Alkami Technology, Inc. ($ALKT)

Good morning, everyone. Thank you for being here. I'm delighted to have Alex Shootman, CEO of Alkami Technology; and Cassandra Hudson, recently appointed CFO of Alkami. Thank you so much for being here with us today.

[indiscernible] being new anymore.

That's true.

You said that 4 weeks in, I think time flies when you're having fun. Great. So we're going to get through a lot today. We're going to talk about the opportunity, competitive position, growth algorithm, AI. But first, on the market because I think that's one of the most interesting parts about your business, honestly. And Alex, you've identified that over 900 credit unions and 1,000 banks are in your ideal client portfolio and that they are still on legacy technology. You said that this is a replacement market governed by 5- to 7-year contract cycles with fewer than 300 potential clients renewing in a given year. Given those dynamics, is the addressable pool of jump balls per year? Is it growing? Is it shrinking? Is it holding steady? And what would cause that to change?

Yes. Right now, it's holding steady. So if you think about our customer set, I make you raise your hand, but most of the people that I meet in these conferences, their bank is Bank of America or Chase and so they don't really have a sense of what does it like to do business with a community bank. The community banks have pretty old technology. It's pretty hard to execute things, execute things digitally. But there's still a lot of fear of making a conversion. So if you think about a community bank or credit union making a decision, it's what's the value of me doing this versus the pain to be going through a conversion. So what would have to change the dynamics is you'd have to increase the value of making the change, which was one of the main reasons that we made the Mantle acquisition. The combination of Alkami and MANTL creates a differentiated digital front end to a community bank that they haven't had before. And so now they start looking at this capability and saying, okay, I'm actually going to increase deposits. more than I did in the past. I'm going to be able to sell more loans than I did in the past. So now this starts to become worth me going through the process of a conversion. So for the jump balls to change, it has to either be a reduced risk of a conversion or an increased value, and that's why we made the MANTL acquisition.

And maybe as a quick follow-up to that, do you see anything in the near future changing either of those variables?

Yes. So right now, when we look at our long-term model, we have not assumed -- let me kind of do some math for a second. As you mentioned, let's call it, 2,200 institutions, 5- to 7-year contracts -- so that means about 300 or so come up every year. And some of them stay and those that don't stay, we have a pretty good win rate on. So that's -- we haven't made any assumptions that, that changes in our long-term model. So if that begins to change, we hope to influence it, then we'll update our model. But right now, when we think about the model that Cassandra reflected there's no change in any of those economics.

Perfect. Thank you, Alex. And a lot's changed in 4 years. I believe 4 years ago, banks were maybe 2% of your live digital banking clients. And today, they're -- and you've said before that 78% of banks are still on legacy core technology, whereas it's lower for credit unions, more like 43%. But if you think about banks expanding within your client portfolio, can you speak to the attractiveness of servicing banks? And what has made you successful in expanding with this customer base in the last, call it, 4 years?

If you thought about Alkami in banks as just a stand-alone software company, let's say, the Alkami, right now, we have the most number of registered live mobile users in the credit union market of anybody -- so let's say that didn't exist. And you said, Alkami in the bank market in '23 and '24, we really hit product market fit. So in 2020, we had one bank customer. In 2021, we had 2 bank customers. And then as we go from for '22 through '25, we go from about 11 live bank customers to 38 live bank customers. So if you thought about starting up a software company, that would be the time we go, "Oh, now I have now we have product market fit. " So where we are without coming is the question is no longer can Alkami sell in the bank market. Now the question is, can Alkami operationalize what it's going to take to grow in the bank market. And so that's really where we are from a growth perspective. What makes it attractive is, we have an ambition to be the #1 technology provider for regional and community financial institutions. Well, at half the markets banks and half the market's credit unions, you can't be #1 if you're only in half the market. So what makes it attractive to us is that it's part of our long-term ambition, which is to be a foundational technology provider to this market.

Perfect. And Alchemy consistently wins 30 to 40 new digital banking logos per year. And again, you're not displacing other modern providers. Everyone is displacing the legacy V1 products. And since you've launched DSSP more recently, are you seeing your win rates changing at all? As a quick follow-up to that. When you do lose a deal, what's the most common reason? Is it conversion risk pricing or something else?

