Q3 2022 Alkami Technology Inc Earnings Call
Personalized and relevant communications, a requirement and reducing attrition and expanding relationships.
Our 2022 acquisition of segment is targeted at this strategic priority for our clients and I am excited about our product progress last quarter.
We completed the initial integration of the alchemy digital banking platform and segments data analytics and marketing products.
This means our clients are now able to seamlessly leverage the target audience from statements key lifestyle indicators directly in the online and mobile banking experience.
Alchemy clients are able to deploy user specific content driving product recommendations financial coaching and retention oriented personalized messaging into the digital banking environment.
Additionally, this integration enables ultimate clients to attribute results to marketing campaigns by capture capturing ascending user interactions from the digital banking platform back to the segment solution.
These enhancements are in the current release are being made available to our clients.
This is the first step that moves alchemy closer to our goal of being both a digital sales and service platform.
For <unk>.
Finally, I'd like to provide an update on the launch and rollout of our new mobile platform.
As a reminder, this new platform was a complete redesign that includes an enhanced user experience, enabling our clients to customize and expand their mobile solutions, while doubling our own mobile development velocity.
We started launching new clients on the platform in mid Q2 and.
And in Q3, we started moving existing clients.
86% of our clients are now on the new platform with the major majority of the remaining clients set to go live by the end of the year. Another proof point in our ability to deploy new technology.
At the beginning of the year are shared with you five companies company priorities, let me recap.
We're committed to becoming the digital banking provider of choice for banks, while maintaining our market leadership with credit unions.
When we started the year, we talked about five to 10 bank wins for 2022, and we are ahead of scheduled <unk>.
Including new sales through today, we've added 11 bank, new logos and the year is not yet over.
Second we continue our focus on growing add on sales.
We saw progress on this priority during the third quarter, adding to our year to date success.
Add on sales represents over a third of sales so far this year.
And our 120% higher than 2021 for the first three quarters.
Third we continue to allocate investments make our platform the foundation of our clients' digital banking infrastructure.
All of our customers have an analog back office and they need to offer innovative digital products and experiences to their customers.
And it's our intent that alchemy will be the operating platform that allows them to connect their past with your future. Our focus has become the most scalable and extensible platform in the market.
Fourth we continue to strengthen our focus on talent.
Ensuring that alchemy becomes the employer of choice in our market.
For example by embracing a remote work strategy, we have reduced our time to hire.
<unk> been able to fill key hard to find skills.
And finally fifth we will remain agile on the M&A front.
The remainder of 2022, we will be focused on the integration of segment our bank strategy.
<unk> in our platform scalability.
But if we see opportunities that fit our portfolio and drive value for our customers, we will pursue them within our capital return requirements.
In closing.
Thank you again for joining the call to hear about Alkermes Q3 results, we're proud of the quarter and we are.
We're energized by the opportunity in front of us and with that.
Let me turn the call over to Brian .
Thanks, Alex and good afternoon, everyone.
Third quarter results continued the momentum we experienced during the first half of 2022 across all our key metrics for the third quarter of 2022, we achieved revenue of $53 4 million, which outperformed the high end of our financial guidance by approximately 1 million and represented growth of 34%. This was due.
Driven by strong performance across all primary revenue drivers combined with segments revenue contribution of just over $3 million.
We implemented 10, new logos in the quarter, bringing our digital platform count to 190 compared to 169 in the prior year. We now have 40, new logos and implementation representing $1 7 million digital users and during Q4 of 2022, we expect to implement.
11 financial institutions from our backlog that represent approximately 520000 digital users.
We exited the quarter with $13 7 million registered users live on our digital banking platform, a $2 3 million or 20% compared to last year and up 390000 digital users sequentially.
Over the last 12 months digital user growth continues to be driven by two areas first we implemented 29 financial institutions supporting $1 2 million digital users and second our existing clients increased their digital user adoption by $1 5 million users or 12%.
