Q4 2022 Alkami Technology Inc Earnings Call
[music].
Hello, and welcome to Alkermes fourth quarter 2022 financial results Conference call. My name is Martin lease and I'll be your operator for today's call.
All participants will be in listen only mode. So.
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Please note this event is being recorded.
I'll now turn the call over to Andrew Venus, Andrew. Please you may begin.
Thank you operator.
With me on today's call are Alex Shoopman, 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.
Actual results may be materially different for 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, and 10-Q entitled risk factors and forward looking statements. The 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 stated 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 quarterly filings with the SEC I will now.
Turn the call over to Alex.
Thank you Andrew and thank you all for joining us today.
Good afternoon, I'm going to provide highlights of our fourth quarter operating results.
<unk> is on the demand environment.
And recap our five key initiatives with some comments related to engineering, our technology platform for scale before turning the call over to our CFO Bryan Hill.
I am pleased to report another quarter of strong performance as we continue to make progress on our key initiatives.
In Q4 2022 alchemy.
Alchemy grew revenues 31%.
Once again ahead of our expectations.
We exited the quarter with $14 5 million live registered users on the alchemy platform up $2 2 million.
They are to the prior year.
And we achieved a $4 million adjusted EBITDA loss in line with the high end of our guidance for the quarter and an important milestone on our path to adjusted EBITDA profitability, which we continue to expect to occur in 2023.
These results reflect continued execution on all five of the five key initiatives I outlined at the beginning of 2022.
Two of these initiatives were fundamental drivers to our performance for the year.
First to become the digital banking provider of choice for banks similar to our competitive position with credit unions and second to drive growth by increasing add on sales.
For the full year of 2022, we outperformed our expectations in both of these areas.
We signed 37, new digital banking platform platform clients for the full year of 2022 of which approximately 30% where banks and our bank wins increased 100% compared to 2021.
As we expected new logo sales were higher in Q4 2021 than in Q4 2022.
However, 22 2022 was a more balanced year in terms of new contract signings throughout all quarters of the year with Q4 being the high point of our new logo signings.
We continued to gain add on sales momentum in 2022 with add on sales representing 37% of total sales for the full year of 2022 up from 24% in 2020 one.
In addition, we renewed 11 client contracts during Q4.
And 'twenty two quiet contracts during the full year.
Our results continue to demonstrate alchemy passion and motivation to become the preferred digital banking provider in the industry and I am personally energized by the opportunities ahead.
Next I'd like to share some thoughts on our end market based upon observations and client interactions since our last earnings call.
Despite the volatility in the macro environment, including challenges experienced by other fintech providers, we still see healthy demand for alchemy digital banking platform and add on offerings.
Our new logo sales team continues to see normal RFP and vendor evaluation activity as well as normal conversion timelines from evaluations to signed contracts.
Our client sales teams, which generally see shorter sales cycles.
We're also experiencing steady activity renewal conversions and cross selling opportunities.
Overall, the factors I discussed in last quarter's call continued to drive demand first our clients require modern banking solutions that may consider investments in alchemy, b mandatory innovation and what is effectively their most important channel.
Second digital user counts continue to rise and we are experiencing double digit user growth amongst our clients.
Third a pfizer realizing that the data they have in their own core and digital banking systems is the best data available for them to target and deliver personalized and relevant communications and offers.
And fourth our target clients need to attract deposits.
They are investing in digital Onboarding technologies, and a great digital banking experience, including business banking to attract new customers.
These themes are while we can we expect to continue to see healthy demand and growth.
Our qualified sales pipeline continues to grow at a strong pace and there are a few digital banking companies, who can provide a modern cloud based solution along with the capacity and track record to manage nearly 2 million digital user implementations at a time.
Alchemy is proud to be a leader.
One of the fastest growing companies in the market.
One year ago.
I shared with you are our five company priorities.
First to become the digital banking provider of choice for banks, while maintaining our market leadership with credit unions second.
Is to grow our add on sales.
Third is to engineer our technology platform for scale.
Fourth is to become the employer of choice in our market.
Fifth is to use M&A opportunistically to enhance our market position.
On recent calls I've discussed our first two priorities and on this call I'd like to provide some comments on our third priority engineering or a technology platform for scale.
In 2020 to.
Alchemy implemented 30, new clients, representing $1 1 million registered users at launch.
And if you go back to the beginning of 2020 until the end of 2022.
Alchemy grew our alive registered users by 103%.
We believe our ability to execute complex implementation projects at this scale and engineer a technology platform that can sustain this growth is a significant and sustainable competitive advantage.
