Q3 2023 Alkami Technology Inc Earnings Call
Hello, and welcome to the Alchemy third quarter 20, twenty-three financial results conference call.
My name is Betsy and I will be your upgrade or for today's call.
All participants will be in a listen only mode.
Should you need assistance. Please signal conference specialist by pressing the stocky followed by zero.
After today's presentation, there will be an opportunity to ask questions.
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Withdraw your question. Please press Star then too.
Please note this is being recorded.
I would now like to turn the conference over to Steve Clark C. If you may begin.
Thank you Betsy with me got today's color, Alex shoot Man, Chief Executive Officer, and Bryan Hill, Chief Financial Officer.
Today's call we may make forward looking statements about guidance and other matters regarding your future performance. These statements are based on management current views and expectations that are subject to various risks and uncertainties are actual results may be material.
Different for summary of risk factors associated with her forward looking statements. Please refer to today's press release and the section center at least 10-K entitled risk factors.
Eight minutes.
The statements made during the call today are being made as of today.
Take no obligation to update or advise any forward looking statements also unless otherwise stated financial measures discussion on this call will be on a non-GAAP basis. We believe these measures are useful to investors and the understanding of your financial results of reconciliation is comparable GAAP financial measures can be found in earnings press release and in our filings with the S. C.
C like.
Like to now turn the call over to Alice.
Peace and good at.
Afternoon, everyone.
The third quarter was another good quarter for alchemy as we grew revenue twenty-seven percent once again ahead of her.
Rotations.
In addition, we achieved positive adjusted EBITDA, one quarter sooner than we committed and we are adding and keeping use yours at a better pace than any other digital banking provider.
Over the last 12 months, we added 3.2 million digital users to our platform and as we approach. The end of 2020 tree, we do not expect to lose a single client off of our digital banking platform. This year.
Two three marks another quarter of progress in our plan to build alchemy into a primary provider of digital technology to banks and credit unions with healthy growth solid profitability.
Strong culture and satisfied clients.
One of the questions. Many of you asked me is how our clients are navigating a very dynamic macro environment.
During September and the first week of October.
I slept in 18 different beds as I traveled the country meeting with clients and prospects and gained a perspective on how regional banks and credit unions are thriving in today's environment.
In addition last week, we hosted a dozen prospects at our headquarters for.
Change with members of our client Advisory Board and got to listen to those executives discuss their current strategies and tactics.
Every conversation on the road and in our headquarters started with some variation of the following narratives.
Alex in all my years of this business I have never seen such a rapid change in monetary and fiscal policy.
The meetings evolved into discussions on the volatility in interest rates, the rising cost of deposits the speed at which their rebalancing deposits and loans and most interestingly the need to desktop playbooks they've not used since the mid 2000.
I had one CEO chummy, Alex we have always talked about driving card usage and attracting direct deposit but.
He really didn't focus too much on it.
She went on to say none of my staff were here. The last time, we had to drive deposits and we were having to teach strategies and tactics, we have not used in years.
I almost each C E O of this change the way they thought about digital banking.
And to a person they told me that digital banking is a mandatory innovation in this environment.
From digital Onboarding.
Analytics to drive card usage.
Tactics to encourage direct deposit and technology to fight fraud.
We're continuing to invest in digital banking and even something as routine as C. D. Rollovers is on their mind. Once you told me Alex We all offered short term C. DS in these products will roll over in 2024, we don't have enough people to handle their manually we have to use digital capabilities to meet the demand.
In addition to the personal meetings are conducted we serve a 215 F I as in September to assess their overall digital maturity by asking a series of questions related to digital adoption invested in investment priorities.
We found the most digitally mature organizations, which ultra reporting the height reported higher revenue growth and there appears.
Much more likely to say the digital banking is more important than branches or call centers.
In addition, there are also much more likely to say that their top investment priority is improving customer experience technology.
As one bank responded put it.
From the top of the organization all the answer the lowest levels. There's a constant reminder, if there's an opportunity.
Digitize it.
Amidst all this change our clients are proving to be resilient.
Well the U S banking industry deposits contract at 4.8% year over here is the F. D. I C reported in June when we evaluate our clients data they've seen almost a 1% increase in deposits since early July.
Also since July their user accounts of increased and the percentage of users with uninsured deposits remains virtually unchanged.
Our client strategic use of digital banking and their ability to compete in this environment mirrored the demand we're seeing in our new client wins and additional products being purchased by our current clients.
For example.
As part of one Oh, no like Q3, Ah client added 12, new products, including data and analytics advanced business capabilities biometric security.
Capabilities that allow them to provision digital cards they're.
They're not alone.
We continue to see earlier client cohorts add functionality.
2018, or 2019 cohorts are now at two times. Their initial are are that are 2020 cohort is already at 1.8 times initial error.
In addition to adding products our clients continue to grow digital users faster than the overall market.
And 20 twenty-three will add more new clients and did you use your digital users tour platform than any ear in our history.
Pipeline going into 2024 is the strongest ever and.
And we continue to deliver on the commitments, we made to our clients and our investors.
To our clients, we committed to invest in expanding our product portfolio. So they can compete with the digital capabilities of Mega banks.
Over the last six years, we've invested over a quarter billion dollars in R&D.
And how come he has consistently spent the most on R&D as a percent of revenue compared to other large companies in our market.
Well this percentage will moderators revenue grows we will continue to grow R&D to keep our platform modern and competitive.
The technology, we delivered today includes fraud protection digital account opening advanced card services commercial business banking capabilities in payment solutions.
At the time of our I P O in 2021 or new clients on average use 34% of our product portfolio and today new clients on board with over 50 per cent of our product portfolio.
This demonstrates where you're not just delivering new products, but also developing the right new products.
We committed to our clients that we would continuously deliver a world class user experience for their end users today, we consistently hold one of the highest ratings in the App store, but maybe more importantly.
Or the App that is most rated and our space.
One of the biggest commitments we make to apply is when we convert them from their legacy system to alchemy.
This is non trivial as their integrations to their back office course systems.
Dozens of connections to third parties and thousands of customer accounts to convert.
And usually the entire user base moves to the alchemy platform on launch day.
Our experienced and Laci, new clients is a significant and sustainable competitive advantage.
Hung the many clients we launched in Q3, we accomplished a first for alchemy.
He launched three clients in a single day.
So it's not just about launching the client. It also has to be a great experience for a client and their end users.
Jerry Agnes was the President and C E O of elevations credit Union told me.
Alex implementing alchemy for a new digital banking platform has been better than any other conversion I've experienced over 88% of our members converted the alchemy with no systems or intervention from our staff and our members are thrilled with the new platform.
Ah digital banking platform must have trusted availability and performance because our clients and users rely on it for during critical life moments.
We committed to continuously evolving our digital platform and over the last six months have made great progress in transitioning to an event driven architecture with advanced tools for Observability and automation.
We are now using auto scaling and we support zero downtime upgrades all of this while driving efficiency through transitioning to technology, such as Postgresql and the next.
Keeping our commitments to our clients is allowed us to keep our commitments to shareholders. We have consistently delivered on gross on our growth targets, we're being prudent with our investments and expenses.
We have delivered on a commitment to be adjusted EBITDA positive and we have confidence in the longer term revenue gross margin and adjusted EBITDA guidance, we have provided.
In closing.
We are proud of the results were delivered in the quarter and pleased with the progress we've made in 2023.
I am confident in the long term prospects for alchemy to be an indispensable technology platform for the financial services industry are.
Great place to work and.
In a reliable partner for the investment community.
And now I'll handle the call to Brian to take us through the numbers.
Alex and good afternoon, everyone during.
During the third quarter of 2023 alchemy crossed several major milestones.