Offsetting digital user growth was churn of 353000 digital users of which the majority is represented by a single client that has been transitioning off our platform over the last 18 months we continue.
To maintain a very high gross retention rate of approximately 97% measured in terms of <unk> and digital users retained over the last 12 months. We ended the quarter with an RP U a $15 57, which is 15% higher than last year. This can.
Here's to a blended market opportunity of approximately $58 per user the.
The segment acquisition contributed 89.
Or 7% of <unk> expansion, along with <unk> expansion of $1 11, or 8% driven by add on sales success and the addition of new clients, who tend to onboard with our higher average <unk>.
Subscription revenue grew 35% compared to the prior year quarter and represents 95% of total revenue.
We increased <unk> by 38% and exited the third quarter at $214 million, we expect to exit 2022, with <unk> $226 million to $228 million representing.
Representing total growth of 34% to 35%.
In addition, we currently have over $43 million of <unk> backlog for implementation over the next 12 months, our expected 2020 to exit or an implementation backlog combined to provide early visibility into a successful year in 2023.
We continue to see strong demand across our product portfolio.
Ahead of this point in 2021, our total new sales performance outpaces 2021 by over 90%.
Keep in mind 2021, new sales were overweight to the fourth quarter, new sales for 2022 have occurred more evenly throughout the year and we expect this to continue in Q4.
Our add on sales focus continues to yield returns representing 34% of new sales for the first three quarters compared to 24% for all of 2021 and 17% for all of 2020 and.
In addition to add on sales our client sales team is responsible for our contract renewals of our clients through the third quarter, we've renewed 11 client relationships, representing 5% of <unk> and adding over $40 million to our clients remaining purchase obligation or client contract backlog are key.
Contract backlog is now $755 million and 37% higher than a year ago, we expect to renew an additional five to 10 client arrangements in the fourth quarter. We are very excited with the success from this team.
Now turning to gross margin and profitability for.
For the third quarter of 2022, non-GAAP gross margin was 57% compared to 58% in the prior year quarter.
22 helps navigate high project concurrency in 2023, and the gross margin pressure that can result.
Moving to operating expenses.
The third quarter of 2022, non-GAAP R&D expense was $15 million or 28% of revenue.
A year ago R&D represented 30% of revenue.
As a reminder, or target operating model is to leverage R&D to 20% of revenue, while we continue to invest in our platform. This will occur over several years as we scale revenue.
non-GAAP sales and marketing expense were eight $6 million or 16% of revenue in the prior year quarter sales and marketing represented 17% of revenue. The margin expansion is primarily attributable to revenue scale as we maintain our best in class sales efficiency.
Go to market efficiency out performs are fintech peers.
And the majority of high gross Aas Pier company comparable.
We expect to maintain our go to market efficiency as we scale the business in gain market share.
non-GAAP generally mimic.
Ministry of expense was $11.8 million or 22% of revenue.
In the prior year quarter Gana was approximately 27% of revenue the margin expansion is attributable to revenue scale. We have reached a sustainable level of G&A spooned as the majority of our public company investments are behind US, we expect to leverage G&A expenses, a percentage of revenue as we move towards our profitability.
80 objectives.
Our adjusted EBITDA loss for the third quarter was four $6 million, which is approximately 16% better than our expectations and $1.5 million or 24% better than the prior year quarter.
As a reminder, our goal is to balance investment opportunities with revenue growth and to maintain a good line of sight to adjusted EBITDA positive, which we continue to expect to achieve as we exit 2000 2003.
Now moving to the balance sheet, we ended the quarter with just under $209 million of cash and marketable securities and just under $85 million of that we are comfortable with our net cash position as it represents several multiples of capital necessary to achieve free cash flow positive.
Quickly turning the guidance for the fourth quarter of 2022, we are providing guidance for revenue in the range of 54.3 million a year to $55.3 million and an adjusted EBITDA loss of 5 million to $4 million.
