Q4 2023 Alkami Technology Inc Earnings Call

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Operator: Good afternoon, ladies and gentlemen, and welcome to the Alkami Technology 4th Quarter 2023 Financial Results Conference Call. At this time, all lines are in a listen-only mode.

Good afternoon, ladies and gentlemen, and welcome to the Alkermes technology third quarter 2012 financial results Conference call.

All lines are in a listen only mode.

Operator: Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, February 28, 2024. I would now like to turn the conference over to Steve Calk, Vice President and Head of Investor Relations. Please go ahead.

Following the presentation, we will conduct a question and answer session.

Have you found your English call, you'll recall that Mister car systems to satisfy.

Operator this call is being recorded on base stays as high as 28 2024, I would now like to turn the conference over to Steve Calk.

Saturday.

Steve Calk: You're with me today on today's call are..., today's call, during the call today, noon, and thank you all. 30. We want 39 new loads. What?

I'm head of Investor Relations. Please go ahead.

Thank you operator with me today 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.

Unknown Speaker: who's all. One of the most reassuring surveys, focused on their. Independent Survey of, 90% of them said they were optimistic. [inaudible] must have a great digital, Unknown Speaker 05.

Are based on management's current views and expectations and are subject to various risks and uncertainties. Our actual results may be materially different for summary of risk factors associated with their forward looking statements. Please refer to today's press release and the sections in our latest Form 10-K entitled risk factors and forward looking statements.

Alex: I believe the demand for the technology is growing. There are now more companies that convert to and stay with Alkami. Tell us that the investment we've made in a cloud-native, single-code base, multi-tenant system with a superior user experience, extensibility as a philosophy, and data as a long-term advantage helps them compete against megabanks, which is why Moore and Fein said yes to Alkami in 2023 more than any other provider in the market. We continue to focus on the priorities that we share with you since becoming public, winning These objectives will continue to drive our multi-year revenue and profit. In 2024, we believe if we do four things well. Related to our long-term priorities, we will create a distance between us and the rest of the market that will be difficult for others to overcome.

Statements being made during the call today are being made as of today and we are we undertake no obligation to update or revise these 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.

Conciliation of the comparable GAAP financial measures can be found in our earnings press release and in our filings with the SEC I'd like to now turn the call over to Alex.

Thank you Steve.

Afternoon, and thank you all for joining us.

I am pleased to report that al can be delivered strong financial performance in the fourth quarter of 2023.

This contributed to a great year and.

It demonstrated on several fronts progress towards the multi year revenue.

Profit guidance, we discussed at the beginning of the year.

In the fourth quarter.

29%.

Once again.

The street expectations.

We exited the quarter with 75 million.

Registered users on the platform.

Million compared to the prior year.

And we generated approximately $3 $1 million of interest.

For the full year of 'twenty to retreat.

The results.

Excluding 30% revenue growth.

But she didn't positive adjusted EBITDA in a quarter earlier than projected.

And making progress on key initiatives that will deliver on our future revenue.

<unk> targets.

Some highlights for the year.

Following.

We won 39 new logos.

Alex: Number one, continue to invest in client satisfaction and the client. Our clients want to move with speed and bring new capabilities to market. We are investing in our platform to make it easier to integrate other technologies into Alkami and allocating engineering resources to reduce the time it takes to implement new capabilities, for example. Number two, accelerate the momentum we're building in banking.

Contract value.

And last year.

Okay.

Okay.

Institutions, a total contract value.

We demonstrated the growth opportunity in our client base by delivering total contract value from add on sales.

This level in our history.

Our culture of treating decline as our North star produced results.

We did not lose a single client.

The platform during 2023.

In Q4 alone we went into 'twenty clients, who averaged five new products added an extended without the need for another five years.

In February of 2024, we've renewed our largest client which.

Which is a top 10 credit Union.

Normally the original total contract value and extending the relationship for another five years.

Execution.

Thank you.

We doubled our bank clients under contract.

We implemented clients on tunable <unk>.

Is that are key to our long term strategy.

We also signed our second largest total contract value new logo transaction in our history.

Alex: During 2023, we had external experts benchmark our commercial offering against market requirements, and they found that Alkami now meets 92% of client expectations in commercial banking functions. We have allocated product and engineering resources to fully close the remaining product gaps in 2020. And as we implement the 17 banks in our backlog, we will continue to strengthen the capabilities of our commercial office. Our sales pipeline remains strong, and we expect continued success in this market segment. Number three, maintain excellence, and launch new clients. Each year, as we grow, we continue to increase the number of new clients we launch. It's one thing to launch a few clients a year, but Alkami plans to launch 40 new clients in 2024.