First we achieved our first quarter positive adjusted EBITDA. This occurred one quarter earlier than originally expected at the beginning of 2023.
Second we increase the digital users on our digital Becky platform by 1 million during the quarter. This represents the largest quarterly increase in company history bring you to just under 17 million digital users.
Third alchemy remaining purchase obligation or contract backlog reached $987 million, representing 3.6 times, our laws are or 31% higher than a year ago. He.
You said achievements combined with our 20 twenty-three financial performance evidence alchemy success, a unique position to capitalize upon the strong secular trend digitization in the banking industry, Let me unpack and impressive quarter for you for the third quarter of 2023, we achieved revenue of 67.7 million.
Representing grow to 27%, which is slightly above the high end of our financial guidance. This was driven by balance performance across our primary revenue drivers.
We implemented a leather new clients in the quarter, bringing our digital platform client counter 229.
So far in 2023, we have implemented 1.3 million users and just under $23 billion of air or both which exceed the full year 2022.
Space.
Based on our near term visibility, we expect to exceed last year's implementation production by 35% and 30% or digital users and a or are we now have 35, new clients aren't implementation backlog, representing 1.1 million digital users with extra the quarter was 16.9.
Registered users live on our digital banking platform 3.2 million or 23% compared to last year.
Over the last 12 months digital user growth continues to be driven by two areas first we implemented 39 financial institution supporting 1.7 million digital users second our existing clients increase their digital user accounts by 1.4 million users demonstrating an ability to drive client.
Growth in digital adoption during a more challenging economic environment. This underscores the importance of the digital channel.
Over the last 12 months, we have not experienced any client churn from our digital banking platform and we expect the same for the full year 2023.
We ended the quarter with an R. P U of $16.28, which is five per cent higher than last year.
By Air on sale success. In addition to new clients, who tend onboard with a higher average R. P U.
Subscription revenue grew 28% compared to the prior year quarter and represents approximately 96% of total revenue we.
We increased air or by 29% and exited the third quarter of $275 million. In addition, we currently have approximately $42 million is a R. R. A backlog for implementation most likely to occur over the next 12 months.
We continue to see healthy demand across our product portfolio. So far in 2023, we assigned twenty-three new digital breaking platform clients of which seven or sign during the third quarter.
Our new client, whereas reflect solid representation from banks was seven signs so far in 2023.
Presently based on the strength of ourselves pipeline and visibility in the queue for digital banking platform decisions, we expect the fourth quarter to be a strong quarter for new client Williams.
Or add on sales success continues to yield results, representing 33 per cent of total new sales for the first three quarters of 2023.
In addition to add on sales are client sells team is responsible for a client contract renewals. During the first three quarters of 2023, we renewed 11 client relationships, where we raise the E R or run rate, 9% through a combination of new product cells and committed client growth in total we expect to renew over to.
20 clients during 2023.
Now turning to gross margin of profitability.
For the third quarter of 2023, non-GAAP gross margin was 59% representing 190 basis points of expansion when compared to the prior year quarter.
<unk> and our gross margin results from operating leverage across our post cell operations, such as our implementation client success and sign up for a lot site reliability engineering teams offset by a higher mix of revenue from our third party I P partners, we're scaling post cell operations, while delivering the previously mentioned.
Fear level of output.
As a reminder, 2026th target operating model is a non-GAAP gross margin of 65% as we continue to scale a revenue.
Moving to operating expenses.
For the third quarter of 2023, non-GAAP Orange do you experience was 17.6 million or 26% of revenue 240 basis points lower than the year ago quarter.
Margin expansion was primarily driven by revenue scale as we've increased R&D expenses at a slower pace than our revenue growth.
However, we are achieving operational scale or investing in our platform to drug future efficiency best in class reliability, and innovate new products and functionality.
Target operating model is to leverage R&D to 20% of revenue, while we continue to invest and expand our platform.
non-GAAP sells a marketing expenses were $10 million or 15% of revenue approximately 130 basis points lower than the prior year. We continue to achieve a high level of sales team productivity and go to market efficiency unmatched by many high gross ask companies, we expect to maintain or slightly improve our go to market <unk>.
<unk> C as we scale the business in gain market share.
Non get general and administrative expense was $11.9 million or 18% of revenue in the prior year quarter G&A. It was approximately 22% of revenue the margin expansion primarily attributable to revenue school as we closely manage G&A expenses, we expect to achieve further leverage as a percentage of revenue as we move towards our profitability.
All of the objectives are.
Justin EBITDA for the third quarter was $826000, which is over a million dollars better than the high end of our expectations and over $5 million improvement when compared to the prior year quarter. We are very pleased to have crossed adjusted EBITDA positive a quarter earlier than originally expected at the beginning of the year we.
We believe this demonstrates the leverage afforded by our financial model as well as the trajectory of our business.
It is a reminder, we have established a 2026 adjusted EBITDA margin objective of 20% we.
We expect our past 20 per cent walk her to pace of roughly 700 basis points of adjusted EBITDA margin expansion each year.
Now moving on to the balance sheet, we ended the quarter with just over $178 million of cash and marketable securities and just under $83 million of that one.
One final item on our third quarter results. In addition to crossing into positive adjusted EBITDA, We're reporting positive operating cash flow of approximately $3 million in free cash flow.
$1.5 million.
Now turning the guidance for the fourth quarter of 2023, we are providing guidance for revenue in the range of $70.5 million to $71.5 million representing growth of 27% to 29% and adjusted EBITDA at 2.5 to 3.0 a million dollars.
For full year 2000, twenty-three, we're raising our revenue guidance to a range of $264 million to $265 million, representing growth, 29% to 30% and an adjusted EBITDA loss of $2.1 million to $1.6 million. This compares to an adjusted EBITDA law.
<unk> $17.6 million for the full year 2022.
In closing we remain confident that we are well positioned to continue on the growth path, we laid out over two years ago.
And the last year, the resiliency of our model has been tested by industry and macro economic factors and we have continued to deliver food for our clients and our shareholders were carrying strong momentum into the fourth quarter and we look forward to delivering another great year in 2024.
With that I'll hand, the call to the operator for questions.
We will now begin the question and answer session.
To ask the questions you may 1st start then one on your Touchtone phone.
If you're using a speaker phone please pick up your handset before pressing the keys.
Is it any time your question has been addressed and you would like to withdraw your question. Please press Star then too.
At this time, we will paused momentarily to assemble our roster.
Unknown Executive: Hello, and welcome to the Alkami's third quarter, 2023 Financial Results Conference call. My name is Betsy, and I will be your operator for today's call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Yeah.
The first question today comes from Bob Nepali with William Plan. Please go ahead.
Oh, Thank you good afternoon oppressive momentum.
I appreciate the guidance and the the trends in Ah EBITDA margin expansion.
Unknown Executive: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star star than one on your touch phone. To withdraw your question, please press star than two. Please note this event is being recorded.
Which obviously begs the question to get the kind of growth that you happen to know that can you have while driving that operating leverage what are you, giving up on the growth side or on the technology development side, expanding 700 basis points, a year, it's pretty pretty dramatic.
Steve Calk: I would now like to turn the conference over to Steve Calk. See if you may begin. Thank you, Betsy.
Steve Calk: With me on today's call, our Alex Shootman Chief Executive Officer in Brian Hilftief Financial Officer. During today's call, we may make forward-looking statements about guidance and other matters regarding our future performance. These statements are based on management's current views and expectations and are subject to various risks and uncertainties. Our actual results may be truly different. For summary of risk factors associated with our forward-looking statements, please refer to today's press release. And the sections that are released form 10K entitled risk factors and forward-looking statements.
