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

Hello, and welcome to Alkami Second Quarter 2023 Financial Results Conference Call. My name is Sarah, and I will be your operator for today's call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Steve Calk. Steve, you may begin.

Thank you, operator. With me on today's call are Alex Shootman, Chief Executive Officer; and Bryan Hill, Chief Financial Officer. During today's call, we may make forward-looking statements about guidance and other matters regarding our future performance. These statements are based on management's current views and expectations and are subject to various risks and uncertainties. Our actual results may be materially different. For a summary of risk factors associated with our forward-looking statements, please refer to today's press release and the sections in our latest Form 10-K entitled Risk Factors and Forward-Looking Statements. Statements made during the call are being made as of today, and we undertake no obligation to update or revise any forward-looking statements. Also, unless otherwise noted, financial measures discussed on this call will be on a non-GAAP basis. We believe these measures are useful to investors in the understanding of our financial results. A reconciliation of comparable GAAP financial measures can be found in our earnings press release and in our filings with the SEC. I'd now like to turn the call over to Alex.

Thanks, Steve, and welcome, everyone. I am pleased to report another quarter of strong operating and financial performance. In the second quarter of 2023, Alkami grew revenue 30%, once again ahead of our expectations. We exited the quarter with 15.8 million live registered users on the Alkami platform, up 2.5 million compared to the prior year, and we achieved a $2.5 million adjusted EBITDA loss better than the high end of our expectations for the quarter. During the second quarter, Alkami continued to execute with the consistency that has characterized our business for over a decade and, recently, as a public company. Since our IPO in the second quarter of 2021, the number of registered users on our digital banking platform is up almost 50%. Our quarterly revenue is up 79% and our ARR is up 78%. Our consistent growth and operating improvement has occurred quarter-after-quarter through both low and rising interest rates in various economic and political cycles during the spring banking crisis in which 3 midsized U.S. banks failed and during an actual global pandemic. This consistency gives us confidence in our revenue growth targets and our ability to achieve a 20% or better adjusted EBITDA margin by 2026. Alkami is able to achieve a level of consistency and performance that is superior to most enterprise SaaS companies because of the unique attributes of our business. These include the mandatory nature of our products, size and health of our TAM, client insight that drives our innovation, the levers that we have in our growth model and the culture of our company. The first reason for our consistency is that our target market considers digital banking to be a mandatory innovation. In every piece of research we conduct, the #1 decision criteria for selecting a new financial institution is the quality of the digital experience. The top 2,000 financial institutions in the United States understand this and are aggressively pursuing a modern digital sales and service channel. But because of this, mobile banking adoption has been faster than computers, mobile phones or the Internet. When I talk with clients and prospects, they tell me 3 things are driving the increased pace in which they are investing in digital banking. First, the pandemic pushed virtually 100% of their customers to become familiar with digital banking. Second, there are new entrants in the market, funded by billions of dollars of venture capital that showcase modern, easy-to-use technology. And third, our market is aggressively pursuing millennial and Gen Z consumers, who have grown up with a digital-first mindset. The closest analogy for what is occurring is what we saw in the mid- to late 2000s when companies finished major back-office investments in ERP systems like SAP and began investing in customer relationship systems like Salesforce and marketing platforms, such as Adobe. The average financial institution in our TAM is 80 years old and their technology investments have historically been allocated to their legacy back-office systems. They are now rotating that investment into a modern operating platform that integrates to their core back-office system and allows them to interact digitally with their customers to sell, serve and improve their customers' experience. A modern digital sales and service platform is seen as a basic requirement for a retail or community financial institution that intends to be a healthy ongoing business. Based upon our research over the past year, the digital banking platform is the most important item to a consumer selecting a banker credit union and ranks above customer service, convenient ATMs and convenient branches. It's the most highly correlated attribute to overall bank or credit union customer satisfaction. It's the top reason of small or medium business who are likely to consider their bank or credit union as its primary financial institution, and it is directly correlated with higher consumer product penetration. For these reasons, 71% of regional and community financial institutions find a digital sales and service platform like the one offered by Alkami to be appealing. The second reason for our consistency is that our market is healthy and growing. When we became a public company, we stated that our market consisted of 185 million digital users, of which, even with our growth, we are today serving less than 10%. That market has continued to grow in the mid- to high single digits as each of us have multiple financial institution relationships. Consider just one aspect of our market. Until about 10 years ago, if you moved to a new city and that city didn't have a branch of your existing FI, you probably opened a new account and closed your old one. Today, when you move, you might open a new account and you'd probably keep your old account. Our research resort shows that the average consumer has 1.7 banking relationships for a debit card or checking account. Among Gen Z, that number increases to 1.9. This creates growth strategies for our target market that never existed before. It's also evolving the primary financial institution as