Which is fine.

What platform.

For a long term scalability.

For our clients.

Our economics.

And we added executive Chang in two important areas of our business engineering and client experience, which includes all post sales activities.

One of the most reassuring outcomes of 2023 is the resilience demonstrated by our end market, which contributes to the confidence we have in our longer term financial guidance.

Our market consists of over 9000 regional and community financial institutions that are rarely public entities, they're focused on their communities and operate with very diverse strategies.

This results in a lower risk profile, which was evident in the months after the spring liquidity event that impacted a handful of superregional banks.

Throughout 2023, we saw stability within our clients' deposit balances.

Number of customer accounts and strike at the buying behavior of our target market.

We are optimistic if that momentum can carry carries over into 2024 and our optimism is supported by some recent market research.

We just completed an independent survey of our market in which 90% of banks and 89% of credit unions said they.

We're optimistic about their financial future over the next 18 months.

Alex: The ability to successfully launch clients is a sustainable competitive advantage for Alkami, and during 2024, we intend to build upon our strength in this area while we improve productivity. Finally, we're going to build leadership at all levels of outcome. As we grow past 1,000 employees and are on our way to serving 25 million or more digital users on our platform, we need leadership infrastructure, just like we have technology. We have a leadership development program within Alkami that's helping our top 50 leaders become great software executives.

And 67% of banks and 72% of credit unions anticipate increases in their technology budgets in 2024.

How can we use target market considers a modern digital banking platform to be a non discretionary investment.

Our clients and prospects tell us that to remain competitive with Mega banks, They must had a great digital sales and service channel.

One industry analyst recently wrote.

We believe the demand for digital transformation remains more robust than ever, particularly as many of these F ours need to invest in technology to attract deposits and what is now a more dynamic deposit gathering environment with higher interest rates.

Companies that convert to and stay with alchemy.

Alex: Understanding how to create value for our clients and our shareholders. [inaudible] In closing, 2023 was a great year for Alkami Tech. We continue to add more digital users and lose fewer clients than any other digital banking provider in the market. This is a result of the people we have, the culture we thrive in, the market we serve, and the technology we build. For too long, our market has suffered with outdated technology, and Alkami intends to bring great technology to this market and be the number one digital banking provider. As we look towards 2024, I'm proud to be part of one of the fastest growing bank technology companies, and I'm excited to drive even more value for shareholders and employees. I'll now hand the call to Brian.

Tell us that the investment we've made in a cloud native single codebase, multi tenant system with a superior user experience extensibility as a philosophy and data as a long term advantage.

Helps them compete against the Mega banks.

Which is why more inquiry said, yes to alchemy in 2023.

Any other provider in the market.

We continue to focus on the priorities that we shared with you since becoming a public company.

When in the bank segment of the market.

Drive growth through add on sales engineer, our technology platform for scale become the employer of choice in our market and use M&A opportunistically.

These objectives will continue to drive our multiyear revenue and profit goals.

Brian: Thanks, Alex, and good afternoon, everyone. 2023 has been another successful year for Alkami. We achieved $265 million in revenue, representing 30% growth, and improved our adjusted EBITDA loss from $18 million in 2022 to $1.6 million in 2023. Our Q4 results contributed significantly to our full-year performance and allowed us to exit the year with positive momentum. For the fourth quarter of 2023, we achieved revenue of $71.4 million, representing growth of 29%. Subscription revenue grew 30% compared to the prior year quarter and represented approximately 97% of total revenue.

In 2024, we believe if we do four things well.

Related to our long term priorities, we will create distance between us and the rest of the market there will be difficult for others to overcome.

Number one continue to invest in client satisfaction and the client journey.

Our clients want to move with speed and bringing new capabilities to market.

We are investing in our platform to make it easier to integrate other technologies into alchemy and.

In allocating engineering resources to reduce the time it takes to implement new capabilities for existing clients.

Number two accelerate the momentum we're building in banks.

During 2023, we had external experts benchmark, our commercial offering against market requirements.

Around that alchemy, now reached 92% of client expectations and commercial banking functionality.

We have allocated product and engineering resources to fully close or close the remaining product gaps in 2024.

Brian: We increased ARR by 29% and exited the year at 291 million. We currently have approximately 52 million in ARR and a backlog for implementation, the majority of which will occur over the next 12 months. We implemented seven new clients in the quarter and 37 for the full year, bringing our digital platform client count to 234.