I appreciate any color around that.
Hey, Bob This is Alex I don't feel like we're giving anything up in terms of our ability to grow the business in the future we are.
We're pleased with a lot of the investments that we're making in the platform and we've got.
A lot of visibility on how those investments.
Turn into leverage as the company grows.
Steve Calk: The statements made during the call today are being made as of today and we undertake new obligations to update or revise any forward-looking statements. Also, unless otherwise stated, financial measures discussed on this call will be on a non-gap basis. We believe these measures are useful to investors in the understanding their financial results. A reconciliation of comparable gap financial measures can be found in earnings, press release, and in our filings with the SEC.
And we're also pleased with.
Uhm.
Leverage that we're beginning to get out of the implementation teams.
And the productivity that we're getting out of the implementation team. So.
We don't feel like we're giving anything up in terms of our ability to serve our customers and grow.
With the with the guidance that we've provided with <unk>.
Bob I'll, just add a couple more comments to Alex a statement I mean, the beauty of our financial model is it provides visibility that allows us to invest in and know when to invest in and where to invest so what I mean by that is we can grow our research and development, So our engineering team or product.
Alex Shootman: I'd like to now turn the call over to Alice. Thank you, Steve, and good afternoon, everyone. The third quarter was another good quarter for Alchemy, as we grew revenue 27%. Once again, on the head of our expectations. In addition, we achieved positive adjusted EBITDA one quarter sooner than we committed, and we are adding and keeping users at a better pace than any other digital banking provider. Over the last 12 months, we added 3.2 million digital users to our platform. And as we approach the end of 2023, we do not expect to lose a single client off of our digital banking platform this year.
Management teams just at the same pace as revenue and will scale that organization sales and marketing again, we really have a best in class sales efficiency, we we deliver about $1.60 an a R. R. For every dollar of sales and marketing spoon.
There are very few SAS companies that you'll find that are delivering a cell's efficiency at that level and then when you look at G. N a I'm coming out of our IPO now it's been a couple of years, we've really made the necessary investments within G&A. So now you'll see some reasonable growth with the <unk>.
Alex Shootman: Two, three marks another quarter of progress in our plan to build Alchemy into a primary provider of digital technology to banks and credit ins with healthy growth, solid profitability, a strong culture, and satisfied clients. One of the questions many of you asked me is how our clients are navigating a very dynamic macro environment. During September and the first week of October, I slept in 18 different beds as I traveled the country meeting with clients and prospects and gained a perspective on how regional banks and credit unions are thriving in today's environment.
<unk> between 7% to 9% a year over the next three to four years and so we'll continue to scale G&A at the level that we've been scaling it during 2023, I mean for the quarter Weird 10 percentage points or a thousand basis points of the just adjusted EBITDA margin expansion.
Which again that just speaks to the leverage in the model the visibility that we have that allows us to invest where necessary.
Alex Shootman: In addition, last week, we hosted a dozen prospects at our headquarters for exchange with members of our client advisory board and got to listen to those executives discuss their current strategies and tactics. Every conversation on the road and in our headquarters started with some variation of the following narrative. Alex, in all my years of this business, I have never seen such a rapid change in monetary and fiscal policy. The meetings evolved into discussions on the volatility in interest rates, the rising cost of deposits, the speed at which they're rebalancing deposits and loans, and most interestingly the need to dust off playbooks they've not used since the mid-2000s.
Thank you I appreciate that and then just follow up on the the number of new customers that you're adding maybe that has the the <unk>.
Alex Shootman: I had one seat you tell me, Alex, we have always talked about driving card usage and attracting direct deposits, but you really didn't focus too much on it. She went on to say, none of my staff were here the last time we had to drive deposits, and we were having to teach strategies and tactics we have not used in years. I asked each CEO if this changed the way they thought about digital banking, and to a person they told me that digital banking is a mandatory innovation in this environment.
<unk> I mean, I see yeah.
Lost any customers so as the <unk>, what's driving the I guess, the acceleration and the customer auditions and what kind of success are you having with good. Thanks.
Yeah, our our win rate remains steady we were we were pleased with the seven new customers that we signed in the quarter.
And then the additional for new customers that we signed in the week or so after the quarter to credit unions and two banks. So we're pleased with the new logo that we're winning in our.
Rates remain high in the in the credit Union space I'll say, we've got a mixed blessing in the bank space we are.
The good news for US is that we are being invited to more opportunities and I think we may have mentioned this in a in a past earnings call, where we had high wind rates in banks, but we weren't being invited to that many opportunities. So we are being invited to more opportunities that results for US right now is our win rate being slightly less in banks.
Alex Shootman: From digital onboarding, to analytics to drive card usage, to tactics to encourage direct deposits, and technology to fight fraud. They were continuing to invest in digital banking, and even something is routine as CD rollovers is on their mind. Once CEO told me, Alex, we all offer short-term CDs, and these products will roll over in 2024. We don't have enough people to handle them manually. We have to use digital capabilities to meet the demand.
And it is in credit unions.
But for US that's really a bit of good news because if we wanted our participation rate and banks to go up.
Thank you appreciate it.
The next question comes from Andrew Schmidt City Global Please go ahead.
Alex Shootman: In addition to the personal meetings I conducted, we surveyed 215 FIs in September to assess their overall digital maturity by asking a series of questions related to digital adoption and investment priorities. We found the most digitally mature organizations, which also reported higher revenue growth than their peers, are much more likely to say that digital banking is more important than branches or call centers. In addition, there are also much more likely to say that their top investment priority is improving customer experience technology.
Good evening this is David <unk> for Andrew Schmidt.
For taking my question.
Can you guys speaking more details regarding the crossover progress what products are seeing the most strength right now.
Yeah. So we we've mentioned this a couple of times, but we created our client sells team and 2019 and once we created the team they're responsible for two two primary functions. One is cross sell into the base and second is to renew.
Alex Shootman: As one bank responded, put it, from the top of the organization, all the amounts of the lowest levels, there's a constant reminder, if there's an opportunity, digitize it. Amid all this change, our clients are proving to be resilient. While the US banking industry deposits contracted 4.8% year over year as the FDIC reported in June, when we evaluate our clients data, they've seen almost a 1% increase in deposits since early July. Also since July, their user accounts have increased, and the percentage of users with uninsured deposits remains virtually unchanged.
New clients when we renew our client at least in 2023, what we're seeing is three to four additional products that are being taken upon renewal Ah. So that is a great opportunity to cross onto the basis when renewal occurs but we're not just dependent upon the renewal cycle and what we're seeing for.
Our client sells team is we're seeing a lot of progress and cross selling our fraud and security products are money movement products and our client service products that that's where we're seeing the most traction from that team in 2023 that team has represented 33 per cent.
34% of total cells last year that was a comparable amount as a percentage of total so two years ago was less than.
Alex Shootman: Our client's strategic use of digital banking and their ability to compete in this environment mirror the demand we are seeing in our new client wins and additional products being purchased by our current clients. For example, as part of one renewal in Q3, the client added 12 new products, including data and analytics, advanced business capabilities, biometric security, and card capabilities that allow them to provision digital cards. They're not alone. We continue to see earlier client cohorts add functionality.
15% of total so so we're seeing a lot of momentum in progress within that function.
I would just add is we've seen some it's nice to have the product portfolio that we have because given the dynamics of the market when you've seen some shift in what the customers are buying based upon their shifting.
Strategies and tactics there is Brian mentioned right now for example.
Alex Shootman: Our 2018 and 2019 cohorts are now at two times their initial ARR, and our 2020 cohort is already at 1.8 times initial ARR. In addition to adding products, our clients continue to grow digital users faster than the overall market. In 2023, we will add more new clients and digital users to our platform than any year in our history. Our pipeline going into 2024 is the strongest ever and we continue to deliver on the commitments we made to our clients and our investors.