When we think about engineering, our technology platform for scale. It is not only about expanding the platform, but also injecting innovation that allows alchemy to continue to be a technology company.
It provides financial solutions.
Our focus is on expanding the platform, while we reduce the incremental unit cost of serving the user and evolving our platform. So that it serves the future needs of the market with speed and quality.
Our clients tell us that they've grown tired of trying to make their legacy systems dance.
They want to focus their core banking application on back office accounting.
And invest in a new operating platform that can scale and become their primary digital sales and service system.
We believe alchemy can be that platform to make this happen we are driving innovation in three areas.
First the alchemy platform from inception is a cloud based single instance, multi tenant SaaS system with security as a foundation.
Cause of dish, we had the opportunity to rapidly adopt new advances in storage database and compute architectures and technologies, such as kubernetes messaging layers and Federated schemas to slow the growth of our compute costs, while increasing the reliability quality and performance of our platform.
Second we will innovate in the technology necessary to connect alchemy, but a myriad of legacy systems that exist in the market. This is the most time consuming portion of our implementations and our planned innovation will result in faster projects for our clients and less cost for alchemy to onboard new clients.
Third is our clients mature the use of their digital mature the use of their digital sales and service channel. They will want increased data capabilities for their customers.
This is why we made the segment acquisition, we are integrating the data capabilities of alchemy and segment into a modern financial data platform that provides for the data collection persistence transformation and actionable insights necessary for alchemy clients to make data driven decisions to grow their business.
With this as a backdrop I am pleased to announce that we just welcomed deep Varma as chief Technology officer of alchemy.
Part of Alchemy deep was chief Technology officer of viral bank, where he built the technology infrastructure for one of the nation's fastest growing neo banks prior to borrow deep was part of the Zillow group technology leadership team, where he led all engineering functions across the truly a business successfully migrating to the cloud and creating the data platform that <unk>.
<unk> unified view of customer home information, including search and personalization.
He's also launched two successful startups and held leadership roles at Yahoo, ABB and IBM.
Besides his experience deep as a genuinely good human being and curious about culture and community and this is why we're excited to have him join alchemy.
The platform efforts I've just discussed are expected to benefit our long term gross margin profile. It will positively impact growth client retention and R&D productivity, but to be clear. These efforts are not necessary to achieve our 2023 gross margin objective.
And should be thought of as upside to our goal of reaching non-GAAP gross margins of 65%.
In closing thank you all for joining the call to hear about alchemy Q4 results. We are proud of the quarter and we were energized by the opportunity in front of us and with that let me turn the call over to Brian to provide more detail on our financial results and walk through our 2023 financial outlook.
Thanks, Alex and good afternoon, everyone.
Fourth quarter results continued the momentum we experienced during the rest of 2022 across all our key metrics for the fourth quarter of 2022, we achieved revenue of $55 5 million, which outperformed the high end of our financial guidance and represented growth of 31%.
This was driven by strong performance across our primary revenue drivers we.
We implemented nine new clients in the quarter, bringing our digital platform client count to 199 compared to 177 in the prior year.
We now have 44, new clients in our implementation backlog, representing 1.6 million digital users.
We exited the quarter with $14 5 million registered users log on our digital banking platform, but $2 2 million or 18% compared to last year and up sequentially 810000 digital users.
Over the last 12 months digital user growth continues to be driven by two areas.
First we implemented 30 financial institutions supporting 1.1 million digital users.
Second our existing clients increased their digital user adoption by one 4 million users offsetting digital user growth was churn of just over 300000 digital users of which the majority is represented by a single client that transitioned off of our platform during Q3 of 2022.
We continue to maintain a very high gross retention rate at just over 97% measured in terms of annual recurring revenue or <unk> and digital users retained over the last 12 months. We ended the quarter with an RP U S $15.55, which is 14% higher than last year.
Year this.
This compares to a blended market opportunity of approximately $58 per digital user.
The segment acquisition contributed 91 or 7% of <unk> expansion, along with the <unk> expansion of 96 cents or 7% driven by add on sales success and the addition of new clients, who tend to onboard with a higher average RPT.
Subscription revenue grew 33% compared to the prior year quarter and represents approximately 96% of total revenue.
We increased a R R by 34% and exited the fourth quarter at $226.1 million.
In addition, we currently have approximately 49 million as a or are in backlog for implementation over the next 12 months or.
Our 2020 to exit a or are an implementation backlog combined to provide visibility into a successful year in 2023, which I will outline later in our financial guidance.
We continue to see healthy demand across our product portfolio.
Our 2022, new sales performance outpaced 2021 by 30%.
Keep in mind 2021, new cells were overweight to the fourth quarter.
