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

All right. All right. Great. Thank you. So look, why don't we go ahead and get started. We're just delighted to have Alkami Technology here with us at the Citizens JMP Technology Conference in San Francisco. And even more delighted to have Bryan, who is the CFO of Alkami, and who we've known all the way back from his RealPage days.

I think this is my 10th conference with you.

He has been at this conference probably 10 times in a row. There wasn't a year in between that you're on?

Well, there's the -- yes, we had that and then also the pandemic.

And the pandemic, yes. I want to eliminate that from my memory.

By 10 of these, that's saying something about your age, isn't it?

Yes. All right. So I'm going to start and get my house business out of the way so we can all write it down.

Sounds good.

All right. And then we're going to talk a little bit about when you joined this business, what's happened and where it's headed. So starting at the top. Pretty good quarter, right? So how are things going? How's business?

Business is great. I mean we had -- about a year ago, there was some concern related to the end market when we had a few financial institutions that had some liquidity issues. But what happened through that, which I think was just remarkably reassuring for us, is how the end market that we target, the resiliency of that market and how it's performed, and then you look forward 9 months after those events that occurred in the first quarter of last year, and we had our best new sales year in terms of new client adds and cross-sell activity. We added more digital users to our platform. And for those of you that are new to the story, I mean, Alkami provides a digital banking platform to mid-market financial institutions. Well, we added 3 million digital users, which was the most in the company history. And doing all this, we started to scale the profitability in the back half of the year. So I'm very pleased with the progress that we made in 2023, and I think it sets us up for a pretty good 2024.

Yes, I think so, too. Okay. So for people who don't know, explain what you mean you provide a digital banking platform for...

So probably everyone in this room is a bank client of what we would refer to as a megabank. And the megabanks are the top 9 financial institutions in the United States that manage more than $450 billion in assets. And so you probably have a digital app on your phone, and you probably have access through online banking into your account. And there's a variety of solutions that the megabanks will provide you. Well, the services that the megabank provides to the digital banking platform are not necessarily the same level of services that mid-market financial institutions provide. There's about 9,500 of those, and they pretty much all of them outsourced to a third party. Some have a homegrown solution, but that's more rare, and it's more the upper end of the market that we focus on. So there's 250 million digital users that are served through those 9,500 financial institutions. And what Alkami does is we're their provider of choice as it relates to the digital banking experience that everyone in this room enjoys from the megabanks.

Okay. Sorry, how many users from the 9,500?

250 million.

250 million people out there, right?

No.

No?

Here's what's interesting about it, and this is a tailwind in the market, is the 250 million users are for every banking relationship one user may have. So for example, I have 6 different financial applications on my phone. Well, so I'm in that 250 million, I represent 6 as one person. And what we're seeing is a proliferation of the number of relationships that are happening. And so the 250 million is growing. At the time of our IPO in 2021, it was 185 million. So the 185 million has grown to 250 million. So that's great from a TAM perspective, but it's also great for our financial model because our clients are growing. So when I indicated that we grew 3 million registered users on our platform in 2023, half of those came from our clients growing their registered users, their digital user communities.

Why are the number of financial apps that I'm using going up?

Because you want choice, right? You have choice in every aspect of your life. So why not with the most intimate aspect of your life, which is your financials? And so there's various offers out there, competition for business. You may enter into a sales finance loan through a Best Buy or some other big box retailer that's really a credit union or a community bank that's behind that. You buy an automobile. Well, every time you enter into a new financial relationship, if you sign up for the mobile banking application or if you register for an online banking application, you become a registered user. And then the financial institution, their goal is that's a client acquisition process for them. They want to convert those new clients to a primary banking relationship. I mean, that's the game that's being played.

Okay. So was it just last year? Last -- so the beginning of last year, all of a sudden, we have bank failures in the U.S., right?

Yes.

Did you -- it was like, who thought that could even happen, right? And then all of a sudden, like one of the biggest banks around here has gone and then another one is gone.

That's right.

And so the perception was, well, if you're providing digital banking solution to banks and banks are going away, things can't be going well for Alkami, right?

Yes. And in spite of that, we had the best new strategy that we ever had. We added more digital users to our platform.