Uhm.
Anything around fraud management.
And advanced card capabilities were which gives people the ability to.
Provision in issue digital cards.
That is got a lot of interest, whereas if you think about maybe a coupla years ago, some things around financial wellness might have a strong and interests. So that's the nice thing about our product portfolio is that customers change their strategies and tactics to manage the big shift in it.
<unk> and.
Fiscal policy that's occurred with the federal government.
Alex Shootman: To our clients, we committed to invest in expanding our product portfolio so they can compete with the digital capabilities and mega banks. Over the last six years, we've invested over a quarter billion dollars in R&D and Alkami has consistently spent the most on R&D as a percent of revenue compared to other large companies in our market. While this percentage will moderate as revenue grows, we will continue to grow R&D to keep our platform modern and competitive.
We've got a product portfolio that allows us to shift and sell them what they need.
The next question comes from.
What's needed an account. Please go ahead.
Hey, guys amount of miles today, thanks for taking the questions here and congrats on yesterday.
Yesterday, but the positive this quarter could.
Alex Shootman: The technology we deliver today includes fraud protection, digital account opening, advanced card services, commercial business banking capabilities, and payment solutions. At the time of our IPO in 2021, our new clients on average use 34% of our product portfolio and today, new clients on board with over 50% of our product portfolio. This demonstrates we are not just delivering new products but also developing the right new products. We committed to our clients that we would continuously deliver a world-class user experience for their end users.
Did you guys just talk a little bit about how customer conversations have changed from last quarter.
If they have it all and you know maybe just talk about the broader demand environment, a little bit more and how you guys feel as we you know start heading ended up quite 24 soon.
Yeah. He knows this is Alex as I mentioned my in my prepared remarks.
Personally I spent a lot of time with customers and prospects during Q3, because I wanted to understand the same thing that you're asking and the they're having to change their their business strategies and tactics because of the shift in the interest rate environment and.
Alex Shootman: Today, we consistently hold one of the highest ratings in the App Store that may be more important than the app that is most rated in our space. One of the biggest commitments we make to apply is when we convert them from their legacy system to Alkami. This is non-trivial. There are integrations to their back-off as core systems, dozens of connections to third parties, and thousands of customer accounts to convert. And usually, the entire user-based moves to the Alkami platform on launch day. Our experience in launching new clients is a significant and sustainable competitive advantage. Among the many clients we launched in Q3, we accomplished a first for Alkami. We launched three clients in a single day.
And <unk>.
Really the the need to attract more deposits.
And so the conversation has has moved to.
What can we do digitally to attract deposits what can we do digitally to do things like promote.
Direct deposits what can we do digitally two.
To market.
C DS to market money market.
Money market accounts. So so all of that has shifted.
What really hasn't shifted as the commitment to the digital channel.
In most of our customers. It's the most important channel that they have.
And they are leveraging it.
Alex Shootman: It's not just about launching the client, it also has to be a great experience for our client and their end users.
Uhm.
To try to attack some of the things that I just talked about so there's no.
Alex Shootman: Curie Agnes, who is the president and CEO of Elevation's Credit Union, told me, Alak's implementing Alkami for a new digital banking platform has been better than any other conversion I've experienced. Over 88% of our members converted to Alkami with no assistance or intervention from our staff and our members are thrilled with the new platform. A digital banking platform must have trusted availability and performance because our clients and users rely on it during critical life moments.
There is no discussion where people are saying.
I'm not going to invest in a digital banking channel that would be like.
Airlines, saying I'm, not gonna have pilots or flight attendants or mechanics. It's just it's part of doing business, which changed is how can I use digital too.
Work on the business challenges that I have right now.
Alex Shootman: We committed to continuously evolving our digital platform and over the last six months have made great progress in transitioning to an event-driven architecture with advanced tools for observability and automation. We are now using auto scaling and we support zero downtime upgrades. All of this while driving efficiency through transitioning to technology such as Postgres and Linux. Keeping our commitments to our clients has allowed us to keep our commitments to shareholders. We have consistently delivered on our growth targets while being prudent with our investments and expenses. We have delivered on a commitment to be adjusted a bit of positive, and we have confidence in the longer-term revenue, gross margin, and adjusted EBITDA guidance we have provided.
Got it that's helpful.
And then just a quick follow up good to see the the seven new logo signs in this corner could you guys just talk a little bit more about those those wins you guys had and you know maybe you know any commentary into the size of these companies you know I'm just trying to get a sense for.
You know are are you guys starting to to you know.
Try and go after some some larger F is out there.
Is it more just you know playing in your your sweet spot right now.
Well, we continue to play in our sweet spot that tends to be the the larger F. I's in terms of average user per F. I keep in mind, what feeds our revenue model is the number of digital users and so we we average <unk>.
Alex Shootman: In closing, we are proud of the results we delivered in the quarter, and please, with the progress we've made in 2023. I am confident in the long-term prospects for Alkami to be an indispensable technology platform for the financial services industry, a great place to work, and a reliable partner for the investment community.
72000 digital users per F I for the 229 lives.
Clients that we have in the next closest competitor to US is in you know kind.
The high fifties low sixties.
Thousands in terms of per average so so we're already focused we believe you know on the top 2000 financial institutions ones as to the the larger financial institutions. What we've seen so far this year is very similar sized F is we've had a few over.
Brian Hilftief: And now, I'll hand the call to Brian to take us through the numbers. Thanks, Alex, and good afternoon, everyone.
Brian Hilftief: During the third quarter of 2023, Alkami crossed several major milestones. First, we achieved our first quarter of positive adjusted EBITDA. This occurred one quarter earlier than originally expected at the beginning of 2023. Second, we increased the digital users on our digital banking platform by one million during the quarter. This represents the largest quarterly increase in company history, bringing us to just under 17 million digital users. And third, Alkami's remaining purchase obligation or contract backlog reached $987 million, representing 3.6 times our live ARR and 31% higher than a year ago. These achievements combined with our 20-23 financial performance, evidence Alkami success and unique position to capitalize upon the strong, secular trend, a digitization in the banking industry.
100000 digital users last quarter, we signed our largest bank today.
So we're pleased with the success, we're pleased with the demand.
Pardon me it looks like we've lost connection with our speakers please hold while we reconnect.
[noise].
Brian Hilftief: Let me unpack an impressive quarter for you. For the third quarter of 2023, we achieved revenue of $67.7 million representing growth at 27%, which is slightly above the high end of our financial guiots. This was driven by balanced performance across our primary revenue drivers. We implemented 11 new clients in the quarter, bringing our digital platform client count to 229. So far in 2023, we have implemented 1.3 million users in just under $23 million of ARR, both which exceed the full year of 2022.
Brian Hilftief: Based on our near-term visibility, we expect to exceed last year's implementation production by 35% and 30% for digital users in ARR. We now have 35 new clients in our implementation backlog representing 1.1 million digital users. We exited the quarter with 16.9 million registered users live on our digital banking platform of 3.2 million or 23% compared to last year.
Yeah.
Brian Hilftief: Over the last 12 months, digital user growth continues to be driven by two areas. First, we implemented 39 financial institutions supporting 1.7 million digital users. Second, our existing clients increase their digital user account by 1.4 million users, demonstrating an ability to drive client growth and digital adoption during a more challenging economic environment. This underscores the importance of the digital channel. Over the last 12 months, we have not experienced any client churn from our digital banking platform and we expect the same for the full year of 2020.