As I said on last quarter's call new sales for 2022 have occurred more evenly throughout the year.
We signed 37, new digital banking platform clients for the full year of which 15 signed during the fourth quarter.
Our add on sales focus continues to yield returns representing 37% of new sales for 2022 compared to 24% for 2021 and 17% for 2020.
In addition to add on cells, our client sales team is responsible for client contract renewals.
In 2022, we renewed 22 client relationships, representing 11% of our lives a R R and adding over $143 million to our clients remaining purchase obligation or client contract backlogs are our client contract backlog is now 893 million.
38% higher than a year ago.
Now turning to gross margin and profitability for.
For the fourth quarter of 2022, non-GAAP gross margin was 56, 4% compared to 57, 1% in the prior year quarter.
Margin dilution was primarily driven by higher cost from our client implementation team and our third party IP partners previously.
Previously, we highlighted and investments in our client implementation team would constrain margin expansion for a few quarters, we have now the <unk>.
Project concurrency curve that resulted in group in 2022 gross margin dilution.
Also during Q4, we renewed early a significant IP partner agreement, resulting in certain in quarter costs that will provide future gross margin benefit.
For 2023 are more evenly distributed project concurrency combined with our recently amended third party IP partner agreement, we expect will put us back on path to our gross margin expansion objective of 200 basis points per year.
Our target operating model is a non-GAAP gross margin of 65% as we scale. Our revenue we expect to achieve our target gross margin at a pace of roughly 200 basis points of expansion on average per year, reaching the 65% level by $20 26. In addition.
Reaching 65% gross margin is not the final destination. It is simply the next milestone in our journey, we expect to continue to drive gross margin above 65%.
For purposes of discussing gross margin expansion. The most important factors for US. In addition to revenue scale are first we are investing in our platform to enable scale well beyond our current level of $14 5 million digital users.
These investments are expected to reduce our cloud hosting infrastructure at a unit economic level improve implementation efficiency and lower the ongoing cost to support our platform.
Second we expect to further improve the cost structure associated with third party IP integrated into our digital banking platform. These arrangements are typically structured as revenue share agreements, which are generally dilutive to our gross margin, but typically very accretive to adjusted EBITDA as.
As we scale our business our opportunity to improve gross margin for these arrangements increases and third continued success renewing client agreements will improve our gross margin the counting for implementation revenue and cost requires we amortize both for each new implementation over its first contract term.
<unk>.
As clients renew their contracts are gross margin no longer possesses this headwind at a unit economic level.
We renewed 22 clients in 2022 and expect to renew a similar amount in 'twenty two 'twenty three.
Moving to operating expenses.
For the fourth quarter of 2022, non-GAAP R&D expense was $16 4 million or 29, 6% of revenue.
A year ago R&D represented 27, 8% of revenue.
Margin dilution was primarily driven by higher head count consulting and cloud infrastructure costs as we have invested in our technology platform for scale.
However for full year 2022, we did experience operating leverage and margin expansion of 180 basis points. 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. We currently expect to achieve our objectives during 2026.
non-GAAP sales and marketing expenses were $7 9 million or 14% of revenue in the prior year quarter sales and marketing represented 14% of revenue as well.
Our go to market efficiency outperforms, our fintech peers, and the majority of high growth SaaS company comparable.
We expect to maintain or slightly improve our go to market efficiency as we scale the business and gain market share.
In terms of the progression of sales and marketing expenses throughout 2023 bear in mind. The second quarter is when we will hold our annual client conference, which resulted in our highest quarterly sales and marketing expense with approximately one five to two $2 million of higher spend than other quarters of the year.
non-GAAP general and administrative expense was $11 6 million or 21% of revenue.
In the prior year quarter, G&A was approximately 27% of revenue.
The margin expansion is primarily attributable to revenue scale, we have reached a sustainable level of G&A spend as the majority of our public company investments are behind US, we expect to leverage G&A expense as a percentage of revenue as we move towards our profitability objectives with an expectation of 10% to 12% of revenue during 'twenty two.
Six.
Our adjusted EBITDA loss for the fourth quarter was $4 million, which was in line with the high end of our expectations and 10% better than the prior year quarter.
As a reminder, our target operating model has two axes and adjusted EBITDA margin of 20%. We now expect to achieve this target for the full year 2026, which also coincides with the achievement of our 65% gross margin go.
Similar to our gross margin goal of 20% adjusted EBITDA margin is not the final objective, but the next milestone after we moved to positive adjusted EBITDA in Q4, 2023 and continue to scale our business along the journey to 2026, we believe these high level targets achieved on the timeline provided.