I know. That's what...

And here's the reason for that, Pat.

Yes, why? Like why was it?

Look, I'm not in here to talk negatively about those financial institutions that had issues. But those financial institutions, they had some very unique operating strategy and goals. And the market that we focus on have very different operating strategies and goals. And what I mean by that is, if you're a community or regional bank or credit union, you are a pillar of the community in which you're operating. And you're there to promote economic development in those communities. And you're not there to speculate on asset liability, duration matching. You're not there to focus on crypto clients. You're not there focusing only on high-wealth individuals. You're there to promote the middle American financial institution client. And as a result of that, those financial institutions are thriving. And when we -- when the issues that you're describing took place, we evaluated our client base. Our client base had less than 1% uninsured deposit exposure. They actually contracted less than 2% in their deposit base initially, and then 60 days later, they were growing their deposits again. And as I mentioned earlier, our clients grew their client base, their registered users, 1.5 million during the issues that you're describing over the last 12 months. So it's a resilient market. And that was probably the most reassuring thing that came out of 2023 for us is how resilient the end market is.

Yes, it's super interesting. Basically, the types of banks and credit unions that you serve are not the kinds of companies that were going out of business.

That's right. That's right.

Yes. Yes. Okay. When did you join? How many years is it again?

Man, in 30 days, it's going to be 5 years.

You basically gave way within that much.

Five years, yes, 2019.

Right. So when you joined in 2019, what did you see at this business that attracted you to it?

So I was leaving my previous employer. And the previous company I worked for was a vertical market, a SaaS company that did very, very well, grew organically, grew through acquisitions, and it was in a space that there was some slow adoption to technological changes. I saw the exact same thing. I saw another vertical market, where there was a need for digital transformation. There was some providers in the space that we're not keeping up with some of the competitive pressure that was occurring. And what I mean by that is the providers of digital banking in this space, who they're really competing against are the megabanks. And the amount of capital investment that the megabanks are making, if you look at Bank of America, JPMorgan, Citi, they each spend individually $10 billion to $13 billion on technology. And an increasing amount of that is going to the digital banking channel, which creates an uneven playing field for the end market that we serve that has service providers that haven't been keeping up. And so I saw an opportunity for a market to transform and have a long runway of growth over a very long period of time, but with superior unit economics to many of the software companies that I've ever looked at working for.

Yes. So the top 5 banks spend, call it, $10 billion to $15 billion a year.

A year. And an increasing amount of that's going to the most important channel, which is the digital banking channel.

Yes. Yes. So how do you compete if you're a smaller bank, right?

You can't, right?

You can't. Yes.

And you have to have a service provider that has an infrastructure that affords the ability to push innovation very quickly through the platform, meaning things that are not new terms, right? These are not new buzzwords, but multi-tenancy, single-code base, continuous delivery, well, that's Alkami, because you're signing a 5- to 7-year contract. And so when you enter into a contract for digital banking, it's not about the products that you're buying today, it's what products am I going to need to buy over the next 5 to 7 years to keep up with what's happening in the market, which is the investment dollars that are coming from the megabanks and who has a track record of delivering the innovation and delivering it quickly and able to deliver to their entire client base? And that's where Alkami steps in.

Okay. And so if we look over the last 5 years, what's gone better than you thought it would? And what didn't go as well as you thought it would?

I mean we have -- believe it or not, I know you're going to challenge me on this. We've hit every financial objective that we've put out there. And we've hit those generally, those financial objectives, a quarter or 2 earlier than what was expected. I was thinking that at this point, we would have grown the platform faster and through M&A. We've completed 3 deals to date. They've all 3 been very successful for us. But coming from my prior employer, where we acquired 50 companies over a 12-year period, I view that as a major component of the story. The difference at Alkami is we're still growing at a very high rate organically. We grew 29% in 2023. Our guidance for 2024 is a 24% to 26% organic growth rate. So it's not as though we need the acquisitions to prop up revenue growth. For me, it was about more expanding the platform more quickly, even having a stickier product than what we have today. In fact, we didn't lose any clients in 2023, which is pretty remarkable.

That's just part of my questions, yes. Yes. What does the platform not do today that you would like it to be able to do and where you sort of eventually have a build-versus-buy decision?