For full year 2022, we're raising our guidance and now expect revenue in the range of $203 million to $204 million and an adjusted EBITDA loss of $18.6 million to $17 $6 million.
To summarize we're executing across all areas of the business, we are improving our already attractive position in the marketplace with increasing momentum among banks and a growing contribution from add on sales demand continues to be strong or new cells pipeline implementation backlog and client contract backlog had never.
Been greater affording early visibility into 2023.
With that I'll hand, the call to the operator for questions.
We will now begin the question and answer session to ask a question you May Die then one telephone keypad.
And you're using a speaker phone please pick up your handset before pressing the keys.
I have a question. Please press Star then kill.
The first question comes from the Andrew Smith at City. Please go ahead.
Hey, Alex Hey, Brian could sail square here, thanks for taking my questions.
Why don't you start off just on the environment and Alex you had some good commentary upfront.
And you just wanted to confirm it doesn't sound like you're hearing anything about pauses and decision making or.
Pullback in terms of Nike span actually sounds like demand is actually our desire to invest is actually stepping up in terms of what your team for you from your customer just wanted to fill down on that.
And just to just to be clear in terms of what you're hearing on that front from your customers. Thanks.
Yeah, Andrew This is Alex thanks for the question Sir.
Certainly <unk>.
And could soften in the future right because neither Brian .
Can predict the future.
Right now we have not seen any.
Any slowdown in demand and I think when it comes back to is is that comment that I shared with the president of a bank prospect.
This is this is a mandatory <unk>.
The investment that people have to make.
Don't have a choice.
To have a great digital banking.
Offering for their customers and I think the thing that was most interesting to me.
Is.
Even as things get.
Perhaps a little more challenging to an institution.
Rotate back into needing to drive.
Deposit growth can you see the digital channel as an area to drive deposit growth as well so kind of all around they see the digital channel is a critical part of their business environment, but we have not seen a drop off in demand.
Andrew our sales pipeline continues to be at all time highs.
And what's encouraging for US is we're maintaining our strong position as it relates to signing do logos for credit unions, but even if we entered into a tougher environment. We are very thinly penetrated into the banks out of the market and seeing the momentum that we're presently gaining on the banks out of the.
Market.
For us, we feel that could offset future headwinds that could occur from a softening environment and combining with that is the success that we're having with add on sales with add on sales now representing 34% of total contract value originated this year and comparing that to prior years.
20% in sub 20% that's another very.
You're a strong indicator that the demand is strong no momentum and the company is still strong and we have good visibility and of the future.
Very clear thank you both for that.
And then if I could just dig into the disability for FY twenty-three.
Obviously long contract durations implementation timeframe seats in depth pretty good visibility at this point, but.
<unk> what is the.
You mentioned the exit right in terms of organic.
Are our growth and then.
Maybe you could talk about pets.
Put some tanks and how that plays into sort of.
At least the minimum expectation for 2023 revenue growth. Thanks, a lot.
Yes, I'll provide 2023 revenue.
And it's in revenue targets and our February day.
But what we did say is we.
We expect to exit the gear with $226 million or 228 million of live.
And that represents a 30, 435% total growth and organic is 27% to 28%.
And then also Andrew what I think is equally as important as we exited two three with $43 million.
In our implementation backlog and thats up well over 50% from the prior year quarter.
Perfect. Congrats on the results guys. Thanks for taking the questions.
And next question comes from my end Camden suddenly them. Please go ahead.
Hey, this is actually Sam <unk> today, thanks for taking the questions and congrats on another strong quarter.
Did you see the 10, new logo wins this quarter I was wondering if you guys could talk a little bit more about these some of these new business wins and renewals from the quarter and on top of that maybe give us a sense as to the size and the scope of of these winds.
No no that's great.
So in 2022 and I'll just speak to our year to date results and we had 22, new logos that we've sign 15 of those and this is through Q3 15 of those credit Union cetera, those are banks and what we're seeing is.