Brian Hilftief: We ended the quarter with an RPU of $16.28, which is 5% higher than last year, driven by add-on cell success and the addition of new clients who tend to onboard with a higher average RPU. Subscription revenue grew 28% compared to the prior year quarter, and represents approximately 96% of total revenue. We increased ARR by 29% and extended the third quarter $275 million. In addition, we currently have approximately $42 million as ARR and backlog for implementation most likely to occur over the next 12 months.
[noise].
Brian Hilftief: We continue to see healthy demand across our product portfolio. So far in 2023, we have signed 23 new digital banking platform clients of which seven were signed during the third quarter. Our new client wins reflect solid representation from banks with seven signs so far in 2023. Presently, based on the strength of our sales pipeline and visibility into Q4 digital banking platform decisions, we expect the fourth quarter to be a strong quarter for new client wins.
It is.
Ladies and gentlemen, thank you very much for your patience, we reconnected with I C K.
Operator, we can move to the next question in the queue unless there was a follow up on that yeah.
Oh no my thanks, guys appreciate it.
Alright, thanks for being patient.
Brian Hilftief: Our add-on cell success continues to yield results representing 33% of total new sales for the first three quarters of 2023. In addition to add-on cells, our client sales team is responsible for client contract renewals. During the first three quarters of 2023, we renewed 11 client relationships where we raised the ARR run rate 9% through a combination of new product sales and committed client growth. In total, we expect renew over 20 clients during 2023.
The next question comes from Adam Hopkins with Goldman Sachs. Please go ahead.
Great. Thanks for taking the questions I guess when you think about where you are today versus the beginning of the year, how much that momentum would you say, it's been driven buying and collecting top a funnel versus an improved pipeline conversion rate I think we're just trying to get a sense for whether this is more an influx of interest on the back of the right environment and some of the tech investments you've made.
Versus the historical topic, and it'll just converting at a higher rate than you've seen historically any color on that would be helpful.
Brian Hilftief: Now turning to gross margin and profitability. For the third quarter of 2023, non-gap gross margin was 59% representing 190 basis points of expansion when compared to the prior year quarter. Improvement in our gross margin results from operating leverage across our post-sale operations such as our implementation, client success, and site reliability engineering teams offset by a higher mix of revenue from our third party IP partners. We are scaling post-sale operations while delivering the previously mentioned higher level of output. As a reminder, our 2026 target operating model is a non-gap gross margin of 65% as we continue to scale our revenue.
Yeah. This is Alex what I would say is we the demand from the credit Union side of the market.
Is in line with what we consistently experience.
And then if we think about.
Laying on top of that the demand from the bank side of the market.
Has picked up compared to.
This same time last year. So so if I just drew a graph of pipeline interest if I just used something like that pretty consistent on the credit Union market.
And then add to that.
Higher demand from the bank market and this time last year.
Brian Hilftief: Moving to operating expenses. For the third quarter of 2023, non-gap R&D expense was 17.6 million or 26% of revenue, 240 basis points lower than the year ago quarter. Margin expansion was primarily driven by revenue scale as we've increased R&D expenses at a slower pace than our revenue growth. However, we are achieving operational scale on investing in our platform to draw future efficiency, best in class reliability, and innovate new products and functionality.
And Adam the demand on the banks started the demand on the banks out of the market is really from us being more active and the bank market beam.
Our product being more prepared a roadmap around the core integrations that are necessary for us to be competitive in the bank market and then a deliberate strategy around creating more market awareness and that has resulted in a sales pipeline now that's 40% of our total sir.
Brian Hilftief: Our target operating model is to leverage R&D to 20% of revenue while we continue to invest and expand our platform. Non-gap sales and marketing expenses were $10 million or 15% of revenue, approximately 130 basis points lower than the prior year. We continue to achieve a high level of sales team productivity and go to market efficiency and match by many high gross sales cups. We expect to maintain or slightly improve our go-to-market efficiency as we scale the business and gain market share.
LS pipeline related to banks.
Got it that's really helpful and I guess just to follow up on that plane.
When you think about being invited more than a bank Rfps point would you say that you know.
A function of just relative awareness is that you know folks from reference ability you getting a sense of your capabilities versus some of your competitors I know some of them call out having done many conversions off of some of the legacy core providers before just curious what.
And that RFP process with banks some of the core Differentiators you hear from customers.
Brian Hilftief: Non-GAT General in the administrative expense was 11.9 million or 18% of revenue. In the prior year quarter, GNA was approximately 22% of revenue. The margin expansion is primarily attributable to revenue scale. As we closely manage GNA expenses, we expect to achieve further leverage as a percentage of revenue as we move towards our profitability objectives.
Value proposition and how that's changed.
This is Alice I think it's two things first of all bank.
Banks are realizing that.
Their commercial customers are made up of people.
And that as the pressure has.
Brian Hilftief: Our adjusted EBITDA for the third quarter was $826,000, which is over a million dollars better than the high end of our expectations and over a $5 million improvement compared to the prior year quarter. We are very pleased to have crossed adjusted EBITDA positive a quarter earlier than originally expected at the beginning of the year. We believe this demonstrates the leverage afforded by our financial model as well as the trajectory of our business. As a reminder, we have established a 2026 adjusted EBITDA margin objective at 20%. We expect our path to 20% will occur at a pace of roughly 700 basis points of adjusted EBITDA margin expansion each year.
Is the pressure has increased for anybody that serves a consumer market to deliver a really great digital experience, they're realizing that their commercial accounts once again being made up of people. They have to deliver a really great digital experience and that's what alchemy is known for so that certainly.
As wind at our back.
We are.
Getting more customer more bank customers live on our platform. So that helps from a referee reference ability.
Standpoint.
And and then those two things together create awareness that alchemy is an option that people should look at if they're a bank and they're considering making a a digital transformation.
Brian Hilftief: Now moving on to the balance sheet. We entered the quarter with just over $178 million of cash and marketable securities and just under $83 million of debt. One final item on our third quarter results. In addition to crossing into positive adjusted EBITDA, we are reporting positive operating cash flow of approximately $3 million and free cash flow of $1.5 million.
Okay. That's really helpful. Thanks, Alex Thanks, Brian.
The next question comes from Pat Robertson.
J M. P. P is go ahead.
Oh, great. Thank you and let me add my congratulations.
Brian Hilftief: Now turning to guidance. For the fourth quarter of 2023, we are providing guidance for revenue in the range of 70.5 to 71.5 million dollars representing growth of 27% to 29%. And adjusted EBITDA at 2.5 to 3.0 million dollars. For a full year 2023, we are raising our revenue guidance to a range of 264 to 265 million dollars representing growth of 29 to 30%. And an adjusted EBITDA loss of 2.1 to 1.6 million dollars. This compares to an adjusted EBITDA loss of $17.6 million for the full year of 2022.
That's how I know you're not at the point, yet where you're ready to give guidance for 2024, but Brian any.
Key points, you want us to keep in mind as we think about that.
Pat we'll we'll provide guidance for 2024 official guidance in February late February when when we announced Q4 I think the key point, though is based on the guidance that we provided for Q4 of 2023, what your what you can and what you can derive from that.
As in accelerating.
Revenue growth rate from Q3 of 2023, so a growth rate in the 28, 29% range versus us delivering at 27% a Q through this year second what we have stated throughout the year is an expectation of being just ride out.
Brian Hilftief: In closing, we remain confident that we are well positioned to continue on the growth path we laid out over two years ago. During the last year, the resiliency of our model has been tested by industry and macroeconomic factors and we have continued to deliver both for our clients and our shareholders. We are carrying strong momentum into the fourth quarter and we look forward to delivering another great year in 2024.
60% gross margin in Q4 of 2023. So you can see his building our gross margin from that as we move towards 2024 and in terms of visibility.