Afford a balanced approach to profit and cash flow generation, while also allowing alchemy to responsibly invest to take full advantage of our attractive market position and large tam opportunity in digital banking.
Before moving on from the income statement I wanted to provide some commentary on stock based compensation, which we understand is becoming a topic of increasing importance among software investors in.
In 2022, we had a significant anomaly and our stock based comp expense, which was a result of our former Ceos retirement. This accelerated the vesting of his shares and therefore impacted our accounting for stock based compensation.
As we look forward to 2023, we expect stock based compensation to be approximately 9% of revenue.
Beyond 2023, and as we scale revenue, we expect stock based compensation to decline to 10% to 12% of revenue during 2026 and to normalize to a long term high single digits percentage of revenue as we continue to scale.
Now moving onto the balance sheet.
We ended the quarter with just over $196 million of cash and marketable securities and just over $84 $5 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 occurring shortly after becoming adjusted EBITDA positive for the fourth quarter of 2023.
Now turning to guidance for the first quarter of 2023, we are providing guidance for revenue in the range of 58 to 59 million and an adjusted EBITDA loss of four and a half to three and a half million.
For full year 2023, we are providing guidance for revenue in the range of 255 million to $260 million and an adjusted EBITDA loss of 7 million to $4 million.
Additionally, because the impact of expense timing such as our client conference as I mentioned earlier, we expect the second quarter to be the trough point of our adjusted EBITDA losses in 2023 modestly lower than the first quarter of the year and we expect to exit 2023 with Q4 adjusted EBITDA modestly positive.
To summarize we are 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 cells in concert with our topline strength, we're focused as an organization on crossing into <unk>.
Adjusted EBITDA profitability in 2023, and we are.
We're on track to achieve meaningful gross margin expansion in 2023 and beyond as a final comment we expect a crossover 65% gross margin and 28% adjusted EBITDA margin objectives in 'twenty 'twenty six.
With that I'll hand, the call to the operator for questions.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Bob Napoli from William Blair.
Bob Please go ahead.
Good afternoon.
Hi, good.
I mean.
Really nice to hear the very specific guidance for 2026 on the trends for 2026 and.
Maybe what do you see as kind of the biggest challenges now what gives you the confidence to put out that specific.
<unk>.
For 2026, and what do you view as the biggest challenges to getting there.
Hey, Bob go ahead, Yeah. Let me start this is Bob This is Alex let me start.
Talk about two things one.
Our confidence and then too.
Or do we have to continue to do work.
As I stated in my comments.
We continue to talk to customers, who believe that a digital banking platform investment is.
Mandatory innovation for them.
And they continue to understand that this digital channel can become for them not just a service channel which has been primarily.
With the appropriate use of data.
In other capabilities. It can also be a sales channel for them that allows them to grow their top line as well.
And so the confidence side comes from.
Moving from market signals about.
How important this investment is too.
Financial institutions.
<unk>.
Brian kind of mentioned the thing for us to manage which.
The best product wins in this space.
Yeah.
There is no real victory and cutting cost too to your future.
And so we need to be.
Hmm.
We need to be wise about how we balance the investment in the product.
Along with the investments to continue.
Continue to tick.
To get to gross margin gross margin targets that we'd want to get too. So in short confidence comes from the market signals.
The hard work that we have to do is continue to build a great product.
And invest in the platform as I talked about to be able to scale out that platform for the future growth.
Any comments a couple of things Bob.
And look we felt it was important to provide more constructive comments in this area given the economic environment that we're in and given some of the investor conversations that we're having.
And Alex now we have a lot of confidence in where we're headed over the next three years.
To give you a couple.
First off.
We still have healthy demand, we feel that we can continue to compound the business each year at 25% minimum.
The guidance speaks to that for 2023, and the lab that I had coming into the year as well as the implementation backlog.
Tremendous amount of visibility of that.
Second we're starting to see momentum among bank wins, we're seeing momentum among the number of bank deals that were participating in and we're seeing a rising win rate as it relates to bags. So that provides us some confidence and second on the revenue front.
It is also our add on sales momentum.
Now add on sales contributes 37% of our total <unk> sales in 2022, and we expect that to continue.
Covid, even out to potentially a 50% level in future years, So that provides us even further confidence in achieving the 25% revenue growth.
As it relates to achieving a 20% adjusted EBITDA margin it starts with hitting a 65% gross margin.
We did have a slowdown in our gross margin expansion in 2022 of the reasons that I've described in this call.
Previous calls as it relates to implementation project concurrency.
Through that now.
More evenly distributed new sales year 2022 has resulted in the ability for us to better manage those investments as it relates to implementation.