A much higher revenue per user compared to the prior year.
I'll give you an example.
<unk> in 2022 is about $3 a user higher.
What we've experienced in 2021 and even much higher than what we experienced in 2020. So that's very encouraging for us and then Alex mentioned.
The month of October we are closed an additional four banks.
And combined with that we have closed additional two credit union. So we have six more new logos that closed in the month of October . So Q4 is starting to look like it can be a pretty nice quarter for us as well.
The average size and in terms of <unk> for the credit unions and banks is really very comparable it's about $800000. The first year that would come from this 2022 cohort.
Drives that is the credit unions tend to have more digital users.
Little bit lower.
RP you then the banks because the banks spring a lower number of users that all the bank.
The majority of the banks will bring with the commercial banking platform, which increases RPE. So we're very excited with the mix we're excited with the.
The momentum that we have in banks were extremely excited about the start to queue for and we look forward to reporting the queue for results in February .
Great that's super helpful.
And then just touching on gross margins appreciate the commentary there.
Especially in the fourth quarter.
Expecting 100 bits of experience.
22 for the full year and I think you guys in the past have said.
We can expect to.
Two to 300 bits of expansion.
Is that still on the table for 2023 years.
Could you guys provide any color on what we should think about gross margins, adding into the next year.
You are exactly right on average, we expect 200 basis points that gross margin expansion that could be 300 basis points in one year 100 basis points in the next but it should average out.
At 200 basis points of expansion each year as we progressed to 65% gross margin and then once we have a bit better line of sight to 65%, we can speak to where we'll go from there.
We have some good indication and gross margin a couple of areas as.
As we originate new business, we're originating that business at around a 70% gross margin. So that's encouraging for us. The other area is as we remove clients.
The head and from implementation costs that are deferred over the original contract. Those go away. So upon renewal will have a 200 to 300 basis point lift at the unit economic levels. So we do have some margin expansion built in structurally to our financial model now that.
Can be somewhat tempered depending on the volume of new logo grow because you're just bringing a new logo so that.
That is a good indication for us now at the beginning of the year a couple of things that we did mentioned we.
We mentioned that the NK decision acquisition would be a headwind the gross margin and that's what we have seen throughout 2022, and we also mentioned that given the significant new logo.
Implementation backlog that we had entering 2022 that resulted in a very high projecting currency that we had to resource for in Q3 and Q4 this year, so or expect our expectations are.
This is all contingent on our success that we had with new logo wounds in queue for our expectations are in 2022, we pull forward. Some of the implementation of investment we would have expected to have had in 2023, which should put us back on a gross margin expansion trajectory in 2023.
Great. That's really helpful commentary thanks, guys.
Our next question comes from Bob Napoli every and Black. Please go ahead.
Thank you and good afternoon.
What is driving the success in banks.
That has the commercial side of your platform.
Been been upgraded our I know you've been investing in that for a long time, but what is driving that and does your win rate and banks coming up.
Hey, Bob This is Alex so yes, we spent the last couple of years because it kind of mentioned my opening comments. We spent the last couple of years.
Improving our commercial bank offering.
And then that.
When was reinforced to us and this focus group that we did where we.
We took.
Several non alchemy customers and have them give us feedback.
The bank offering and the fever I think it was really interesting because they said look.
Clear.
Is that what you all have done is apply your user experience disciplines. So that's not user interface, but that's the discipline that we have on the science, we have and the company while I'm trying to understand.
What's the worst that people are trying to do and then how can we have an application that is intuitive because is anticipating the work that they are trying to do and so they they told us that there is three or four areas of our application, where we've really rethought.
The way that the application is presented.
It's more unified at a better user experience for one of their customers. So what they were reflecting on as if this was a commercial account of ours.
This is what they would be saying to us about the experience that you're providing so I think it's a combination of the product. But then also we've made investments from or go to market perspective, and from a services perspective to bring in.
Skills and talent that understands that market, which is different.