Unknown Executive: With that, I'll hand the call to the operator for questions. We will now begin the question and answer session. To ask the question, you may press star than one on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star than two.
Would expect once we exit Q4 of this year will still have the same level of visibility in terms of you know a backlog of about 12 months of AOR to be implemented over the next year.
Alright, that's super helpful and that Alex for you sort of on the same.
The the same theme so what what are the sort of the top.
Unknown Executive: At this time, we will pause momentarily to assemble our roster.
Two or three things that you're giving me most focused on for 2024.
Bob Napoli: The first question today comes from Bob Napoli with William Blair. Please go ahead. Thank you. Good afternoon. Impressive momentum. Appreciate the guidance and the trends and even that margin expansion, which obviously begs the question to get the kind of growth that you have and the momentum you have while driving that operating leverage. What are you giving up on the growth side or on the technology development side, expanding 700 basis points a year is pretty pretty traumatic. Appreciate any color around that.
Well certainly continuing to progress that we're making at the bank market that that's.
That's pretty critical for us and so that is.
Is the continued to build out of the product capabilities the skills and the organization. The number of course that we're integrating integrated into getting the same bank customers live.
With an excellent experience in reference of also so.
So that's pretty key the.
Creating capabilities in the platform itself that start to.
Create distance between us and any other digital banking competitor in terms of the flexibility of the platform in terms of the telemetry that we have coming out of the platform in terms of the the extensibility of the platform.
Alex Shootman: Bob, this is Alex. I don't feel like we're giving anything up in terms of our ability to grow the business in the future. We are, we're pleased with a lot of the investment that we're making in the platform. And we've got a lot of visibility on how those investments turn into leverage as the company grows. And we're also pleased with the leverage that we're beginning to get out of the implementation teams and the productivity that we're getting out of the implementation team. So we don't feel like we're giving anything up in terms of our ability to serve our customers and grow with the guidance that we've provided with to y'all.
That will clearly be a a priority for us and then really Pat.
We are successful because we get a bunch of people that like working at alchemy, and like serving our clients and doing a good job for them and so we have to continue to build alchemy into a place that people want to come to and.
People want to work and they want to be proud of the work and and and and be passionate about what they're doing.
Alright, great. Thank you both.
Brian Hilftief: And Bob, I'll just add a couple more comments to Alex's statement. I mean, the beauty of our financial model is it provides visibility that allows us to invest and know when to invest and where to invest. So what I mean by that is we can grow our research and developments, our engineering team or product management teams, just not the same pace as revenue and we'll scale that organization. Sales and marketing, again, we really have a best-in-class sales efficiency.
The next question comes from Jacob Stephan with Lake Street Capital markets. Please go ahead.
Hey, guys I just want to add my congrats on the corner as well here maybe.
Maybe help me kind of understand the implementation backlog here, so thirty-five new clients and add on sales orders. So the 35, new clients down corner over a quarter, but you know a are are not down as much as well as a percentage.
Brian Hilftief: We deliver about $1.60 in ARR for every dollar of sales and marketing spoon. There are very few SaaS companies that you'll find that are delivering a sales efficiency at that level. And then when you look at GNA, coming out of our IPO now, it's been a couple of years, we've really made the necessary investments within GNA. So now you'll see some reasonable growth with the business between seven to nine percent a year over the next three to four years.
So.
Basically <unk> is there a higher mix it kind of bank customers in there versus the credit Union said.
No I mean in our new logo or client when backlog at 35, we have roughly 14 of those are banks. The bank's carry an R. P U of $30. So as we've always indicated banks tend to carry a higher.
P U.
The 21 credit unions that are included in the backlog are around $23 and <unk>.
Brian Hilftief: And so we'll continue to scale GNA at the level that we've been scaling it during 2023. I mean, for the quarter, we are 10 percentage points or a thousand basis points of adjusted EBITDA margin expansion, which again, that just speaks to the leverage in the model, the visibility that we have that allows us to invest where necessary.
They are split fairly evenly between the two cohorts within the backlog. So it's very similar nothing.
Bob Napoli: Thank you. Appreciate that.
Would not work at our backlog and suggests that the mix is significantly different than what it's been over the last several quarters.
Okay.
That's helpful.
Then maybe you just kind of talk about the the kind of technological.
Unknown Executive: And then just follow up on the number of new customers that you're adding. Maybe it has the win rate. I mean, I would say you haven't lost any customers, though, as the win rate improves, what's driving the, I guess, the acceleration in the customer additions? And what kind of success are you having with with banks? Yeah, our win rate remains steady. We were pleased with the seven new customers that we signed in the quarter.
<unk> upgrade cycle of banks first credit unions do you see banks upgrading quick quicker you know, adding new solutions quicker than credit Union side or.
How can we think about that.
Okay. This is really it's not a materially different cycle, they're in they're both in long term contracts they.
They both start.
Evaluating different options a coupla years before the I mean, if you think about a decision process. If you are ending a contract you'd want to give yourself some cushion of making sure you're live on something new before you end that contract.
Unknown Executive: And then the additional four new customers that we signed in the week or so after the quarter two credit unions and two banks. So we're pleased with the new logos that we're winning and our in rates remain high in the in the credit union space. I'll say we've got a mixed blessing in the bank space. We are the good news for us is that we are being invited to more opportunities. And I think we may have mentioned this in a in a past earnings call where we had high win rates in banks, but we weren't being invited to that many opportunities.
Probably build yourself a nine to 12 month implementation cycle and then you build yourself.
Unknown Executive: So we are being invited to more opportunities that results for us right now as our win rate being slightly less in banks than it is in credit unions. James, but for us, that's really a bit of good news because we wanted our participation rate and banks to go up.
No I don't know six nine months decision cycle.
And so.
Unknown Executive: Thank you. Appreciate it.
Mmm, that's not materially different between a bank and.
In a credit Union I think the difference.
He didn't really ask this but there's a difference in the implementation cycle because on a credit union, it's predominantly retail.
And so the credit Union would be thinking about okay, I'm going to go through the large.
And then just have my customers.
Unknown Executive: The next question comes from Andrew Schmidt with CD Global. Please go ahead. Good evening. This is David buildings beyond for Andrew Schmidt. Thanks for taking my question. Can you guys speak in more detail regarding the process progress? What products are seeing the most ranked right now?
Individually move themselves to the new platform by downloading the new application from the from the App store, but in a in a banking situations, particularly if they've got some large commercial customers, they're going to want to help their customers move to the new to the new platform and so it's not really too much.
A difference in that decision cycle. The decision timing there is a difference in terms of the motion in which we're implementing a customer.
Alex Shootman: Yeah, so we mentioned this a couple of times, but we created our client sales team in 2019. And once we created that team, the responsible for two primary functions. One is cross selling to the base and second is to renew new clients. When we renew a client, at least in 2023, what we're seeing is three to four additional products that are being taken upon renewal. So that is a great opportunity to cross on to the bases when renewal occurs, but we're not just dependent upon the renewal cycle.
Okay. Yeah, no. That's that's that's really helpful.
I think that's all I had best of luck going forward here against.
And our final question comes from Daniel Hits Me with My account. Please go ahead.
Hey, this is Daniel on for Jeff Van re yeah excellent quarters that celebration on user add looking very impacted maybe if you could just help us with at a high level with the driver of that is in terms of is that local sciences at the lack of churn at the number of men who is coming on it looks like the live regional Pat.
Alex Shootman: And what we're seeing from our client sales team is we're seeing a lot of progress and cross selling our fraud and security products, our money movement products, and our client service products. That that's where we're seeing the most traction from that team. In 2023, that team has represented 33%, 34% of total sales last year. That was a comparable amount as a percentage of total sales two years ago was less than 15% of total sales. So we're seeing a lot of momentum and progress within that function.