That's right. So today, where a lot of effort is going into, it's on our commercial banking platform, so more around treasury management. We've invested in that side of our platform for the last 3 years. And now we're down to maybe 8% to 10% functionality that we need to continue to add, aimed more at the higher end or the upper end of a bank financial institutions clients, okay? Because if you're competing for a new bank financial institution and you cross off 90% of the capability that's needed for their client base, but the remaining 10% is their largest 10% of their clients, you don't have the capability to deliver the solution. So we're closing that gap in 2024 and in 2025. So that's an area of investment and focus for us. The other area is around digital account openings. The Apple card experience is desired by consumers. And so in order to open an account in 3 minutes digitally...

I never [ wanted to use ] this non-Apple Pay credit card anymore. Period. Like -- just like -- I figured out what it was yesterday. Someone wanted me to put in just the CSV, just the 3 digits from the back of my credit card, or I could use the Apple Pay, then I clicked on use Apple Pay.

And you -- but you used Apple Pay with a credit card from a financial -- do you use an Apple card? Or do you...

Yes, yes. No, I'm just saying the ease of use that...

But you're right, but what I'm describing is the ability to open that initial account and to be digitally identified, move money, get approved for either a credit card or a new depository account with a debit card and be able to transact in 3 to 4 minutes by dropping it into your Apple Card wallet, your Apple wallet. That's what I'm describing, and that's a frictionful experience today, and more friction needs to be removed from it. And so it's a natural extension of digital banking. It's an acquisition that we did a couple of years ago where we acquired some technology, but it's improving upon that and have it more of a seamless experience with the digital banking experience.

So this is for opening a new account, right?

A new account -- I'm a new account holder at a financial institution.

And do it all online.

And do it all digitally. And that exists today. There's companies out there that provide the service, but it's reducing the friction that occurs in the service so you don't lose that prospect.

Yes. Has anyone opened a bank account entirely on an app in the last -- what was it for? That's funny. Anyone else?

That's funny.

Yes, that's funny. Interesting. I think also the -- our younger audience members are probably more likely, yes, right?

You're absolutely right. So we do a lot of market analysis, and we use consultants to help us with this. But if you look at millennials and Gen Z generation, 80% of them will tell you that they've either left a financial relationship or they're in the process of seeking a new financial relationship based 100% on the digital banking experience. And so the mid -- our market knows this, they understand us. And so that's where Alkami steps in as the contemporary provider of innovation in the space.

Yes. What's another example like that? Like within our family, the funniest thing is when grandma gives a child like $20 for their birthday, and they literally are like...

They don't think it's...

They have no idea what to do, right? Like, "Dad, can I give you this $20 and you Venmo me?" I'm like, "Yes, Venmo you $18."

And they're never going to walk into a branch. They're never going to use an ATM, right? So money movement products. I mean the innovation and money movement just continues. And so that's another area for us, but -- and it's changing.

So they won't go in a branch for sure, right?

Never go to a branch.

They won't use ATM, no, because they don't use cash.

No.

What else is different?

They're going to hide money from you and how -- they're lending it to their friends through Venmo and other things, right? You never know. You're trying to find where is the money at. But it's all those things. And so then you get into opening an account, applying for an auto loan. I mean all those things are going to be 100% digital, and they already are today, in large part, but it's even going to be more important to the younger generation.

Yes. So where's the friction in that today?

It's the digital identification.

Like what's the actual thing? Like what do you actually have to do that's the friction?

It's the right partners. It's because it's a continuum of steps, right? It's not just one little simple thing. And it's being able to prove who Pat Walraven (sic) [Walravens] is to limit the amount of fraud that's occurring. It's being able to quickly move money from one of Pat Walravens' accounts to another -- to this new Pat Walravens account in order to begin transacting. And it's all the KYC stuff and regulation that's involved. It creates a frictionful -- and it's necessary, but that's what creates the friction in the process.

All right. Cool. Let's take a second to see if we have any questions from our audience.

So [indiscernible] question on that point of friction. So can you talk a little bit about [ forgings ] and the layers in the cyber around that because that usually [ pings ] for things and stuff.