And then really exit 2023 with the gross margin.
And 60% maybe slightly ahead of 60% so that gives us great visibility and the and achieving a 65% gross margin by 2026, and then as you work your way down through operating expenses, we are already in sales and marketing have a very efficient go to market.
Efficiency as it relates to sales and marketing as a percent of revenue.
G&A, we've already made our public company investments and revenue scale well continue to provide operating leverage in that line item of Opex. We saw a 500 basis points for the full year of 2022, and just over 600 basis points in Q4 year over year, so lots of momentum there.
And then it really comes down to what I view as controllable investment in R&D, but still investing in the platform or efficiency gains and investing in the platform, we're bringing more product to market, we expect to bring somewhere between three to four new products to market in 2023. So.
All of these items come together for Alex and I to have a tremendous amount of confidence in providing more of a multiyear guide on when we will reach.
A more acceptable level of profitability.
Great. Thank you that's Super helpful. And then just a follow up on that.
The cross sales.
What is working in particular on cross sales how is management segment.
How is that working it seems like a big opportunity. So just some color on cross sells and as it relates to the revenue per user or do you expect to see a steady what kind of growth in revenue per user with cross sells.
Hey, Bob This is Alex in for the first thing I would tell you is.
I'm really proud and encouraged about.
The sales team that's in place that covers our existing customers.
So highly professional sales team they understand the industry to understand their customers. They do the right thing by their customers.
And that is obviously a key contributor to the success.
Segment was really exciting for us we had.
13, what I would call synergy deals that would be either add on deals or deals that were.
New customers.
And then we had 40 new deals besides that.
And I think that we're just I think we're just barely scratching the surface with with segment. If you think about what segment is it really is a.
Self contained.
Marketing.
The marketing Tech stack, if you will for a bank that comes alongside existing investments and allows that bank too.
<unk> had a a walled garden, where they have the best data possible the data that comes out of.
Their core system their digital banking system.
And then use that data to understand amongst tens of thousands of key lifestyle indicators, what micro segments they have within their customer base.
And then be able to target offers to those micro segments and deliver that content in channel I mean, all of this is the Holy Grail of marketing and the financial institutions are just beginning to understand that this is what they need in their digital channel.
So I'm really excited about what's happening with segment. So far I'm excited about the synergy and I think that as the market continues to understand what they need to be able to interact with their customers in the digital channel. This is going to create a pretty big uplift for us.
And Bob just in terms of the product categories that contributed to the majority of our add on sales effort. The theme in Q4 did not really change from the themes for the first three quarters of the year the money movement product family category that was a significant contributor.
Client services account category, which includes chat and chat bot in conversational AI products.
Fraud, and security, which includes <unk> <unk>, which was an acquisition from 2020 that was a pretty significant contributor and then finally, the marketing and analytics product family category, which includes segment. So those four product family categories really are the I would call 75%.
<unk> of our add on sales success came through those areas and if you step back and give some consideration to those products. Those are really some of the newer products in the market. So our installed base, which averaged nine to 10 products from several years ago. When we were bringing in new logos. These products really.
Either we're not available or certainly not available through alchemy and now they are which is what presents that back cross sell opportunity.
Great. Thank you. Thank you very much I appreciate it I appreciate it.
And now we will proceed with a question from Andrew Schmidt from Citi. Andrew. Please go ahead.
Yes.
Andrew.
I'm sorry.
Andrew.
Yeah. There we go. Thank you go ahead Andrew.
Great. Thank you so much hey, Alex Hey, Brian Good results here. Thanks.
Thanks for taking my question.
I wanted to dig into the just the demand environment, a little bit it's good day here.
The resilience in obviously, great step up in terms of.
The wins in the fourth quarter, maybe talk a little bit about based on top of funnel pipeline, how youre thinking about just the environment for net wins, our logo wins and.
Like issues should I use your backlog for 2023, because clearly we're back at an elevated rate and it's great to see but I'm curious, how you're thinking about the setup for the coming year. Thanks a lot.
Yes, Andrew this is Alex as I mentioned in my comments, we we can we continue to see a strong pipeline that pipeline is.
Evenly balanced between banks and credit unions.
And as I've said on other calls.
We can't predict the future so.
Maybe sometime in the future that demand drops off but but over the last couple of quarters. We just have not seen that drop off we've seen consistent.
Growth in the pipeline consistent movement in the pipeline and consistent balance between credit unions and banks.
And Andrew.
The way that the pipeline works through the year, because even though sales were more evenly distributed in 2022 Theres still has an overweight to Q4. It just wasn't as pronounced in 2022. So when you go into the year.