defined by consumers. A few years ago, that was determined based upon where the consumer had a checking account. Our research shows that it's shifting to where the consumer does most of their digital banking. As a result of this dynamic, many of our clients are creating digital first growth initiatives, when in the past they would have led with a branch investment. In addition to the growth of the market, spending on digital banking technology remains resilient. Even in the wake of the banking crisis in the spring, 89% of our target market expects technology budgets to remain the same or increase over the next 12 months. The third reason for our consistency is that we exist to help our clients compete with the digital capabilities of megabanks. And given the criticality of this element of their business strategy, we have the ability to meet with any level and any function in our client base. And this level of intimacy gives us first-mover advantage in developing new market opportunities, which is why our ARPU has grown 20% since our IPO. An example of this is our entry into the commercial banking market. Over 5 years ago, several of our larger credit union clients were expanding into business banking, and they asked us to develop capabilities for them. Today, we can deliver business solution to 99% of potential bank clients. And so far in 2023, we added another 6 banks to our client roster, including the largest bank win in our history. In addition to converting to the Alkami digital banking platform, this bank is deploying a full suite of Alkami products, including segment, digital account opening and ACH Alert. We now have 25 banks under contract. Another example is the segment acquisition. From our inception, Alkami's captured anonymized transactional data because we believe in the power of that data to help our clients interact more personally with their customers and members. But for many years, only a handful of early adopters took advantage of this capability. Recently, the combination of digital transformation and financial institutions that are pursuing a digital-only growth strategy has moved the use of data from early adopters to the broader market. For example, last Tuesday, I met with the executive team of a prospect that historically was focused on 5 counties in 1 state in the northeast, and now has a growth strategy to expand nationwide through a digital-first approach. The main topic of conversation was their desired use of data to attract and grow customers digitally. In fact, our research shows that 84% of regional and communities FIs want to leverage the data and their digital banking platform for more sales growth. Why? Because 73% of consumers say that personalized product recommendations would make them more likely to trust, try new products from and/or recommend a financial institution. But as the broader market began focusing on their data strategy, they gave us feedback that our legacy data platform was challenging to adopt. And they let us know the smaller technology company that had mastered the ability to simplify the use of data analytics and marketing for regional and community FIs. That company was Segmint, and we are very pleased with the acquisition and the pace in which we are adding new stand-alone clients and the bundling of our data capabilities with new logo wins. Here's how added innovation plays out in terms of add-on sales. If our average client is halfway into a 6-year contract, that means the initial solution was proposed in 2019. When you consider the innovation that's occurred in the last 3 to 4 years and they need to compete, we don't have to force an add-on product conversation. In fact, within our target market, lack of awareness and new products is the top barrier to a financial institution adopting add-on products. Good account management, executive relationships and product education goes a long way towards driving our continued growth. That is why our cumulative ARR expansion is 2x among the 2018 and 2019 cohorts. The growth equation for Alkami is simple. Registered users times revenue per user. And the fourth reason for our consistency is that we have multiple levers to work on this equation. First, we can grow by adding clients. We've been doing this for years in the credit union market and are now making progress in the bank market. We win as our clients win. Meaning, our revenue grows as our clients expand their customer account base and add registered users to their digital banking platform. Reselling community FIs continue to add customers and our clients tend to grow faster than the industry average. In addition, when selected as the digital banking provider, we are starting a long-term relationship with our clients, on average, 70 months. This long-term relationship reduces our attrition rate and equally as important, provides us an opportunity to expand the relationship to our clients adopting additional products. This occurs during the contractual term and at the point of renewal, both driving a higher ARPU. And finally, since our clients tend to be on the acquiring side of M&A transactions, would benefit from M&A in the marketplace. The result of our growth algorithm is a model with multiple levers that can work at different tempos, affording a high degree of visibility and supports continued growth performance. The final driver of our consistency is the Alkami culture. You don't sell a 6-year, highly complex, user-disrupting solution to an 8-year-old financial institution unless you have values deeply embedded in your organization, values of client first, a long-term orientation around innovation and conservative business practices that are aligned with your clients. Our commitment to culture is how we establish a leadership position among credit unions over the course of a decade. We built our business the same way they built theirs, serving and innovating on behalf of their customers and members rather than our own agenda. And that's why we're now winning among banks. In closing, I'm proud of our continued consistency in the second quarter. It's a result of good people, good products and good execution in a business where the market considers our products to be a mandatory innovation. It also helps that we have a large TAM that continues to grow, client relationships that give us a front-row seat to see new market opportunities, a business model with multiple growth levers and a culture that understands the client is the North Star. And now I'll hand the call to Bryan to take us through the numbers.