And as we implement the 17 banks in our backlog, we will continue to strengthen the capabilities of our commercial offering.

Our sales pipeline remains strong and we expect continued success in this market segment.

Number three.

Maintain excellence, our excellence in launching new clients each.

Each year as we grow we continue to ramp the number of new clients we launch.

It's one thing to launch a few clients a year, but I'll quit plans to launch 40, new clients in 2024.

Brian: We now have 44 new clients in our implementation backlog, representing 1.3 million digital users. We exited the quarter with 17.5 million registered users live on our digital banking platform, up 3 million or 20% compared to last year. Over the last 12 months, registered user growth continues to be driven by two areas. First, the 37 financial institutions we implemented in 2023 represent 1.5 million registered users and just over 27 million ARR, both of which exceeded the full year of 2022 by approximately 35%. Second, our existing clients increased their registered users by 1.5 million, demonstrating the market's focus on driving customer retention and growth through the digital banking platform. In terms of churn, for 2023, we did not experience any digital banking client churn, and we expect to lose only three clients in 2024, representing less than 1% of our ARR. This compares to our expected long-term average churn of 2% to 3%.

The ability to successfully launch clients is a sustainable competitive advantage for alchemy and during 2024, we intend to build upon our strength in this area, while we improve productivity.

Finally.

We're going to build leadership at all levels of alchemy.

Because we grew up almost 1000 employees and are on our way to serve 25 million or more digital users on our platform, we need leadership infrastructure, just like we have technology infrastructure.

We have a leadership development program within alchemy, that's helping our top 50 leaders become great software executives understanding how to create value for our clients and our shareholders and maintain a culture that's been critical to our success.

In closing 2023 was a great year for alchemy.

We continue to add more digital users they lose less clients than any other digital banking provider in the market.

This is a result of the people we have the culture, we tried it in the market we serve.

And the technology, we built.

For too long our market has suffered without data technology and alchemy intends to bring great technologies. This market can be the number one digital banking provider.

As we look towards 2024.

Proud to be part of one of the fastest growing bank technology companies and I'm excited to drive even more value for shareholders clients and employees.

Brian: We ended the year with an RPU of $16.63, which is 7% higher than last year driven by add-on sale success and the addition of new clients who tend to onboard with a higher average RPU. We continue to see healthy demand across our product portfolio. During 2023, we signed 39 digital banking platform clients, of which 16 were signed during the fourth quarter.

I'll now hand, the call to Brian.

Thanks, Alex and good afternoon, everyone.

2023 has been another successful year for alchemy, we achieved $265 million in revenue, representing 30% growth and improved our adjusted EBITDA loss from <unk>.

$18 million in 2022 to $1 6 million in 2023.

Our Q4 results contributed significantly to our full year performance and allowed us to exit the year with positive momentum.

Brian: Our new client wins reflect solid representation from banks, with 12 signed during 2023. In addition, 14 of our new clients adopted ACH Alert, while 22 adopted Segment, demonstrating the importance acquisitions can play in building out our platform and creating a competitive advantage. Our add-on sales focus continues to yield results representing 35% of total new sales for 2023. In addition to add-on sales, our client sales team is responsible for client contract renewal. During the year, we renewed 31 client relationships, where we raised the ARR run rate 6% through a combination of new product sales and committed client growth. And finally, our remaining purchase obligation or contract backlog reached $1.1 billion, almost four times our ARR and 28% higher than a year ago. Now turning to gross margin and profitability. For the fourth quarter of 2023, non-GAAP gross margin was 60.3%, representing 390 basis points of expansion when compared to the prior year quarter.

For the fourth quarter of 2023, we achieved revenue of $71 4 million representing growth of 29% subscription.

Revenue grew 30% compared to the prior year quarter and represented approximately 97% of total revenue.

We increased <unk> by 29% and exited the year at $291 million. We currently have approximately 52 million as a or are in backlog for implementation. The majority of which will occur over the next 12 months.

We implemented seven new clients in the quarter and 37 for the full year, bringing our digital platform client count to 236, we now have 44, new clients in our implementation backlog, representing $1 3 million digital users.

We exited the quarter was $17 5 million registered users live on our digital banking platform up $3 million or 20% compared to last year.

Over the last 12 months registered user growth continues to be driven by two areas first 37 financial institutions. We implemented in 2023 represent $1 5 million registered users and just over $27 million of a or are both of which exceeded the full year of 2022 by approximately $35.

Uh huh.