Client count that top 10, or so it looks like you every year that stop.
Sort of significant record I assume the primary driver is the number of new level is coming on is that.
Maintainable pay for that sort of recent surge implementations just help us. Thank you to reconnect celebration and user at.
So what what's really driving our user adds as we mentioned in the prepared comments is first implementation of new clients under our platform we added.
Alex Shootman: What I would just add is we've seen some it's nice to have the product portfolio that we have because given the dynamics of the market, we've seen some shift in what the customers are buying based upon their shifting strategies and tactics. Or as Brian mentioned right now, for example, anything around fraud management and advanced card capabilities, which gives people the ability to provision and issue digital cards. That is got a lot of interest whereas if you think about maybe a couple of years ago, some things around financial wellness might have a strong interest.
$1.7 million 1.8 million digital users over the last 12 months, we have that visibility at any given time during the year and that comes from our backlog of implementations and then our clients are drawing themselves. Our clients are growing at a rate of about.
10% in that 10% over the last 12 months resulted in 1.4 million digital users of only for 2023. So the three quarters of 2023, our clients have grown.
Million digital users. So what we find is since we focus on the top 2000 financial institutions and the market those financial institutions tend to be the more technology leaning in financial institutions and as a result of that they grow.
Alex Shootman: So that's the nice thing about our product portfolio is that customers change their strategies and tactics to manage the big shift in interest rates and in fiscal policy that's occurred with the federal government. We've got a product portfolio that allows us to shift and sell them what they need.
Their digital platform communities at a fairly nice right.
And it certainly I mean to be in a position where.
We're not going to lose a single customer on our digital banking platform. This.
Samuel Salvas: The next question comes from Sam Salvas with Needed and Co. Please go ahead. Hey guys, I'm on for my own today.
This year that that certainly helps.
We may not be able to do that every year for the next 20 years, but that's a that's a great result of our ability to.
Alex Shootman: Thanks for taking the questions here and congrats on the just a little bit positive this quarter. Could you guys just talk a little bit about how customer conversations have changed from last quarter if they have it all and maybe just talk about the broader demand environment a little bit more and how you guys feel as we You know, start heading into play 24 soon. Yeah, you know, as I this is Alex as I mentioned my in my prepared remarks, personally I spent a lot of time with customers and prospects during Q3 because I wanted to understand the same thing that you're asking.
To take care of our customers. We believe that there is no other provider in the space, adding three or $3 million or more users over a 12 month period.
Thanks for that color and then maybe just one follow on for me I'm looking at the RP up about 5% year over year I think the commentary that artwork new customers in the backlog as amount of 24 for instance is current or prove and 16, just don't a weighted average with.
Alex Shootman: And the they're having to change their their business strategies and tactics because of the shift in the interest rate environment and and you know really the need to attract more deposits. And so the conversation has has moved to what can we do digitally to attract deposits? What can we do digitally to do things like promote direct deposits? What can we do digitally to to market CDs to market money market money market accounts?
All those new customers coming on it at a high argue I would've thought that you know.
Be able to get in a little bit higher than 5%, which I know is that it.
Alex Additionally, grown around that current 5% is there any other sort of mix shepherd pricing element that plays into the <unk> and the way that at spending.
Well, we so again our clients added one 1.4 million digital users over the last 12 months and the way our pricing model works is the more scale the more users that a financial institution brings to our platform.
The incremental cost per user goes down so when we grow 5% that's overcoming the head win of the 1.4 million digital users that are coming in at below $10 per user.
Alex Shootman: So so all of that has shifted what really hasn't shifted is the commitment to the digital channel in most of our customers. It's the most important channel that they have and they are leveraging it to try to attack some of the things that I just talked about so there's no. There's no discussion where people are saying I'm not going to invest in a digital banking channel that would be like a airline saying I'm not going to have pilots or flight attendants or mechanics. It's just it's part of doing business. What's changed is how can I use digital to work on the business challenges that I have right now. Got it.
So the gross the gross or poo expansion is in the 7% to 8% range and then you have the dilution that comes from the incremental users added by our financial institutions.
And that makes a lotta sense. Thanks, so much for the caller.
This concludes that question and answer session and concludes in the conference call. Thank.
Thank you for attending today's presentation you may now disconnect.
Mhm.
[noise] [music].
Unknown Executive: That's helpful. And then just a quick follow up. Good to see the the seven new logos signed this quarter. Could you guys just talk a little bit more about those those wins you guys had and you know maybe you know any commentary into the size of these companies, you know just trying to get a sense for. You know are you guys starting to you know trying to go after some some larger FIs out there.
Unknown Executive: Is it more just you know playing in your sweet spot right now. Well, we continue to play in our sweet spot that tends to be the larger FIs in terms of average user per FI. Keep in mind what feeds our revenue model is the number of digital users. And so we we average 72,000 digital users per FI for the 229 live clients that we have and the next closest competitor to us is in you know kind of the high 50s low 60s into the thousands in terms of per average.
Unknown Executive: So so we're already focused. We believe you know on the top 2000 financial institutions wins us to the larger financial institutions what we've seen so far this year is you know very similar sized FIs we've had a few over 100,000 digital users last quarter we signed our largest bank to date. So we're pleased with the success. We're pleased with the demand. Part of me, it looks like we've lost connection with our speakers.
Unknown Executive: Please hold while we reconnect. Ladies and gentlemen, thank you very much for your patience. We've reconnected with our speakers. Operator, we can move to the next question in the queue. Unless there was a follow-up on that. Yeah, yeah.
Okay.
Mmm.
Okay.
Uh-huh.
[noise].
Okay.
Mmm.
[noise].
Adam Hotchkiss: Thanks for being patient.
Adam Hotchkiss: The next question comes from Adam Hotchkiss with Goldman Sachs. Please go ahead. Great. Thanks for taking the questions.
Alex Shootman: I guess when you think about where you are today versus the beginning of the year, how much momentum would you say has been driven by an inflecting top of fun all versus an improved pipeline conversion rate? I think we're just trying to get a sense for whether this is more an influx of interest on the back of the rate environment and some of the tech investments you've made versus the historical top of the funnel just converting at a higher rate than you've seen historically.
Alex Shootman: Any color on that would be helpful. This is Alex. What I would say is we the demand from the credit union side of the market is in line with what we consistently experience. And then if we think about layering on top of that, the demand from the bank side of the market has picked up compared to the same time last year. So if I just do a graph of pipeline interest, if I just use something like that, pretty consistent on the credit union market and then add to that higher demand from the bank market than this time last year.
Alex Shootman: And Adam, the demand on the bank side, the demand on the bank side of the market is really from us being more active in the bank market, being our product being more prepared, our roadmap around the core integrations that are necessary for us to be competitive in the bank market and then a deliberate strategy around creating more market awareness. And that has resulted in a sales pipeline now that's 40% of our total sales pipeline related to banks.
Alex Shootman: Got it. That's really helpful. And I guess just to follow up on that point, when you think about the being invited more to bank RFP's point, would you say that's a function of just relative awareness? Is that folks from reference ability getting a sense for your capabilities versus some of your competitors? I know some of them call out having done many conversions off of some of the legacy core providers before just curious what in that RFP process with banks, some of the core differentiators you hear from customers on the alchemy value proposition and how that's changed.
Alex Shootman: Well, this is Alice. I think it's two things. First of all, banks are realizing that their commercial customers are made up of people. And that as the pressure has, as the pressure has increased for anybody that serves a consumer market to deliver a really great digital experience, they're realizing that their commercial accounts, once again being made up of people. We have to deliver a really great digital experience. And that's what alchemy is known for.