Thank you, Alex, and good afternoon, everyone. During the second quarter of 2023, we delivered another quarter of strong financial results. We continue to see strong demand for digital transformation, including a higher adoption rate of the products offered through our platform to serve our clients and users. For the second quarter of 2023, we achieved revenue of $65.8 million, which outperforms the high end of our financial guidance and represents a growth of 30%. This was driven by balanced performance across our primary revenue drivers. We implemented 12 new clients in the quarter, bringing our digital banking platform client count to 218. We now have 40 clients in our implementation backlog, representing 1.5 million digital users. We exited the quarter with 15.8 million registered users live on our digital banking platform, up 2.5 million or 19% compared to last year and up sequentially 730,000 digital users. Over the last 12 months, digital user growth continues to be driven by 2 areas. First, we implemented 38 financial institutions supporting 1.5 million digital users. Second, our existing clients increased their digital user adoption by 1.3 million users, offsetting digital user growth, which turned at just over 300,000 digital users, of which, the majority is represented by a single client that transitioned off our platform during the third quarter of 2022. We continue to maintain a very high gross retention rate of approximately 98%, measured in terms of ARR and digital users retained over the last 12 months. We ended the quarter with an RPU of $16.20, which is 6% 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. Subscription revenue grew 28% compared to the prior year quarter and represents approximately 93% of total revenue. We increased ARR by 26% and exited the second quarter at $257 million. In addition, we currently have approximately $48 million of ARR in backlog for implementation over the next 12 months. We continue to see healthy demand across our product portfolio. Our new sales performance for the first half of 2023 outpaced 2022 by over 75%. In the first half of the year, we signed 16 new digital banking platform clients, of which, 10 were signed during the second quarter. Our new logo client mix reflects strong representation from banks with 6 signed so far in 2023. Our add-on sales focus continues to yield results as well. Compared to last year, our add-on sales effort resulted in 27% higher total contract value as our client base adopts additional products across our 10 product family categories. In addition to add-on sales, our client sales team is responsible for client contract renewals. During the first half of 2023, we renewed 5 client relationships where we raised the ARR run rate just over 11% through a combination of new product sales and a higher minimum contractual commitment. We expect to renew over 20 clients during 2023. And finally, our remaining purchase obligation or contracted backlog represented $967 million as we exit the second quarter, which is 39% higher than the year ago quarter. Now turning to gross margin and profitability. For the first quarter of 2023, non-GAAP gross margin was 58.7%, representing 70 basis points of expansion when compared to the prior year quarter. Improvement in our gross margin results from operating leverage across our post-sales functions, such as our implementation, client success and site reliability engineering teams, offset by a higher mix of revenue from our third-party IP partners. Our near-term operating model is non-GAAP gross margin of 65% as we scale our revenue. Also, we expect to achieve a gross margin of approximately 60% during Q4 2023 as we exit the year. Moving to operating expenses. For the first quarter of 2023, non-GAAP R&D expense was $16.9 million or 26% of revenue, 200 basis points lower than the year ago quarter. Margin expansion was primarily driven by revenue scale as we've increased R&D expenses at a slower pace than our revenue growth. As a reminder, our target operating model is to leverage R&D to 20% of revenue, while we continue to invest and expand our platform. Non-GAAP sales and marketing expenses were $12.1 million or 18% of revenue. In the prior year quarter, sales and marketing expenses represented 18% of revenue as well. Our annual client conference, Co:lab, occurred during the second quarter of both years, driving a higher expense to revenue ratio than other quarters of the calendar year. For the full year 2023, we expect our sales and marketing expense to revenue ratio to fall below 16%, a slight improvement from full year 2022. Non-GAAP general and administrative expenses was $12.7 million or 19% of revenue. In the prior year quarter, G&A was approximately 24% of revenue. The margin expansion is primarily attributable to revenue scale. As we closely manage G&A expenses, we expect to further leverage expense as a percentage of revenue as we move towards our profitability objectives. Our adjusted EBITDA loss for the second quarter was $2.5 million, which is better than the high end of our expectations and less than half of the loss we incurred in the prior year quarter. We expect to be adjusted-EBITDA positive starting in Q4 2023. As a reminder, we've established a 2026 adjusted EBITDA margin objective of 20%, which coincides with the achievement of our 65% gross margin goal. Now moving on to the balance sheet. We ended the quarter with just over $176 million of cash and marketable securities and just under $84 million of debt. We are comfortable with our net cash position as it represents several multiples of capital necessary to reach free cash flow positive, which we will achieve a few quarters after becoming adjusted-EBITDA positive. Related to our capital structure, during the second quarter, we amended our existing credit facility. The amendment, among other things, increases the amount of the revolving loan commitment by $20 million with Citibank joining as a new lender and extends the maturity date from 1 year to April 29, 2026. We filed an 8-K on June 28 that provides additional information regarding the amendment. Now turning to guidance. For the third quarter of 2023, we are providing guidance for revenue in the range of $66.5 million to $67.5 million and an adjusted EBITDA loss of $1.25 million or $250,000. For full year 2023, we are raising our revenue guidance to a range of $261.5 million to $264.5 million, representing revenue growth of 28% to 30% and an adjusted EBITDA loss of $4.25 million to $2.25 million. This compares to an adjusted EBITDA loss of $17.6 million for the full year of 2022. In closing, we are thrilled with our continued progress and the solid financial performance we are delivering. We are well positioned to capitalize on our unique business model, attractive market and exceptional product offering, and we believe these will continue to fuel our success going forward. With that, I'll now hand the call to the operator for questions.