Second our existing clients increased their registered users by 1.5 million demonstrating the market's focus to drive customer retention and growth of the digital banking platform in terms of churn for 2023, we did not experience any digital banking client churn and we expect to lose only three clients.

Brian: Gross margin expansion resulted from improvement in our hosting costs for registered users combined with operating leverage across our post-sale operations, such as our implementation, support, and site reliability engineering teams. We continue to scale 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. Moving to operating expo. For the fourth quarter of 2023, non-GAAP R&D expense was $17.3 million, or 24% of revenue, 530 basis points lower than the year-ago quarter.

In 2024, representing less than 1% of our <unk>. This compares to our expected long term average churn of 2% to 3%.

We ended the year within <unk> of $16.63, which is 7% higher than last year driven by add on sales success and the addition of new clients, who tend to onboard with the higher average RPC.

We continue to see healthy demand across our product portfolio.

During 2023, we signed 39 digital banking platform clients of which 16 were signed during the fourth quarter, our new client wins reflect solid representation from banks with 12 signed during 2023.

Brian: We're achieving operational excellence while investing in our platform to drive future efficiency, best-in-class reliability, and innovate new products and functionality. Our target operating model is to leverage R&D to 20% of revenue by 2026 while we continue to invest and expand our platform. Nine Gap sells a marketing expense of 10 million, or 14% of revenue in line with the prior year.

In addition, 14 of our signed new clients adopted HTH alert, while 22 adopted segment demonstrating the importance acquisitions can play in building out our platform and creating a competitive advantage our add on sales focus continues to yield results representing 35% of total results for 2020.

Brian: We continue to achieve a high level of sales team productivity and go-to-market efficiency. For example, during 2023, we increased our ARR by just under 65 million while investing 41 million in sales and marketing, representing an efficiency ratio of 1.6 to 1 for ARR creation to sales and marketing investment. We expect to maintain or slightly improve our go-to-market efficiency as we scale the business and gain market share. As you consider 2024, keep in mind that we will host our annual client conference in the second quarter, which results in approximately 2 million to 2.5 million of higher spin than other quarters of the year. Non-GAAP general and administrative expenses were $13.5 million, or 19% of revenue.

In addition to add on themselves our client sales team is responsible for client contract renewals.

During the year, we renewed 31 client relationships, where we raised the <unk> run rate, 6% through a combination of new product sales and committed client growth and.

And finally, our remaining purchase obligation or contract backlog reached $1 1 billion, almost four times, our <unk> and 28% higher than a year ago.

Now turning to gross margin and profitability for.

For the fourth quarter of 2023, non-GAAP gross margin was 63% representing 390 basis points of expansion when compared to the prior year quarter.

Gross margin expansion resulted from improvement in our hosting cost per registered user combined with operating leverage across our post sale operations, such as our implementation support and site reliability engineering teams, we continue to scale <unk> operations, while delivering the previously mentioned higher level about.

Brian: In the prior year quarter, GNA was approximately 21% of revenue. The margin expansion is primarily attributable to revenue scale. As we closely manage G&A expenses, we expect to achieve 10 to 12 percent as a percentage of revenue as we move towards our 2026 profitability objective. Our adjusted EBITDA for the fourth quarter was $3.1 million, which is an improvement of over $7 million when compared to the prior year quarter.

As a reminder, our 2026 target operating model is a non-GAAP gross margin of 65% as we continue to scale our revenue.

Moving to operating expenses for the fourth quarter of 2023, non-GAAP R&D expense was $17 3 million or 24% of revenue 530 basis points lower than the year ago quarter, we're achieving operational scale, while investing in our platform to drive future efficiency.

Brian: We are very pleased with our 2023 adjusted EBITDA progression. As a reminder, we've established a 2026 Adjusted EBITDA Margin objective of 20%. We expect our path to 20% will occur at a pace of roughly 700 basis points of Adjusted EBITDA Margin Expansion per year. Now moving to the balance, we ended the quarter with just over $92 million of cash and markable security. During Q4, we retired our term debt of just over $82 million. Our Credit Facility Revolver remains undrawn and provides 60 million of borrowing capacity.

Best in class reliability, and innovate new products and functionality our target operating model is to leverage R&D to 20% of revenue by 2026, while we continue to invest and expand our platform.

non-GAAP sales and marketing expense is $10 million or 14% of revenue in line with the prior year we continue.

To achieve a high level of sales team productivity and go to market efficiency. For example, during 2023, we increased our <unk> or just under $65 million, while investing $41 million in sales and marketing representing an efficiency ratio of one six to one for AOR creation to sales in March.