Alex Shootman: So that certainly is wind at our back. We are getting more customer, more bank customers live on our platform. So that helps from a reference, a reference ability standpoint. And then those two things together create awareness that alchemy is an option that people should look at if they're a bank and they're considering making a digital transformation.
Unknown Executive: Okay, that's really helpful. Thanks, Alex. Thanks, Brian.
Patrick Walravens: The next question comes from Pat Walravens with KMP. Please go ahead. Oh, great. Thank you. And let me add my congratulations.
Brian Hilftief: So, I know you're not at the point yet where you're ready to give guidance for 2024, but Brian, any key point you want us to keep in mind as we think about that? You know, Pat, we'll provide guidance for 2024 official guidance in February, late February when we announce Q4. I think the key point, though, is based on the guidance that we provided for Q4 of 2023, what you can derive from that is an accelerating revenue growth rate from Q3 of 2023.
Brian Hilftief: So, a growth rate in the 28, 29 percent range versus us delivering at 27 percent in Q3 this year. Second, what we have stated throughout the year is an expectation of being just right at 60 percent growth margin in Q4 of 2023. So, you can see us building our growth margin from that as we move towards 2024. And in terms of visibility, I would expect once we exit Q4 of this year, we'll still have the same level of visibility in terms of, you know, a backlog of about 12 months of ARR to be implemented over the next year. That's super helpful.
Alex Shootman: And then Alex, for you, sort of on the same, the same theme. So, what are the sort of the top two or three things that you're going to be most focused on for 2024? Well, certainly continuing to progress that we're making in the bank market. That's pretty critical for us. And so, that, you know, is the continued build out of the product capabilities, the skills in the organization, the number of cores that we're integrating, integrated into getting the signed bank customers live with an excellent experience and referenceable.
Alex Shootman: So, you know, so that's pretty key. The, you know, creating capabilities in the platform itself that start to create distance between us and any other digital banking competitor in terms of the flexibility of the platform, in terms of the telemetry that we have coming out of the platform in terms of the extensibility of the platform that will clearly be a priority for us. And then really Pat, you know, we're successful because we get a bunch of people that like working at Alchemy and like serving our clients and doing a good job for them. And so, we have to continue to build Alchemy into a place that people want to come to and people want to work and they want to All right, great.
Unknown Executive: Thank you both.
Jacob Stephan: The next question comes from Jacob Stephan with Lake Street capital markets. Please go ahead. Hey guys, I just want to add my congrats on the quarter as well here. Maybe help me kind of understand the implementation backlog here. So 35 new clients and add on sales orders. So the 35 new clients that's down quarter over quarter. But you know, ARR is not down as much as a per percentage. So basically, is there a higher mix of kind of bank customers in there versus the credit union side?
Jacob Stephan: No, I mean in our new logo or client win backlog of the 35, we have roughly, you know, 14 of those are banks, the banks carry an RPU of $30. So as we've always indicated banks tend to carry a higher RPU, the 21 credit unions that are included in the backlog are around $23 of RPU. The AR is split fairly evenly between the two cohorts within the backlog. So it's very similar. Nothing, I would not look at our backlog and suggest that the mix is significantly different than what it's done over the last several quarters. Okay, that's helpful.
Brian Hilftief: And then maybe just kind of talk about the kind of technological upgrade cycle of banks versus credit unions. Do you see banks upgrading quicker, you know, adding new solutions quicker than credit union side, or how can we think about that? Okay, this, this really, it's not a materially different cycle. They're in, they're both in long term contracts. They both start evaluating different options a couple of years before the, I mean if you think about a decision process, if you are ending a contract, you'd want to give yourself some cushion of making sure you're live on something new before you end that contract.
Brian Hilftief: Then you'd, you know, probably build yourself a nine to 12 month implementation cycle. And then you'd build yourself, you know, I don't know, six, nine month decision cycle. And so that's not materially different between a bank and a credit union. I think the difference. You didn't really ask this, but there's a difference in the implementation cycle because on a credit union, it's predominantly retail. And so the credit union would be thinking about, okay, I'm going to go through the launch and then just have my customers individually move themselves to the new platform by downloading the new application from the, from the app store.
Brian Hilftief: But in a, in a banking situation, if, particularly if they've got some large commercial customers, they're going to want to help their customers move to the new, to the new platform. And so I don't, it's not really too much of a difference in the decision cycle or the decision timing. There is a difference in terms of the motion in which we're implementing a customer, and Christopher. Okay, yeah, no, that's, that's really helpful.
Unknown Executive: I think that's all I had. That's a lot going forward here, guys.
Daniel Hibshman: And our final question comes from Daniel Hibshman with Clay Cowell. Please go ahead. Hey, this is Daniel on for Jeff Sandree. Yeah, excellent, quarter of the acceleration on user ads is looking very impressive. Maybe if you could just help us with a highly level with the driver of that is in terms of is that logo size is at the lack of churn is at the number of logos coming on. It looks like the live visual platform client count that's up ten or so. It looks like you every year. That's up at a sort of significant record. I assume the primary driver is the number of new logos coming on.
Brian Hilftief: Is that a maintainable pace is that a sort of recent surge in implementations just help us think to the recent acceleration and user ads? So what's really driving our user ads as we mentioned in the prepared comments is first implementation of new clients under our platform. We added 1.7 million, 1.8 million digital users over the last 12 months. We have that visibility at any given time during the year. And that comes from our backlog of implementations.
Brian Hilftief: And then our clients are growing themselves. Our clients are growing at a rate of about 10% and at 10% over the last 12 months resulted in 1.4 million digital users only for 2023. So the three quarters of 2023. Our clients have grown a million digital users. So what we find is since we focus on the top 2000 financial institutions in the market, those financial institutions tend to be the more technology leaning in financial institutions.
Brian Hilftief: And as a result of that, they grow their digital platform communities at a fairly nice rate. And then certainly, I mean, to be in a position where we're not going to lose a single customer on our digital banking platform this year that certainly helps. You know, we may not be able to do that every year for the next 20 years, but that's a great result of our ability to take care of our customers.
Brian Hilftief: Yeah, I mean, we believe that there is no other provider in the space adding three or three million or more users over a 12 month period. Thanks for that color. And then maybe just one follow on for me, looking at the R2 up about 5% year over year, I think the commentary was that R2 new customers in the backlog is around 24 versus current R2 around 16. Just on a weighted average with all those new customers coming on at a high R2, I would have thought that, you know, you'd be able to get a little bit higher than the 5%, which I know is how it's traditionally grown around that current 5%.
Brian Hilftief: Is there any other sort of makeshift or pricing element that plays into the R2 in the way that that's trending? Well, again, our clients added 1.4 million digital users over the last 12 months, and the way our pricing model works is the more scale, the more users that a financial institution brings to our platform, the incremental cost per user goes down. So when we grow 5%, that's overcoming the headwind of the 1.4 million digital users that are coming in at below 10% per user.
Brian Hilftief: So the gross RPU expansion is in the 7% to 8% range, and then you have the dilution that comes from the incremental users added by our financial institutions. And that makes a lot of sense. Thanks so much for the color.
Unknown Executive: This concludes our question and answer session, and concludes the conference call. Thank you for attending today's presentation. You may now disconnect. Thank you. Robert Napoli, Patrick Walravens, Charles Nabhan, Daniel Hibshman Robert Napoli, Patrick Walravens, Charles Nabhan, Paul Robert Napoli, Patrick Walravens, Charles Nabhan, Paul Robert Napoli, Patrick Walravens, Charles Nabhan, Paul