[Operator Instructions] Our first question comes from Patrick Walravens with Citizens JMP Securities.

Congratulations on the continued execution. I have 2 questions that are sort of related to the demand environment and your customers. So Alex, the survey sounded really interesting. Could you just repeat that and maybe break out for us how many were up versus flat? And then secondly, I'm wondering what the customer base is thinking in terms of demand for gen AI-driven kinds of solutions?

Yes. The one thing I said in the script, Pat, was that kind of even in the wake of the banking crisis, 89% of the target market expects technology budgets to remain the same or increase over the next 12 months. There are a lot of data points in there. But basically, we haven't seen any fall-off in the focus on, let's just call it, digitizing the front of the house for the financial institutions. So that continues to be a priority. The areas that people are interested in AI within a financial institution would be really 3 areas. One is around security. We continue to work with customers on brand-new threat vectors in terms of either trying to penetrate an account or have any kind of account takeover. So anything that can help our customer through any kind of pattern recognition determined that they've got a new threat vector, they're getting hit with a threat is something that's interesting to customers; anything that can help them read the transactional data that they have and provide them opportunities to increase revenue or increase retention of their consumers or customers. We've actually just released, I'd call it like -- it's a capability that the customer can use themselves to compare the economic benefit of what they have in transactional data in terms of being able to get people that are paying mortgages to another financial institution and maybe provide them an offer. We've provided a tool that allows them to see how they're performing in the use of their data versus their peer sets in the industry. So any kind of use of artificial intelligence or any kind of learning against their transactional data that improves business performance is interesting to them. And then anything that's in the call center, right? The call center continues to be a source of expense and investment for a financial institution and anything that they can do there. So those are the 3 areas past security, the use of data and in the interactions with their customers and members.