<unk> investment we.

We expect to maintain or slightly improve our go to market efficiency as we scale the business and gain market share.

Operator: Now turning to God. For the first quarter of 2024, we are providing guidance for revenue in the range of $74.5 million to $76 million and adjusted EBITDA of $2.5 million to $3.5 million. For the full year of 2024, we are providing guidance for revenue in the range of $327 million to $333 million, representing growth of 24 to 26%, and adjusted EBITDA guidance of $20 million to $23 million. Additionally, because of the impact of expense timing, such as our client conference, as I mentioned earlier, we expect the second quarter to be the low point of our adjusted EBITDA in 2024, modestly lower than the first quarter of the year and In summary, 2023 was a great year for Alkami, a year of strong performance where we achieved a record level of new sales from both new client wins and add-on sales, added a record number of digital users to our digital banking platform, and meaningfully improved our profitability profile by exiting the year with a gross margin over 60% and continuing a trend of positive adjusted EBIT dollars.

As you consider 2024 keep in mind, we will host our annual client conference in the second quarter, which results in approximately $2 million to $2 5 million of higher spin than other quarters of the year.

non-GAAP general and a minute administer administrative expenses were $13 5 million or 19% of revenue in the prior year quarter G&A was approximately 21% of revenue. The margin expansion is primarily attributable to revenue skill as we closely manage G&A.

<unk>, we expect to achieve 10% to 12% as a percentage of revenue as we move toward our 2026 profitability objectives are.

Our adjusted EBITDA for the fourth quarter was $3 1 million, which is an improvement of over $7 million when compared to the prior year quarter. We are very pleased with our 2023 adjusted EBITDA progression.

As a reminder, we've 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 per year.

Now moving to the balance sheet, we ended the quarter with just over $92 million of cash and marketable securities. During Q4, we retired our term debt of just over $83 million or.

Our credit facility revolver remains undrawn and provides $60 million of borrowing capacity.

Now turning to guidance for the first quarter of 2024, we are providing guidance for revenue in the range of $74 5 million to $76 million and adjusted EBITDA of $2 5 million to $3 5 million.

Operator: We remain confident that we are well positioned to achieve our 2026 financial objective, a 20% adjusted EBITDA mark. Our confidence is derived from exceptional visibility and a track record of execution and scale across all areas of the business. We exit the fourth quarter with strong momentum and look forward to delivering another great year in 2024. With that, I'll hand the call to the operator for questions. Thank you. And ladies and gentlemen, we will now begin the question session. Should you have a question, please press the star followed by the number one on your telephone keypad. You will hear a prompt that your hand has been raised. Should you wish to decline the polling process, please press the star followed by the number two. If you're using a speakerphone, please keep the handset before pressing any keys.

For the full year of 2024, we are providing guidance for revenue in the range of 327 million to $333 million representing growth of 24% to 26%.

Adjusted EBITDA guidance of $20 million to $23 million.

Additionally, because of the impact of expense timing such as our client conference as I mentioned earlier, we expect the second quarter to be the low point of our adjusted EBITDA in 2024 modestly lower than the first quarter of the year and consistent with our long term seasonality of our second quarter expenses.

Okay.

In summary, 2023 was a great year for alchemy, a year of strong performance, where we achieved a record level of new sales from both new client wins and add on sales added a record number of digital users to our digital banking platform and meaningfully improved our profitability profile by exiting the year with gross margin over 60%.

And continuing that trend of positive adjusted EBITDA.

Mayank Tandon: One moment, please, for your first question. And your first question comes from the line of Mayank Tandon from Needham. Your line is open. Oh, thank you. Good evening, Brian and Alex.

We remain confident that we are well positioned to achieve our 2026 financial objective of 20% adjusted EBITDA margin. Our confidence is derived from exceptional visibility and a track record of execution and scale across all areas of the business. We exited the fourth quarter with strong momentum and look forward to delivering another great year in.

Mayank Tandon: I wanted to start with a question on the bank market. As you compete for banks in the SMB space, I just want to get a sense of, you know, what the competitive landscape looks like. What are your win rates in that market?

Alex: And who are you taking share from? Are they the legacy incumbents or some of the other digital-centric players that might have secured that market some years ago but are now, maybe coming up on renewables and maybe losing market share to cloud data solutions like yours. Yeah, thanks for the question. This is Alex.

<unk> 2024.

With that I'll hand, the call to the operator for questions.