Then then then the credit Union credit.
Credit Union market.
Thank you and then.
Cross sell success what is.
I don't know if this relates to the acquisitions, but Howard.
K decision and segment going in.
Very strong cross sales what is.
What products are driving are you cross selling from M K and settlement or what other products I'm sure. It's other products as well.
I'll give you a quick commentary on segment and then Brian if you can share some.
Broader data, you'll remember, we just closed the segment acquisition and.
In the middle of Q too.
But we made we made progress on our data market integration firm for that line of business from home buyer research.
No. The marketing is involved in 52% of digital bank banking purchase decisions and so we developed a targeted sales plenty to address marketers.
And we close to new logo Windsor included segment in the third quarter.
We've also got a pretty big opportunity in our existing clients.
Where we can quickly show the value of segments analytic engine on the digital banking data and so what we did was so convinced of the ROI on segment <unk> bottom line that we offer to try and buy program.
Which was signed by six prospects. In addition to that during the third quarter. We sold segment into two existing clients. So we were pleased with the progress on go to market from that acquisition and Bryan I'll, Let you comment overall on add on sale and just and just a bit of a tag onto Alex's comment on segment.
Segment also has.
Direct business a base. So so in addition to the two new logo.
Cross sold into our installed base, we had six additional new logos added specifically for this segment products. So non digital banking platform, new logos and we also see experience like that with a C. H a R.
So we will continue to expect as we have acquisitions will go to market sell them into our installed base include Doom and new logo cells, but then also be digital banking platform agnostic and sell.
Into new logos specific to those service offerings, but.
But as it relates to our add on sales success, it's very consistent with Q2, Bob and.
Areas you know we have a product families. We have three to four of those that are driving in large part.
Sure.
Cross sales success on sale success brought in security is an area where the individual products that are really driving that are <unk> alert product, which was an acquisition. As you are aware and then also our account takeover product is gaining some momentum and it really gained momentum as.
We exited 2021 and that's continued into 2022.
Another area is money movement money movements, driven by Bill pay it's also driven by instant account verification and Thats, where crypto product resides is within that product family group and then finally I would say client service, where <unk> are focused on.
Creating a.
Improved experience for their customers.
Also creating a self service environment that helps their operating expenses and so chat and conversational AI products are doing pretty well within that product family group.
Great. Thank you appreciate it.
As a reminder, if you have a question please press style.
Next question comes from Charles Nathan Stevens. Please go ahead.
Hi, good afternoon, and thank you for taking my question. So most of my questions have been asked but I wanted to get a little color around uhm. What's next on your product roadmap, whether it comes organically through your product ecosystem or via M&A. If that's part of the consideration today.
If you think about think about alchemy.
And a three act play.
If you think about.
Most indispensable software technologies that you're familiar with those technologies evolve through three acts. The first act is it's a great application.
Where you've intuited, what the what the user needs.
And you build a great experience and people are attracted to your application and then people start, saying gosh I would like to do more.
Because this is a great application. So the application starts to take on platform characteristics that.
That means that the application becomes extensible and it's easier for people to connect.
Third party applications or do their own development into that platform.
And then once you are starting to get those different products connected to your platform.
You start gathering a tremendous amount of data and you start realizing that you've got an opportunity to take that data and create strategic value for your customer with that data. So think about when we think about the future of alchemy, we think about it.
In terms of those three acts which are happening at the same time, but they are happening at different levels of maturity what else can we add to our application that makes it.
More and more usable.
Two.
To the financial institution.
And that's where you saw us make the investment and things like digital account opening.
How does our platform become more extensible. So then it's easier for people to plug technologies into our platform. If you look at the number of partners that we have today versus three or four years ago, and then how do we take the data that is uniquely the <unk> data and turn it into strategic value for.
Sure that that's how you should think about.
The planning horizon for alchemy.
Got it I appreciate the call. Thank you very much.
This concludes that question and answer session.
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