments. So it's just a matter of scaling G&A as we grow our revenue. And then when you look at sales and marketing, we're extremely efficient. I mean, today, we're around 15% of revenue. So there's probably an ability to improve upon that some, Alexei. But our focus is really more on R&D and G&A within OpEx. So to step back from our -- where we are today in 2023 and our path to 2026, think about 700 basis points of adjusted EBITDA improvement a year, 200 basis points that come from gross margin. The other 500 basis points will come from a split between R&D and G&A.

Perfect. And can you maybe talk about your confidence in sort of some of the targets you laid out, especially for this year? I mean, having such high gross retention and clear implementation pipeline probably helps a lot in your visibility in a given year.

Yes. I mean, what's great about our financial model, I mean, it starts with just a high, very high gross retention, as you mentioned. And even our net dollar retention today is 115%. And we feel as we continue to gain momentum in our client sales go-to-market, so where we're expanding our existing client relationships that we can take that above 120% over time. But that affords a great amount of visibility. And then what you combine with that is when I go into a 12-month period, I have effectively all of my new logo implementations in backlog. We entered this year with 1.6 million digital users and backlog that we'll implement in 2023. And now we're building almost an equal amount of ARR backlog related to our client sales go-to-market motion. So I'll go into a year, I'll have 25% ARR growth sitting in backlog. And so what that does for Alex and I, because we know when those implementations are going to occur, it allows us to make the appropriate investments in the business to balance growth and profitability. Because we think in today's environment, balancing those 2 measures is very, very important. And our cost structure is predominantly fixed. We make some step investments along the way as we're scaling and growing the business. So investments that we're making are almost exclusively discretionary. So we have a tremendous amount of control over when we become adjusted EBITDA-positive, which will be Q4 of this year. We could be adjusted EBITDA-positive today, but we think it's important to balance the right level of investment with growth and then also within the constraints of our long-term profitability objectives.

Perfect. And how do you view potential -- and obviously, your appetite for M&A over the near or maybe midterm, particularly given some volatility that we're seeing in your space?

Well, like any company, we -- people make decisions on build, buy, partner. And that's how we look at something like an M&A as we look at what's the customer spending money on? And then what out there is a unique asset that we would want to purchase. So for example, Segmint was interesting to us because Segmint can apply to any of our customers. And so that would be the type of thing that we'd look at and say, "Gosh, that would be worth buying." But then we have other technologies that we partner with. For example, there's a biometric security product called BioCatch, which that's a great technology. And it's a great technology for us to embed in our user experience, but that should be a partnership technology as opposed to a company that we're buying. So for us, it's what are customers spending money on? And then what should we build? What should we buy? And what should we partner with? I think it's important what Bryan said, when we take a partner technology, this is not a situation where we're just simply reselling something. This is a situation where we're taking a technology, and we are tightly embedding it in the customers' user experience. So the customer looks at the overall Alkami solution with the partner technology just being a piece of that experience.

And I mean, it wouldn't be a discussion fireside chat if I wouldn't ask about AI implications. Have you thought about some positive or maybe some headwinds that could come from this new evolution of AI? And how have you been applying it in your technology?

Interestingly, the biggest impact for us short term from anything like a ChatGPT is actually internal velocity improvement. If you think about Alkami today, think about all of the core processors. And then 4, 5 years ago, if we were doing an implementation, we would integrate into 4 or 5 different products. Today, we're integrating into 21, 22 different products when we're doing an implementation. So you can imagine the body of knowledge that's necessary to be successful in the market. And so these kind of capabilities for us right now are being applied internally to create velocity in the implementation and to create better knowledge sharing as opposed to running our customer data through a model, which you would imagine we wouldn't really do because we've got a lot of PII data in the system.

Perfect. Thank you both for being with us today. This has been great. And I really appreciate your time. Thanks, everyone.

Thank you.