Thank you and ladies and gentlemen, we will now begin the question.

Session should you have a question. Please press the star followed by the number one on your telephone keypad you will hear from your head has been raised.

Would you restate the decline from the polling process. Please press the star followed by the number two if you're using a speaker phone. Please keep the handsets are progressing.

Alex: The pattern match is very similar to the early days of the credit union market, where these clients have a legacy digital platform that might be 10 or 15 years old. So we are replacing those legacy platforms that are 10 or 15 years old with a more modern experience. What they're realizing is that there are kind of two things.

One moment. Please for your first question.

And your first question comes from the line of <unk> Tandon from Needham Your line is open.

Oh, thank you.

Good evening, Brian and Alex I wanted to start with a question on the bank market as you compete for banks in the SMB space.

Alex: One, Even though they're serving businesses, those businesses are made up of people, and those people have an expectation of a more modern experience in any of the technology that they use. The second thing that they're realizing is that some of the legacy technology creates a pretty big overhead on their own internal operations, and that a more modern platform can create some efficiencies for them internally. But the short answer is we're replacing. 10- to 15-year-old technology, just like we did in the early days of our participation in the Credit Union. That's very helpful, Alex.

Just wanted to get a sense of what the competitive landscape looks like what are your win rates in that market and who are you taking share from the legacy incumbents or some of the other digital centric flare that might have secured debt market some years ago, but now are.

Maybe coming up on renewals and maybe losing market share to a cloud based solution like yours.

Yeah. Thanks for the question this is Alex.

Pattern match is very similar to the early days of the credit Union market.

Brian: And then maybe just turning to the financials. And Brian, maybe you talked about this, but just trying to look at the revenue growth that you guided to, you know, how does that break down between our pool extension and obviously user growth being the main engine? Just want to get a sense of the balance between the two key drivers of underlying growth. Yeah, no, that's great, Mayank.

These clients.

Our legacy digital platform.

It might be 10 or 15 years old.

So we are replacing those legacy platforms that are 10 or 15 years old with a.

With a more modern experience what they are realizing is that.

Kind of two things one.

Even though even though they are serving businesses. Those businesses are made of people and those people have an expectation of a more modern experience in any of the technology.

If they are using the second thing that they are realizing is that some of the legacy technology creates a pretty big overhead on their own internal operations and that a more modern platform can create some efficiencies for them for them internally.

Brian: Our 2024 revenue guidance is very comparable to the longer-term guidance that we provided on revenue and as well as our profitability objective. And what we continue to say is, we've got a company, we've developed a model, and we have a market that can sustain a 25% growth rate, which is the midpoint of our guidance. And how we achieve that from year to year is a combination of two things. We would expect to add between 18 to 20% of users to the platform and 5 to 7% coming from our pool expansion. The users that we add to the platform will first come from the new logo backlog that we have for entering the year.

The short answer is we are replacing <unk>.

10 to 15 year old technology, just like we did in the early days of.

Of our participation in the credit Union market.

Okay.

That's very helpful. Alex and then maybe just turning to the financials and Brian maybe you talked about this but just trying to look at the revenue growth that you guided to how does that breakdown between our pool expansion and obviously your user growth being the main engine just wanted to get a sense of the balance between the two key drivers of underlying growth.

Yeah.

Yeah, No that's great Mike are our 2020 for revenue guidance, it's very comparable to the longer term guide that we provided on revenue and as well as our profitability objective and what we've continued to say is we've got a company. We've developed a model we have a market.

Brian: So we have 1.3 million digital users in backlog, we have 44 financial institutions in backlog, and we expect to implement approximately 40 of those this year. The balance will come from our clients growing their users. So in 2023, our clients grew their users by 10%. In 2022, it's slightly higher than 10%.

That can sustain a 25% growth rate, which is the midpoint of our guidance and how we achieve that from.

From year to year is a combination of two things, we would expect to add between 18% to 20% from.

Users to the platform and 5% to 7% coming from our <unk> expansion. The users that we add to the platform will first come from the new logo backlog that we have entering the year. So we have $1 3 million digital users and backlog, we have 44 financial institutions and backlog and we expect to.

Brian: So we expect that we'll continue at that 10% existing client user rate. As relates to our pool expansion, there are two areas that we derive growth from in 2024 and really beyond. One is add-on sales. Add-on sales are now approximately 35% of the total contract value that we sell each year.

Approximately 40 of those this year.