I've been in software for a while, and I've made my fair share of acquisitions that had a business case that didn't come true. We've been really surprised by the execution of the MANTL acquisition. When we acquired Mantle we had only 11 customers that had all 3 of the products that make up the digital sales and service platform. So that's our online banking application, our data and marketing platform and then our origination platform. And now we've got almost 50 customers that have signed up for all 3 of those. And I haven't been part of an acquisition that had that kind of 1-year performance. Our win rate -- on the front half of '25 in the back half of '25 was markedly different. So we saw our win rate go way up in the back half of '25. In terms of when we lose, our biggest competitor is still scared of the conversion, right? And so that's now starting to break free in the bank market. So that was always a sweet market. And now you're starting to see more community banks make a decision to have a different technology front end than they get from their core. But that's still our #1 competitor is I'm going to stay with my older technology.

And as a follow-up to that, in a market like this where the 2023 regional bank failures are behind us and the balance sheet of regional banks seems pretty strong. Are you seeing more interest in making that conversion? Or would you say it's pretty steady year-to-year?

I'm going to step away from the credit union and stay on the bank market. Really what's happening in the bank market as opposed to any underlying financials is that think about a community bank, right? It's got the majority of its deposits. So let's say they have 8,000 customers or 15,000 customers. They've got 100 customers that are the majority of their deposits. And those 100 customers were started by a baby boomer or generational ownership of a firm that was still run by a boomer. And now what they're struggling with is the ownership of those companies are passing on to younger generations. And the CEOs that I talked to, the conversation is, I'm not going to keep this money, right? I may keep a little bit of money, but I'm not going to be the primary bank if I don't upgrade my technology to be able to serve this next generation of business ownership in this community. So that's become more of a driver in terms of the banks making a change is them understanding their demographics.

Perfect. And getting into AI a little bit, I think something that I find really interesting about the digital banking space is that what you provide to your customer embeds thousands of regulatory requirements, integrates with over 450 technology systems, and serves as system of record for fraud mitigation, money movement and business logic. But in this AI world where cogeneration is cheaper, do you think the regulatory and integration complexity becomes a bigger moat for you or a smaller one?

Yes, let me kind of lay out what one of our customers looks like. So our average customer spends $800,000 a year on the digital banking solution. So what is that? That's 2 to 4 employees, right? So the question is, are they going to dedicate 2 to 4 employees or less than for employees to try to write a digital banking system to somehow have some cost savings? So the fundamental thing that most of the customers look at is it makes no sense to me from a cost perspective to try to vibe code digital banking. Now when you get into what you were talking about, what I think most folks don't understand is you have a regulation and then the community bank has to interpret that regulation. And then when they interpret that regulation, the rules of how they interpret it, they actually code into digital banking. So how much are you able to deposit each month? How much are you able to, withdraw each month, what kind of money movement do you [indiscernible] All of those decisions that they make, the layer that captures that is the digital bank, all money movement, if you think about money movement, scheduled payments, recurring payments, that's all sitting in the digital banking system. So it's almost impossible to create a public LLM with that kind of information that you could put into to create a system. Our customers are 100% thinking about AI, not in terms of rebuilding digital banking, but in terms of, can I make more loans. Can I make more deposits? Can I take cost out of the back end? Can I take cost out of fraud? So those are the conversations we have with our customers or those 4 business conversations and how can we apply AI towards that.

Perfect. Getting into the growth algorithm a little bit more. So astounding fact that every 5 years, clients can grow by more than 100% of their original platform investment with 2021 to '23 cohort spending more than 2x their landing ARR and even clients from '26 spending up to 4x more. So with your long-term vision now assuming 40% of ARR growth from new logos and 60% from expansion, can you speak to your cross-sell levers? And what gives you so much confidence that this can continue?

I'm going to do an answer and then give it to you, but I'll talk about the customer dynamics and then hand it to Cassandra. So when we have a customer, let me go through their journey, the first part of their journey is moving on to the digital banking platform, right? So they've made a decision that they're going to convert. They go through a 9-month project, they come on to the platform. And then they breathe a huge sigh of relief for about 6 months, and they go thank goodness for over that conversion turned out to be pretty good. We've got everybody on board. The customers like it. And then our account team sits down with them and says, "Now let's conduct a strategic account workshop. " And what that is, is what's the next 24 months of your digital journey. So they may have only bought 17 of our 30-some-odd products to go through the conversion. And now they lay out a 24-month path of new digital capabilities. Well, remember, most of these businesses are small businesses. They might have 500 employees. So they can only take on a sequential amount of projects, right? They can take on a project this month, 2 more projects next month. What that creates for us is this continuous flow of digital projects over a number of years where we're adding products to the customer. So that's why we have confidence in the growth algorithm is because of our -- what we have on the truck because of what the customers' appetite is for digital banking as it evolves. And then also just the rate and pace at which they can consume it, it creates this pretty steady flow.