Our next question comes from Mayank Tandon with Needham.

It's actually Sam on for Mayank. Nice results here. Could you guys dig in a little bit more into the add-on sales success you guys had this quarter, and maybe talk a little bit about how that stacks up relative to last quarter, if that changed at all?

Sure. So the add-on sales team, as you're probably aware, that was a team that was created in 2019. And our ultimate goal from our add-on sales team, which we refer to as client sales, is to deliver a 50% of our total contract value year in, year out from that team. Presently, we've been running in the, call it, mid-30% of total contract value, maybe as high as 40% as a total contract value originated. And then -- so that's occurred year-to-date in 2023. From quarter-to-quarter, the production from that team has been pretty even and consistent. What can cause some variability from that team is the number of renewals they may have in any one quarter year-to-date. So far through 2023, we've had 5 renewals, as we mentioned in our prepared comments. But we expect to have 15, maybe as many as 20 renewals in the back half of the year. So we expect a lot of productivity coming from this team in the back half of the year. Areas where we're seeing some good cross-sell adoption from our client base continues to be, and this is true for 2023 as well as 2022, at our money movement products, our security products and our marketing and analytical products.

Great. That's super helpful. And then just a quick follow-up on M&A. I know it's been a little while since you guys did the segment acquisition, and that's worked out pretty well for you guys by the sound of things. So I guess, just curious what the appetite is for M&A today, and maybe any potential areas you guys would look to target.

Yes. So we view M&A as a part of our strategic product road map, along with some of our third-party IP partners. And so we're evaluating what's available, but it has to fit within our product road map. It has to meet our financial model requirements and then also it's a capital allocation decision. It has to be a good return of capital. What we're finding today in today's market is while it's starting to occur, the valuation expectation for M&A is still yet to catch up to where the public equity markets are at, meaning, we think deals out there that are attractive are still fairly expensive. So we're just demonstrating a lot of discipline as it relates to M&A, where we evaluate our third-party partner pipeline, which could be a source of M&A for us. A couple of our acquisitions actually came from that group of partners that we've completed so far. But that's the way we think about it and where the market is today and would it yield the right capital return. Areas where we would focus on really fit into some of the same areas where we're seeing some add-on sales success. So the fraud security area would be of interest for us. Some continued extension of products within financial wellness would be interesting for us as well as marketing and analytics.

Our next question comes from Cris Kennedy with William Blair.

Alex, you've talked about the data platform that you have, but can you just go into a little bit more what the opportunities are as you think about your road map, your product road map over the next couple of years?

If you think about a bank trying to interact with their customers digitally, it's the same as any other generalized industry who wanted to interact with their customers digitally. And so to do that, you need several different elements of the platform, right? You need a great CDP or customer data platform. You need the ability to develop content and distribute content. You need the ability to plug into any kind of automated delivery of messaging. You need to be able to report on the results of your campaigns. So anything that you and I might think about in the generalized marketing technology stack, a CDP, marketing automation, content management, integration into Ad Networks, campaign ROI reporting. All of those capabilities are going to be necessary in a microcosm for a regional or community financial institution to engage in a digital channel in the same way that they engage in a branch. And the market understands that. What the market has been looking for is a set of technology that can be consumed by the skill sets and the skill level that exist inside a regional and community financial institution. So hopefully, that gives you a sense of -- there's a lot of different vectors that we can go in, in terms of providing technology for a financial institution. The summary I would just tell you is these financial institutions have succeeded because they have a personal relationship with their customers or members. And they understand that the digital channel is now becoming very important. And what they want to do is replicate the quality of the personalized relationship that they've had in the branch, they want to replicate that digitally. And it's not something that we have to -- we don't have to sell them on the idea. They understand it. They want to do it. And so that's the wide range of opportunity that we have in front of us is all of those kind of capabilities.