Your sales pipeline is.
Most likely at one of the lowest levels and then you're building it up as you continue through the year.
But our Q4 exit sales pipeline.
2022 was larger than Q4 from 2021 from 2000 22019 as far back as you want to go so we feel very confident.
And our souls numbers that we need to put up this year in order to continue to achieve our revenue aspirations now Alex did make a comment.
That our pipeline is evenly distributed between credit unions and banks that is a change from where we have been I would say from the previous quarters. When banks contributed about a third so we're seeing more activity from banks, we're seeing that we're participating in more deals as it relates to banks and.
We're winning our win rate is increasing among banks and our win rate among credit unions are staying very constant as it has in previous years. So.
I think all of this speaks to the resilience the need for innovation in this space, particularly through the digital banking channel.
Got it makes a lot of sense and then the comment in terms of just.
Banks being a larger part of the.
The mix does that suggest it when we think about the growth outgrowth for 2023 and beyond that we'll see more of a lean towards <unk> as you may be on boarding.
Thanks <expletive>.
Perhaps consume more products and perhaps the lower U users relative to credit you just curious about how to build that might change as we think about the model going forward. Thanks.
I mean, our thoughts on the mix as we will remain in.
The market, leading position and adding credit unions.
And our focus on credit unions has not changed what has changed is we understand the importance of.
Our addressable market, consisting about 50% of bank financial institutions.
Now as when we look out several years. Our view is we will sell into an originate an equal number of banks as credit unions.
That's our longer term objective and we think we can achieve that over the next three to four years how.
How that will change the characteristics of our client base is exactly what you were suggesting generally for the same a or our opportunity between our bank and our credit Union. The bank will have fewer users, but will also have more products as a result of the business banking platform.
Resulting in a higher revenue per user.
And then the one thing I would I wouldn't add to that.
Interesting is.
The.
There is an increasing understanding amongst banks that they have to provide a great modern digital experience.
I just got off a video call with the President of our bank right before we had this earnings call.
And he told me.
Alex the first time, we looked at alchemy.
Unfortunately, the second time, we looked at alchemy, we couldnt afford you.
This time, we've decided that we can't afford not to afford you because we need to be able to give our customers a modern user experience. So I think the other thing that we're seeing in banks is a realization that it is really really important to have a great user experience for.
For a bank and I think that will provide us.
Tailwind because that's been our DNA, our DNA has been to build a great user experience.
Yes that makes a lot of sense.
Since you said data I just wanted to tab on your one question obviously.
Big opportunity, yes, potentially win so much inertia breaks down you have more kind of rfps up for grabs each year are you starting to see that at all it sounds like based on your commentary, we're maybe at the beginning innings of seeing banks B a little bit more.
Focused on having best in breed versus versus more cost into full platform solutions, such but just curious.
Seeing any indications that way.
I'll leave it there guys.
Yes, the only thing I would just point you back to is the comment that Brian made which was through most of last year.
Pipeline was.
Third banks, two thirds credit unions and right now, it's probably closer to half and half. So I think that that's it that's the the objective evidence that we have right now right and we competed in roughly two times the number of bank opportunities in 2022 that we competed in 2021.
So we're seeing rising pipeline.
Rising actual real opportunities that we're competing in it's not just for business banking. These are full platform deals retail and business banking and we suspect that that will continue now that our pipeline continues to.
Pivot more towards the banks.
We will now have a question from Miami Camden from Needham.
Ma'am. Please go ahead.
Hey, guys. This is Sam on for Mike today, Thanks for taking the questions and nice results here.
Wanted to ask a question on the growth algorithm for 'twenty three.
How should we think about revenue growth in the year.
And the balance between RPI gains and end user growth.
Decelerate and dipped a touch sequentially. So just trying to get some color on how we should think about that for this year. Thanks.
Yes, the way that we think about the growth algorithm.
Is 7%, 5% to 7% revenue per user growth. This quarter was 14% half was really from having this segment acquisitions, so that would be an inorganic component.
But the other 7% came through just cross sell activity as well as onboarding clients with a much higher ARPA. You then the the average of the company for existing clients. So we don't suspect that that will change, which means 18% to 20%.
User growth and that will roughly come half from.
Our backlog of new logos that we will be implementing this year and the other half will come from.
Just our clients growing we generally think about our clients growing at a clip of 100000 users a month.
Got it okay. That's helpful.
And then just one quick housekeeping item last quarter, you guys gave the segment contribution for the <unk>.
The quarter did you guys give that for one Q.
This year that I might have missed because I think you acquired them in March of last year.
We acquired segment in April .