I wish you'd repeat the question.

Yes. Yes, you're right. So the question is related to the fraud that's involved in, I guess, areas like digital account openings or other areas as it relates to the digital like moving money around. When we have conversations with our clients or prospects, believe it or not, the fraud that they're really experienced in 2 areas. One is just the old-fashioned check fraud, where someone shows up the branch and somehow they fraudulently have altered a check, and they're doing something nefarious in that way. The other is account takeover attempts, as you would expect. So that's where it starts entering into more of the digital platform area. And there's all types of new innovation that's occurring there to help identify that this digital user behind the screen is, in fact, who that they purport to be. And one area of technology that we have, it's actually a kind of a biotech -- biometric technology that is around how you interface with your mobile device, how you hold it. Are your right handed or are you left handed? Whatever. I mean it's just crazy the innovation here that can help prove your digital fingerprint just by how you interact with your device. So it's definitely top of mind. The fraudsters are getting more and more innovative and smart. They tend to stay ahead of the technology, but it's definitely an area where the return on investment for our products as it relates to fraud is really measured in the net operating income that it's saving within the financial institution.

How did the account takeover attempts work?

How do they work?

Yes.

Well, I'm not a fraudster, Pat. I mean -- but I mean, generally, it's kind of bots that are just -- they go out into the dark web. They find IDs, and then they're going back into a financial institution. They start kind of pinging and dialing for dollars, more or less, right? it's not -- now on the corporate side, I mean, a huge exposure is through like LinkedIn. Going into -- I work at Alkami Technology, and I work in Treasury. So now I know Bryan Hill works in Treasury at Alkami Technology, I'm going to find a pattern to be able to get in and start pinging Bryan Hill. So it's areas like that where the fraudsters can start try and to identify who you are, what you do, and is there an advantage for me to take over, in some way, your account?

And then this idea about the -- how you interact with your phone, was that saying -- did you present an acquisition yet? Or is that still your license...

That's actually a partner that we have. So what we do, and from a product development perspective, is we either organically develop product, we partner with third parties or we acquire. And 2 of the 3 acquisitions that we've completed actually has come from our partnership network because you kind of get to try it before you buy it. But what we're doing, though, is the IP of third parties becomes integrated into our workflow. And so that's how we differentiate. And it's not just a commodity that we resell and half a dozen other firms resell. It's a part of, in many respects, just the workflow and the code of our business.

Who's that company?

You want me to reveal who that company? BioCatch is the name of the company. Yes.

BioCatch, yes. This is cool. It's super cool.

It's a unique company. And so there are -- and -- so what's driving this -- the name of the company is BioCatch. But what's driving this is the need for innovation in the space. There's a lot of private equity, venture capital and other capital that's flowing into the space. It's creating these niche products that there -- at the end of the day, there's going to be an endless amount of those. I could give you a half dozen other examples like our money movement, where it's just a really small fraction of what's happening with money movement, but it's a great product that you can plug into our platform, and it could be a big product for us over time. And so that's where a partnering and M&A strategy, combined with organic development that prolongs our organic growth runway for quite a while.

Yes. All right. And then I always ask this, but hope you won't mind. Flip side of that, under what circumstances does this business gets sold?

Victims of our own success. I mean, we're a pretty attractive asset today. But I mean, I think it's best for our end market and our clients that we remain an innovative, fast-moving independent company. When you look at some of the acquisitions, large acquisitions that have occurred in the space from some of the larger providers in this space, oftentimes, the innovation stops. And so I think, for us to create a lot of shareholder value, is to continue to execute the way that we have, continue to take market share in the manner that we have. And I guess the investment thesis can always be there is a potential for M&A at some point in the future.

Yes. Who would it be if one of these sort of core providers that doesn't...

I don't know. I mean, look, if I was managing a $50 billion private equity portfolio, and there was an opportunity to pair Alkami with 3 or 4 other contemporary providers that are adjacencies and be a category killer, that could be a pretty interesting asset. But I don't know how you make something like that really happen today.

Yes. All right. Well, Bryan, it's a treat having you.

Yes, it's great.

I appreciate your willingness to answer questions like that. It's been great. It's great.

Yes. Yes.