Great. Fantastic. And then just one last one. You talked about the renewal outlook for this year. How does the renewal outlook for 2024 look compared to 2023?

If you look out over the next several years, our renewal pipeline is about 10% of ARR each year. It's pretty consistent for the next 2 to 3 years, that could -- depending on the size of the clients that are renewing in those years, it could be more or less than the 20 clients or so that will renew this year, but it is around the 10% of ARR.

The next question comes from Jacob Stephan with Lake Street.

Congrats on the quarter. I just kind of want to touch on the 2x ARR expansion among the 2018, 2019 cohorts. With the 2020 and 2021 cohorts, are you starting -- are you seeing the similar kind of trajectory that you've seen with solution uptick within the 2018, 2019?

We are. And so in fact, the increase in each of the individual cohorts, it's really being driven by 2 things. And this is the beauty of our financial model because we're not overly dependent on any one lever. But what's driving it historically has been our clients growing their users. And then as I mentioned earlier in the Q&A session in 2019, we created our client sales team, and they're gaining a lot of momentum cross-selling into our client base, which is now adding another component that's driving ARR expansion within each individual cohort. But if you look at 2020 and 2021, they're between 150% and 200% expansion from their original contractual memos.

Okay, awesome. Maybe just kind of touch on the pipeline. Did you kind of break out the bank versus credit unions and the implementation backlog?

Yes. Our -- we're not in the implementation backlog. We haven't -- well, I can speak to that. So we have 25 bank clients under contract, of which 10 are live and 15 are in the implementation backlog. Our total new logo implementation backlog is $34 million of the $48 million represented by close to 40 financial institutions. As it relates to our sales pipeline, banks now represent just under 40% of our total pipeline. Our pipeline is higher than it was at this point in time last year. It continues to grow year-over-year at a nice healthy pace. And then -- which provides us great visibility into our future sales that we close that leads to our implementation pipeline and ultimately, revenue. So revenue visibility on into 2024 is now developing at a pretty nice pace. And as I mentioned in the prepared comments, year-to-date, our new sales are 75%-plus over 2022, which is pretty fantastic in this market.

Our next question comes from Saket Kalia with Barclays.

Alex, maybe for you. Maybe building on that last question. Great to see the bank wins so far this year and just that commentary on the pipeline. Maybe the question is, can you just remind us how the profile of a bank win compares to the profile of a credit win, for example? Is it maybe higher users with the bank contract? Or is it higher ARPU? Anything on sort of how the profile of a bank contract win versus a credit union contract win. That would be really helpful to understand.

Yes. I would just generalize it to say that the contract value between a bank and a credit union is likely not that different. In the credit union , we're going to have a lower ARPU and more users because of the retail focus. And then in a bank win, because we add in some of our higher-priced products, we'll end up with a lower number of users but a higher ARPU. And Bryan, I don't know if you've got any specific examples, but just generally think about it as across the TAM, the ACV or the ARR per customer is going to be pretty consistent. Credit union, lower ARPU, higher number of seats. Bank, higher ARPU, lower number of seats.

Yes. And if you look at our implementation backlog, which today, as I mentioned in the last question, is 40 financial institutions, 15 of which are banks. The RPU for all 40 financial institutions in the new logo backlog is around $24. Credit unions are at $22 and banks are at $30. So that gives you a sense of the RPU difference. In some respects, it's because 100% of the banks have commercial banking generally as a product. And on average, it's about 60% of the credit unions may have commercial banking. And as Alex mentioned, generally, banks will have fewer users. But Alex did call out, in his prepared comments, that we signed our largest contract value bank client this quarter. And it just so happens that client has over 150,000 digital users. So that's a little bit of an exception in terms of the number of users that a bank will have. This was an 8-year deal. They took 21 products. It was a competitive deal with a few names that you would be very familiar with out there that we compete against. And we won that deal, and we're super excited about it.