And we adjusted our guidance $9 million at the point in which we added them so $9 million for the remainder of 2022 and segment came in right at that $9 million of revenue contribution.
Got it alright, thanks, guys.
Yeah.
Okay.
Our next question comes from Charles Nabhan.
From Stephens Charles Please go ahead.
Good afternoon, and thank you for taking my question just a couple of quick ones from me.
First does the deceleration in the M&A environment have any impact on.
On user growth.
Are your expectations for the next year for revenue.
So the user growth for us.
Generally is coming from our clients growing organically, we have benefited from some consolidation and in fact, we had a renewal in January .
February two.
<unk> 2023, which was a result of the merger and it is going to bring in a significant number of users at a high level in 2024.
So we do benefit from that but generally it's more from organic growth within the financial institution.
Got it.
So it's good to see you're winning in the market and some very constructive positive commentary, but just curious in terms of the feedback you hear from your.
From your new banks and credit Union clients, where are you I'm, just curious where you're specifically differentiating.
On these rfps as the technology as a service is that all of the above.
What I'm getting at here I was just curious where you are where you're winning specifically.
Yes.
<unk>.
The reasons why a customer chooses alchemy.
Our number one.
They have a commitment to provide a great user experience for their consumer.
We continue to right at the very top of the App scores.
The App store scores on user experience, that's known in the market that's understood by buyers.
And so it starts with.
Are you a available performance secure system that I can count on.
Do you provide my consumers.
Great user experience.
Are you on.
Judah.
Are you on a modern technology platform that allows you to innovate and allows me. The other thing that our customers have come to understand is $200 billion spent on.
Fintech by venture capitalists.
The last 18 months or so has created products that their consumers want and soon they want to understand can I take a product that my consumer wants to use and integrated into my digital banking.
I would I'll begin to call not just an application, but our digital banking platform.
And then there's one that's kind of an intangible that.
<unk> is really really important to customers which is.
Or are you are down to Earth approachable company. That's humble that's customer focus that we're going to be able to work with because they understand that they are getting into a 789 year relationship.
A lot of the.
Customers that are looking to.
Make a decision actually will spend multiple days.
At our headquarters visiting with 40 50 different ALCHEMIST across the organization.
Because like I said, they understand they're not just buying a product for one year's worth of use there.
Getting into a long term relationship with the.
With the company. So those are the things when people make a decision to buy alchemy, they make a decision to buy.
Alchemy for those reasons.
Got it I appreciate that color and if I could sneak in one last quick one and apologize in advance if you touched on this but how should we think about the growth rate for segments.
Segment component of the revenue base over the next year.
So we haven't provided specific.
Outlook as it relates to segment, but we do have a lot of excitement and confidence on where it is in the market.
Segment since we acquired segment in April segment created 50, new client relationships 37, or so of those 40 of those came from their standard go to market motion that they had prior to us acquiring them.
Over the last couple of quarters of 2022, we started gaining quite a bit of momentum and including segment and new logo opportunities as well as cross selling back into our base. So we're in the very very early innings of gaining traction there and we expect segment to continue to be a fairly significant contributor to our <unk> expansion.
Got it I appreciate the color guys. Thank you.
Our next question comes from Josh back from KBC am.
Josh. Please go ahead.
Hey, guys you have matti on for Josh I, just wanted to say thank you for all the granularity you're giving on guidance and then the quarter it's been super helpful.
Just in terms of a healthy backlog and implementation timeline you guys mentioned how are you thinking about the penetration that you are at for the total market opportunity is my first question.
And my second question is.
How should we be thinking about margin expansion going forward, obviously, you mentioned the 200 basis points.
Expansion should that all just naturally come from the scaling of revenue are there any additional cost cutting initiatives that you guys need to take.
Yes, I'll take the first one Bryan.
Turning to segment, but I would say, we don't have cost cutting initiatives, so I'll start with that.
We.
I'll, let you I'll, let bryan kind of <unk>.
To the gross margin.
On a pretty large market I think we said that we're at $14 5 million live registered users.
The overall market.
Is.
$280 million.
Plus users of which a third of those might be owned by a small number of mega banks and Mega credit unions.
And so if you just kind of think of two thirds of that.
Being a market.
Everybody already has a digital banking platform.
And that market is very fragmented with a significant number of those digital banking users being on.
Legacy platforms that are not a great experience, we feel like we're in pretty early days.
<unk>.
I have a pretty large tam that we can go after and all that.
Brian talked about gross margin expansion, yes, yes, and just before I move on to gross margin expansion back to the market penetration.
So today, we're less than 8%, 7% penetrated in the overall market as Alex mentioned.