Yes. It's one of the things, actually, I've been so impressed by since I've joined Alkami because I've been a part of companies that have a strategy -- a cross-sell strategy that never comes to fruition, but it really is a cross-sell machine here. I think it's a testament to the platform. We have hundreds of integrations. We resell upwards of 40 products today. And so I think that really gives us a lot of visibility into that add-on sale component, if you will. I think it also makes it easier for us to bring the latest and greatest technology to right? Obviously, we're developing product internally that we're rolling out on a regular cadence. But there's new products that come to bear and we can quickly partner with those individuals just given the strength of our platform. So kind of between those elements, that's what gives us confidence. And maybe just to touch on the growth algorithm overall. It's really 3 components. One, just new logo growth, right, which is very -- has been very consistent, and we're assuming remains consistent. We have existing customer growth, which is just driven by the number of accounts someone has, population growth and just overall trends within each of the community banks that we serve. And that has been contributing kind of in the 5% range each year. So that will continue to drive growth for us. And then the third element is the cross-sell of products that Alex speaking about.

Perfect. And maybe the one piece that I'd like to drill in a little bit more is the user growth piece. So there's still a big delta between what population growth is, which I think is sub-3% and what the market is growing at. And you've said that your existing customer base is starting to moderate towards that market rate. So could you maybe recap what the market rate is and what drives that delta between population growth?

There certainly is a trend of individuals having more than one account. I may be above average, but I think I have 9. So I think that is a trend that we see and that certainly some of the delta. And I also think we tend to serve banks that are growing more rapidly and also benefiting from consolidation, and that is a factor as well.

Perfect. Maybe more on the DSSP economics. So recently, you've said that DSSP clients see a 30% uplift in ARR versus traditional digital banking new logos with longer contract durations and stronger retention. What's a realistic path for DSSP to become the default landing motion for a majority of new logos, acknowledging that it's still very early days?

It is early, but I mean even in Q1, about half of our new logos were -- so we're seeing really good traction. I think the story is resonating with our customers, for sure. So I think it will continue to be an important part of our ARPU growth both for new customers and then also on the add-on sales side of continuing to sell these products.

And there's a reason why, just show of hands, who uses a large money center bank as your bank like a JPMorgan Chase or yes. So if you think about your experience, if you went to buy a CD, right, or you went to open a second account, it's a very nice, seamless experience. There's a website, you say, I want a second account. You immediately open it, your accounts approved. That is not the experience that is in these thousands of banks, right? That would be a call into the call center. Opening an account could be printing off a PDF form, signing that PDF form, walking it into a branch, stuff that you're not going to do. So the reason why we've had the performance is because we took these acquisitions and we actually did the technical work to bring the products together so that now even if you look at a Alkami account opening versus a [ Chime ] account opening, more seamless and it's in half the time. And so when a community bank sees that, they say, this is what I've been trying to do the past 10 years. That's why we're having the results that we're having. It's not because we're good salespeople. It's because we show them a capability, and they basically -- any community bank CEO that I go to, and I say, who's your competition? It is my competition is Chase and Chime. Those are the 2 people that I'm competing with, and I have to have the technology. That's why it's selling so well.

Perfect. Very clear. Maybe a bit on AI monetization. So your recent customer conference, you showed 4 AI prototypes you've said that there's a challenge. The challenge is less about the technicality of AI and more about the packaging and the pricing and that there is a tension between the simple pricing where you absorb the cost risk versus usage-based pricing that's unfamiliar to your clients. Where are you leaning these days? And how do you expect to have enough data from your beta clients to set the scalable model?

Yes, I'll give you an example. We've got an SDK and that is so that a customer can extend Alkami. For -- I'll just share this example earlier today visited a customer and they've built a Friday night loan application. So this is Friday night, my water heater breaks, I need a $1,000, I need to get a loan. So that is something they created that is connected to Alkami. Lots of our customers do that. And we built a prompt driven code generator. So we took 8 million lines of code that other customers had built into Alkami. We built -- we trained in LLM with that. And then at our conference, we showed how you could prompting, you could build code, just like you would expect to be able to build code. Our customers were very jazzed by that and saying, "When can we have that," and we said, "Well, would you pay us month for that? Would you pay us $20,000 a month for that," and they're just not willing to pay that much money for something that looks like capabilities that they could get from a free version of Chat GPT even though it's not trained on 8 million lines of code. So we don't know what we can charge for that. We also don't know what the back-end cost is going to be. If all of our customers signed up for that and started using that capability, what's that cost going to do? So that's the work that we -- and I think when I talk to my peers that we all are going through right now is -- and as you all know, we're not really paying for the cost of tokens right now. We're paying for about 2% of the cost of tokens. And so we're -- at least for the people that I check to and us, we're in this mode of, we can build the technology. We don't know how much we can charge for it, and we're a little bit concerned about what this cost model on the back end is going to be. I don't think you all are going to give us a pass if we say tokens at our EBITDA guidance, right? That's what we're struggling with right now. So we -- like I said, the tech is not actually -- on our platform, we're single code-based multi-tenant. We've got a lake back end. It's not hard to build the technology. It's hard to figure out what it's going to cost.