That's great. That's great. And congrats on that win. Bryan, maybe for the follow-up for you, how do you think about sort of the user adds here in the back half? And maybe just the different components in terms of how many are coming from backlog, how many are kind of coming from sort of growth? And whether there is any sort of seasonality that we should think about in that net add trajectory.

Yes. So every year, I mean, it's very different. There's not really seasonality to our business. It's more about the timing of when the new logo wins occur, about 9 to 12 months before the implementation. But year-to-date, we've implemented from new clients, just under 700,000 digital users. I would expect. Unless we have an implementation that could slip out because it happens from time to time, we should be somewhere around, call it, 800,000 to 850,000 digital users that we'll implement in the back half of the year with a lot of concentration in Q3. As it relates to our clients growing their digital user base, just Saket, continue that 100,000 digital users a month is the way that we think about it. We're a little over that year-to-date through June 30. I would expect we'll add somewhere in the neighborhood of 600,000, 650,000 in the back half of the year.

The next question comes from Charles Nabhan with Stephens.

My question is on M&A and the impact it could have on your business over time. Obviously, consolidation activity is pretty slow right now. But as we near an end to the rate hike and presumably a soft landing, hopefully, I was curious if that's become a topic of conversation with your clients. And if so, could it potentially be a catalyst for investment in technology as some of your clients prepare for another M&A cycle?

Fortunately, for us, our customer base tends to be the customers that are more digitally advanced thinking about -- if you think about an Alkami customer, it's somebody who has, by definition, decided that they are going to have best-of-breed technology. And they're choosing best-of-breed technology because technology is part of their growth strategy. And so these are the customers that tend to be the acquirers in an M&A environment. And so one of the things that was in my prepared remarks is what we've seen so far is that the M&A transactions that have occurred have been a benefit to us because our clients have been the ones making the acquisitions. So once again, there's almost 10,000 financial institutions in the United States. We target the top 2,000 financial institutions in the United States, and they tend to be the acquirers of the smaller institutions that are not being competitive. So in general, we think of M&A in our market as being good for us. And the other thing to think about is -- and I know I'm telling you stuff you already know, but we price per seat, right? So the overall number of seats, even if M&A is occurring in the United States, is not going down, it continues to grow. And if financial institution is buying another financial institution, they're not buying them because they have the same customers. They're buying them because they want to grow. So our pricing model also helps us in the M&A environment because we price by number of seats, not necessarily a huge platform fee that's charged to an individual financial institution. So in summary, M&A is good for us.

Got it. And I apologize for missing your comments earlier, I hopped on late. Apologies in advance if you've addressed this one as well. But I wanted to get your comments on the competitive landscape with private fintechs more focused on profitability and funding drying up. Curious if you're seeing anything different in the competitive landscape. And conversely, if you're seeing any different behavior from the larger guys you compete against as well.

Not really. I mean if you think about it, if somebody is going into -- first of all, as you know, 100% replacement market, so we don't ever go to our customer and go, we have this cool idea around digital banking, and they go, "Oh my gosh, I've never thought about that." So the primary wins continue to be against legacy technology that is not providing the type of digital and sales and service platform that the institution wants. So by the time that somebody is starting an evaluation process, which can take a period of time, they've already decided that the legacy technology that they have is insufficient for their business needs. That's why they've kicked off a process in any case. So there's good competition in the marketplace. We all compete honorably with each other. But really what we're primarily doing is replacing legacy technology. And once again, to reiterate, when we launched our IPO, we said the market was 185 million users, our target market. That continues to grow. And even with our growth, we're still serving less than 10% of that market. So I think the good thing about this market is there's a couple of folks that can compete really well in this market and grow nicely because there's a lot of legacy technology to replace.

Yes. And I'll just add a couple of comments to Alex's commentary. If you look over the last 2.5 years on a win rate, from a win rate perspective, an ARR that's up for grabs, we're consistently winning in that 34%, 35% of the ARR that we're competing for. That was consistent in 2022 and it's been consistent in year-to-date 2023 as well. What's interesting in that is as it relates to credit unions, very consistent. And actually, we're probably a little bit on the higher end of that number in 2023. We're approaching 40% of the ARR that we've been competing for. What I find even more intriguing is our win rate for banks is increasing. But more importantly, the number of bank deals that we're competing in, that's increasing as well. So there's a lot of marketing effort, a lot of marketing energy focused on increasing our share of voice and the marketing subsegment of the market that we're going after. So that's just a little bit of flavor on how we're performing in terms of win rate as it relates to the ARR that we're competing for in each of these deals.