Balance will come from our clients growing their users. So in 2023 year clients grew their users 10% in 2022 is slightly higher than 10%. So we expect that will continue at that 10% existing client user right as it relates to our <unk> expansion.

Brian: We think over time we can increase that to a level of 50%. But our pool expansion primarily comes from add-on sales into the existing base. And then finally, what we're identifying is as we have more products to sell, our sales team on the new client win side sells more products on the initial order. So in 2023, on average, we had 18 products per order. We had over 14 clients that had 20 plus products. So there was a greater adoption of products on the initial order. If you went back a year, it was 17 products. A year before that, it was 15. And a year before that, it was 12.

Two areas of that we derive expansion in 2024 and really beyond one as add on sales add on sales is now approximately 35% of the total contract value that we sell in each year. We think over time, we can increase that to a level of 50%, but ARPA expansion primarily comes from.

<unk>.

Add on sales into the existing base and then finally, what we are identifying is as we have more products to sell our sales team on the new client win side. There is selling more products on the initial order. So in 2023 on average we had 18 products per order we had.

Over 14 clients that had 20 plus products, so theres a greater adoption of products on the initial order. If you went back a year. It was 17 products a year before that it was 15 and the year before that it was 12. So we're seeing good momentum in the number of products that are being taken on the initial order, which also has the impact of expanding <unk>.

Mayank Tandon: So we're seeing, you know, good momentum in the number of products that are being taken on the initial order, which also has the impact of expanding our pool over time. That's a very helpful quote. Thank you so much.

Overtime.

That's very helpful color. Thank you so much.

And your next question comes from the line of Andrew Schmidt.

Andrew Garth Schmidt: And your next question comes from the line of Andrew Schmidt from Citi. Your line is open. Hey, Alex. Hey, Brian, Steve.

Your line is open.

Hey, Alex Hey, Brian Steve Good.

Andrew Garth Schmidt: Good quarter here. Good, consistent results. Thanks for taking my question. You know, the ARR, I think it was up 29% exiting the year, the live ARR, yet, I think at the Revenue Outlook, as you mentioned before, Brian, you had 25% at the midpoint. Maybe you can help us just reconcile that. Seems like, you know, ARR is obviously a good indicator, but any help there would be great.

Good quarter here good consistent results. Thanks for taking my questions.

Yeah.

I think it was up 29% exiting the year on the <unk> yet the I think the revenue outlook as you mentioned before Brian you had 25% at the midpoint.

If you could help us just reconcile that seems like a is obviously a good indicator, but any any help there would be.

Brian: Thanks so much. Yeah, so when we provide guidance one quarter out, Andrew, it's a very predictable revenue model. So we generally have between 97 to 98% ARR coverage on the subscription revenue that we're going to deliver in the next quarter. And then also, what we know, and we know this with a pretty high degree of certainty, again providing us with visibility and predictability of the model, is the number of clients that we'll launch in the quarter. So the clients that we'll take live out of backlog and then also really what's been scheduled for the full year. So that's a very important item for us as well.

It would be great. Thanks, so much.

Yes, so when we provide guidance one quarter out Andrew.

It's a very predictable revenue model.

So we generally have between 97% to 98%.

Our coverage on the subscription revenue that we're going to deliver in the next quarter and then also what we know.

And we noticed with a pretty high degree of certainty again, providing us the visibility and predictability of the model is the number of clients that will launch in the quarter. So the class that will take a lot out of backlog and then also really what's been scheduled for the for the full year. So that's a very known item for us as well.

And so then the final areas that Tom can provide revenue lift over time is our ability to sell more product from our add on sales perspective into the base and the speed at which we implement that so thats. The variables that we have that can drive the revenue growth.

Brian: And so then the final areas that can provide revenue lift over time are our ability to sell more product from an add-on sales perspective into the base and the speed at which we implement that. So those are the variables that we have that can drive revenue growth. All right.

Alright, Thank you Brian.

Andrew Garth Schmidt: Thank you, Brian. Maybe then just a product question. I think, Alex, you mentioned the commercial product, and the big initiative this year is to sort of continue to iterate and improve that. Maybe you could talk a little bit about where you are today in terms of the business sizes you serve, the functionality, and then, you know, some of the things that you're going to be doing this year to continue to iterate on that. Obviously, you know, a big focus on deposit gathering. It seems like it could be, you know, well received in the market, but any help there would be great. Thanks a lot.

Maybe then just a product question I think Alex you mentioned the commercial product.

Big initiative. This year is to sort of continue to iterate and improve that maybe talk a little bit about where you're at today in terms of.