And on that note, maybe you just answered it, but you've made it clear that you're not ready to change the long-term financial model for AI on either the revenue or the efficiency side, and it seems exactly for that reason. Do you have -- do you have a view, though, like would the positive impact show up first on the cost side or the revenue side?

I think it's going to show up on the revenue side first. And then as customers start consuming the capability, then it's going to surprise us on the cost side. And so that's what we have to -- we just have to watch a couple. We've got 3 or 4 cool products that we've built. We've just got to work with some pilot customers -- here because here's the challenge, right? If you want to price it simply, you just say, here's an [indiscernible] code creator for SDK and it's an extra $1,000 a month. If you want to cover your cost, you have to put some consumption layer in. But now you're putting a consumption layer that the customer has no history of modeling. So how are they thinking about their cost. This really the dance that we're going through in collaboration with our customers to try to figure out how to bring the technology to market.

And maybe one just quick follow-up on the efficiency side. I mean, I think we're already seeing pretty amazing product gains like a lot of other companies out there. So I think we'll start to see that show up in the next 12, 18 months. And I think even internally, you can see that people much more focused on deploying AI use cases and learning about them than ramping headcount as quickly.

Perfect. And Cassandra, I have a flurry of guidance and growth questions for you now, so perfect timing. So I think investors are trying to piece together what the underlying organic growth rate of the business is right now. There's lots of puts and takes between the longer DSSP implementation time lines, some effect from termination fees. So maybe if we strip out the timing items and some of the headwinds, what is the underlying growth rate of the business?

Well, before I address that, just I want to clarify the implementation point on just to make sure that it's well understood. Today, if we do a stand-alone mantle or data and marketing implementation, that takes us about 6 months. When we sell DSSP, obviously, it's digital banking, data and marketing and the deposit origination product. And we're assuming that, that's going to take the full 12 months that it would normally take digital banking. Customers are very focused on that contract end date, and there's a lot of organization around it. So that's kind of the comments that we've made on the lengthening. It's not digital banking per se. It's just the 2 smaller components. There certainly is a bit of noise in our numbers this year between the termination fee impact, which is a few points and a slight benefit from the timing of the MANTL acquisition, which happened in March of last year. I would direct you to ARR growth, which at Q1, obviously, is clean. It does not have any noise from either of those 2 things, and we grew 22%

Perfect. Maybe as a quick follow-up to that. It does seem because ARR is not affected by the timing effects as much and whatnot. Is that the better metric to be focusing on over revenue?

I mean, obviously, they're both important. And I mean I think there's these minor noise items impacting revenue, but ARR is certainly our focus. Our entire go-to-market teams are organized around ARR, and it's what I and manage internally.

Perfect. And as we think about the 2026 revenue guide, the 2026 guide, your revenue assumptions include continued cross-sell momentum, city ARR launches, high single-digit ARPU growth and moderation in existing client user growth, which of those assumptions do you think is most conservative? And what conditions could create upside whether it's DSSP adoption, higher ARPU, more bank wins or anything else?

I mean, I think Hard to say which one is the most conservative. Probably, implementation has the most variability is what I would say. obviously have a lot of visibility into that, and projects are planned out 3 to 4 quarters in advance. So we feel good about the guidance that we gave. But you could see timing shift, especially around the DSSP deals that I was just speaking about. We're assuming that customers elect to implement all 3 products on that 12-month time frame, but they could decide to implement data and marketing first, and maybe they want to use that to actually drive some of their digital banking marketing. So I think we could see some variability there and could be upside for us. if it plays out that way.

And hypothetically, if Alkami wanted to speed up any implementation time lines. What do you think would have the biggest impact? Would it be AI? Would it be hiring more...