At the most penetrated level of the market.
It's it's.
Certainly higher than were alchemy.
Of the alchemy is adding more digital users than any other provider in the space to the digital banking.
Two our digital banking platform.
We see a market opportunity where over the next three to four years. There's no reason why we would not have doubled our users based on the pace at which we're adding users today. So we don't feel there is a market saturation issue and we think the market is hungry.
For innovation and innovation that can be added quickly and provides flexibility through an extensible platform, which is where alchemy sits today from.
From a gross margin perspective provided quite a bit of.
<unk> narrative in my prepared comments today on gross margin.
But to Alex's point, we're not going to achieve our margins through cutting costs, we're going to continue to invest in our platform. We're investing in our platform to provide more products to our clients.
As well as to have the ability to scale, our platform more efficiently, which will add to our gross margin profile.
All the while we will also leverage our R&D spend while we're doing this in other words will gain operating leverage through that.
I also mentioned how renewals can impact our gross margin so had a unit economic level when we renew our client, which we have a very high success rate at renewing clients. We achieve a 300 to 500 basis point gross margin expansion at the contract level and then finally.
Our third party IP partners, that's an area, where we had some success in restructuring and arrangement in Q4 of 2022, and we suspect as we continue to add more digital users to our platform, we'll be able to continue to leverage the economies related to those arrangements.
Two two.
Alchemy.
That's kind of near term areas. In addition to revenue scale that will provide us gross margin expansion.
Awesome and I appreciate that additional color if I could sneak one last one and just wondering if you guys are seeing any differences on the willingness of ITT spend between thanks variances may be credit unions kind of looking towards 2023.
In general.
Yes, I mean the car.
Inverse stations that I have with bank presidents and credit Union Ceos.
Is that obviously because of the environment.
They are scrutinizing.
The full stack of their.
Budget in the full stack of their it spend but they prioritize their digital banking channel right and so.
Where you've heard me talk about.
And understanding that this is a mandatory innovation for them. So I don't want to speak for any other industry other than digital banking, but I could imagine that on the fringes of our full stack of the.
Of our banks it budget that there would be things that they would be shaving, but so far we have not seen that on the digital banking investment in the digital banking channel.
Amazing Thanks for taking my questions.
We have a question from Patrick Wall Ravens from J M. P. Patrick Please go ahead.
Hi, This is Owen on for Patrick and Thank you for taking the question for us.
Congrats on the good results this quarter. So I was wondering a little more on a kind of goodbye to the two of the previous questions on the.
The add on versus net new logo.
Additions versus the and its effect on gross margins and kind of philosophically how do you guys.
How do you guys think about going on.
And pursuing those two different lines of business are you considering its effects on the gross margin.
I'll, let you answer the effect.
I would start with saying when Brian talked about look when we think.
Into the future.
We think that a healthy enterprise SaaS software company that Scott.
Product that people like and it's a company that people want to do business with.
Ought to shape their business, where they are getting about half of that.
Their new TCE growth from new logos and about half of their T CV growth from.
From add on sales, but by the time you required a customer and have a good relationship with our customer and you've got a professional account team that is engaged with that customer and understanding their business and really has a front row seat to how they're thinking about their digital banking platform what that gives us is real in.
The site into what their priority areas are where they would invest in so that allows us that is kind of a virtuous cycle that then feeds back into our product management organization and gives us viewers the products that we should build or the partnerships that we should have or the acquisitions that we should make.
Should we think of <unk>.
First of all.
To begin with the end in mind, a really healthy enterprise SaaS software company, it's got about half of their new.
<unk> is coming from add on sales and then if you've got a really good account team.
Between your sales team and your customer success team.
You get really good insight with these customers about where their investment priorities are and that gives you a great feedback into the product management organization. How do we think about the business in general let Bryan talk about how we think about it impacting the gross margin.
Couple of benefits from add ons, so the person.
And maybe even the most important as an add on sale is significantly.
Wes effort in the implementation.
Process and what I mean by that is a new logo today for alchemy.
As you know on average 20 system integrations that occur in order to launch the platform and the new logo.
Add on sell effort from an implementation perspective.
There is still some complication there however.
It's able to leverage those integrations that occur once the platform has been integrated that results in a lower implementation effort in terms of cost which helps the gross margin profile.
Currently an add on cell the speed of revenues going from order to revenue is much quicker.
To the extent that we're having success in add on sales it can be an acceleration to our organic growth profile.
Great. Thanks, so much for that and then that's it for me.
Thank you and this concludes our question and answer session.
And it also concludes the conference. Thank you for attending today's presentation you may now disconnect.