Our next question comes from Dan Hibshman with Craig-Hallum.

This is Daniel on for Jeff. Just first off, just kind of on the sales motion for banks, where do you guys think in terms of the go-to-market in terms of is that refined in terms of the pitch? Is that -- do you guys have it down yet? Or does that need more work yet on refining the pitch? And then kind of just looking forward to where we're at. So it looks like -- if I have to speak 6 signings of banks in the first half 23 versus about 6 signings first half '22. Just what are you guys thinking in terms of the bank adoption curve. Is this steady, slow acceleration? Is there a point at which there's a critical mass or inflection point? How should we think about that kind of adoption rate?

Yes, this is Alex. I'll take the first half of the question. I'll let Bryan take the second half of the question. In terms of the sales motion, in Q1, we identified 12 specific skill sets that -- you can't learn to swim in the front yard, right? So we started making progress in the bank market. We started engaging with bank prospects. We started winning some banks. And then through that, we started saying, oh, okay, actually -- and I would kind of expand it to not just the sales motion, but to say from the sales through the implementation motion, what have we learned. And as I was saying earlier, we learned that there were 12 specific skills that we needed within the organization. And then we set a goal for ourselves to bring those skills on board in the second quarter. And we were able to bring those skills on in the second quarter. And then, Bryan, the question -- the second part of the question was related to how do we see the adoption of banks moving forward. Is it going to be in the same ratio that we have right now? Is that ratio going to change?

Yes. I mean longer term, we think that we'll remain at our current level of competitiveness for credit unions. So we'll continue to win between 30 to 35, maybe as many as 40 credit unions per year. But once you get to 2026 and beyond, we would expect to win the same number of banks. So last year, we won 11 banks. This year, year-to-date, we're at 6. We are building a strong sales pipeline. So I suspect that we're going to do better, quite a bit better than 11 that we signed last year and then next year will continue to increase. And then as we reach out to 2026 and beyond, we'll be at that 30 in terms of number of banks that we're winning each year, which would be a commensurate amount as to what we're winning on the credit union side of the market.

That's great color. And then just kind of maybe sticking to the go-to-market theme. In terms of sales capacity, how many reps you've got now and whether that's a good amount or expecting to scale that up where that might be by the end of the year?

Yes. We don't really disclose the number of sales reps that we have. In terms of total sales team, we're in that kind of the 60 to 65 FTEs, and so they include sales support, sales engineers as well as direct sales reps for new logo and client sales. But when we do go to market, we do have a hunter and farmer mentality, meaning we have a new logo team. We have our client sales team that's responsible for renewals and cross-sell. And then as it relates to some of our acquisitions, we'll have a few sales reps that are more of a specialty sales rep variety as it relates to those individual products because they may have some uniqueness to them. And then it also helps support and drive sales through those other teams by having the sales specialists involved.

I will say just one add-on comment with Bryan. One of the things that we really like about this business model is if you look at a company like an Alkami versus a generalized SaaS company, in a generalized SaaS company, you have to spend maybe 30%, 35% of revenue on sales because you have to stimulate the market with the -- with your sales organization. And so as you're growing revenue, you're actually having to add sales expense ahead of time to make sure that you're pushing the market for lack of a better term, but obviously, in a highly verticalized SaaS type of industry. And then if you go deeper than that, the thing that's great about our industry is it's really an industry where you can really do account-based marketing because think of all of the data that's published about every single one of these institutions, what they have to publish to the government. And so what you would normally have to do to leverage your marketing organization to drive demand, in a lot of cases, it's really hard because of the lack of data about the industry. But here, the data is there, and so it allows us to utilize the marketing organization in a much more targeted manner than other kind of go-to-market situations, which allows us to keep sales headcount, frankly, lower than a lot of other SaaS models.

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