It would be third if you think about a typical implementation for us, we've got -- we're coordinating 15, 16 different third parties. And these aren't necessarily third parties that we brought to market. I'll give you just one that is right now, we have a customer who is going live next week, and we need a new API endpoint from Pfizer to be able to get their e-docs, right? So these are the kind of things that we're managing all the time through every single implementation. So really, if we wanted to speed up implementations with a client, it's going to be through technology innovation, which you could theoretically do with artificial intelligence in terms of the third-party integrations. However, a lot of that is still logistical, right? So we've got to get a project manager signed from Pfizer core. We've got to get a project manager assigned from the cards business at FIS. That's mostly what we're managing when we're managing a customer onboarding. And then the customer will say, I'm nervous. I want to go through one more round of employee pilot before we go live. And we're not going to go to the customer, even though you want us to. We're not going to go to the customer and say, "Hey, we forecasted this for this week, you can't go 2 weeks out. We're going to say, "Okay, Mr. Customer, if you're nervous, we're going to go a couple of weeks. " Most of the onboarding is logistics as opposed to some sort of technical challenge.

Makes sense. And to that point, you've churned less than 1% of Digital Banking ARR annually for the past 3 years and expect the same in 2026 with only 4 clients turning. Your long-term model still assumes a 2% to 3% total dollar churn. So maybe what's driving the gap between that sub-1% and the 2% to 3% total? And does it make you think that maybe it's a little conservative?

I mean we've certainly been trying to help investors understand the components of our business, which is why we've historically provided digital banking churn and that level of detail. But we do have churn from our other products, and they have different contract links. So for example, MANTL when sold on a stand-alone basis has about a 3-year contract life. So that 2% to 3% guidance factors in churn from our other solutions as well.

But look, if we did 99% gross retention rate for 3 years in a row, I probably wouldn't change the forecast because that's pretty hard to achieve. That's why I don't feel like the 98% is conservative. I feel like that's a realistic good planning number that we've overachieved for a couple of years.

Very clear. And maybe a bit about your -- you've said that the India captive is largely through its initial investment phase, and you expect operational maturity by the end of this year. And if we think about your 300 bps of margin expansion this year or in your long-term model rather, is that driven by the offshore efficiencies? Or is that more to do with pure scale leverage on R&D and G&A?

Certainly, a little bit, but I would point more towards the scale leverage. We've been improving as a percentage of revenue with R&D at a pretty steady rate and pace, I expect that to continue. And I think we're starting to become more efficient is on the G&A side, and I think we'll see that pick up over time.

Perfect. And something I'm also excited about is your free cash flow conversion target. So you've targeted 90% free cash flow conversion from adjusted EBITDA by 2030. What are the structural drivers improving that conversion? Your CapEx intensity is already pretty low. So is that primarily working capital dynamics?

You're exactly right. Very low CapEx intensive business, which is great. I think, again, it's that same scale leverage that's benefiting adjusted EBITDA expansion with cash flow catching up. I don't think there's anything too crazy from a working capital perspective. Of course, there's seasonality in certain quarters, but it really is scale with one slight nuance that eventually, we will become a more meaningful taxpayer, and so that will have to be factored into the 90% target.

Perfect. And in general, we're seeing software companies right now making trade-offs between M&A and buybacks and they're definitely leaning towards buybacks in general. But how do you think about balancing buybacks versus keeping powder dry for acquisitions? And maybe what would an ideal acquisition target look like?

I mean we're doing that calculus every single quarter, right? I think for us, our M&A strategy has been more opportunistic. I think we'll continue to be opportunistic. We're pretty well integrated with the MANTL acquisition, but we still have a little bit of digesting to do on that acquisition. So I think that factors in. And then just at current stock price levels, the buyback felt like the right thing to this time. But it's calculus we'll do continuously and make sure that we're balancing both priorities. I think as we're more meaningfully expanding our adjusted EBITDA that is driving more cash flow, and so that makes the math a little bit easier.

Perfect. And stock-based compensation, increasingly a big focus for investors as they look at not only EBITDA multiples, but an EV free cash flow, but also GAAP profitability. So you've guided that stock-based comp will be about 14% of revenue in '26, declining to 10% by 2030. What's driving that decline? And how do you think about SBC in the context of your buybacks?

Well, the decline from '25 to '26 is really driven by the MANTL acquisition. There were some onetime stock-based comp charges that kind of elevated our stock-based comp in the year. So I think we're kind of getting to more level stock-based comp. We work very closely with our Compensation Committee to be -- make sure that we're managing the amount of stock that we're granting in any given year to manage to these levels. So I think just as we become larger, more mature, while also managing how we give out or grant equity at the company that lends itself to this path.

Perfect. And Alex, Cassandra, we've covered a lot in the past 30 or so minutes. And the last few seconds we have, is there anything you'd like to leave investors with or emphasize?

I'll just say this is a really healthy end market. It's a really healthy end market that has a very predictable purchase pattern. And then once a customer comes on board, we've got a very predictable growth pattern for the customer. So -- that's the part that is largely misunderstood about the end market.

Perfect. Alex, Cassandra, thank you so much for being here today.

Thanks for having us.