Business size as you serve the functionality and then some of the things that youre going to be doing this year to Q iterate that obviously.

Big focus on deposit gathering it seems like it could be well received in the market, but any help there would be great. Thanks a lot.

Yeah. Thanks, the feedback that we've had from customers that we've signed in the bank market with respect to our commercial offering is that they are attracted to our commercial offering.

Alex: Thanks. The feedback that we've had from customers that we've signed in the bank market with respect to our commercial offering is that they're attracted to our commercial offering, but with some of their more sophisticated customers, they have, just call it in the payments area. They just have a wire capability that they'd like to see us improve on. So generally, as I mentioned in the call, External Study.

With some of their more sophisticated customers they have.

Let's just call it in the payments area. They just have.

Wire capability that they'd like to see us improve our.

Our sophistication on so generally as I mentioned in the call <unk>.

External study, we got really great coverage on the product.

Alex: We've got really great coverage for the product. When our customers look at the product and then look at their more sophisticated customers, they're saying, "boy, Alkami, there's a couple things you could do to help me with our more sophisticated customers." The second area is their customers that have more complex ownership interlocks, if you will, where one person might own three or four different LLCs, and they might share those LLCs with different folks, and they might have bookkeepers that operate against different against different entities. And so that's something that we built in the back half of the year, once again, from customer feedback, to say, I need a better way to allow these, I would say not sophisticated So in summary, their ownership structures, and certain areas of payments like wire processing. Got it. Thank you very much, Alex. Andrew, we're at a pretty fine grained level now.

When when our customers look at the product and then look at.

They're more sophisticated customers they are saying boy alchemy Theres a couple of things you could do to help me.

With our more sophisticated customers the second area is.

They are customers that have more complex.

Ownership Interlocks, if you will where one person might own three or four different llc's and they.

Make sure those LLC with different folks and they might have bookkeepers that operate against different.

Against different entities and so.

That's something that we built in the back half of the year once again from customer feedback to say.

I need a better way to allow these <unk>.

Sophisticated I would say not sophisticated but but more complicated.

Entities to be able to access the right.

On the right businesses in the in the digital channel.

So in summary.

Their ownership structures.

And certain areas of payments like wire processing.

Got it thank you very much Alex Ed correct.

We're at a pretty defined grade level now.

Andrew Garth Schmidt: When you start talking about having 92% coverage on the product, we're starting to get to a pretty fine grained level in terms of what we need to work on. Got it. Thanks, Alex. Appreciate the comments. And your next question comes from the line of Jacob Stephan from Lake Street. Your line is open.

Talking about having 92% of coverage on yes on the product we are starting to get to a pretty fine grained level in terms of what we need to work on.

Got it.

Thanks, Alex I appreciate the comments.

Okay.

Yes.

And your next question comes from the line of Jacob Stefan from Lake Street. Your line is open.

Hey, guys congrats on the results.

Jacob Michael Stephan: Hey guys, congrats on the results and strong finish to the year here. I just want to touch on the non-renewals that you pointed out. You know, what is this, is this a factor?

Strong finish to the year here.

I just wanted to touch on the non renewals that you pointed out.

What is this.

A factor in many of these customers switching to a competitor or are these more just acquisitions.

Brian: Are these customers switching to a competitor? Or, you know, are these more just acquisitions in the F5 space? Yeah, so the three financial institutions that we know are not renewing and leaving us in 2024, two of those are pretty small financial institutions that are going through a core conversion, and they've selected cores that are more esoteric in nature that we will never build integration into. There's not a density of financial institutions in those cores for the investment to provide the right return of investment for us.

Acquisitions in the.

Space.

Yes, so the three financial institutions that we know are not renewing and leaving us in 2024 two of those are.

Pretty small financial institutions that are going through our core conversion and they selected cores that are more esoteric in nature that we will.

Never build integration to Theres not a density of financial institutions on those cores for the investment.

To the right return of investment for Us.

Brian: The third one is the result of the financial institution being acquired. Traditionally, for Alkami, we've been the beneficiary of mergers and acquisitions of financial institutions. But in this case, we are not the...the financial institution that's our client is not the acquirer, and they're moving to the digital banking platform of the acquiring financial institution. Okay, and then it sounds like the mix of banks and implementation backlog is shifting kind of above the one-third bank to two-thirds credit union, like it has been over the last couple quarters. But maybe, you know, you could just kind of talk about what you're seeing there. Is there any difference in implementation times for a bank versus a credit union? Yeah, yeah, yeah, I'll jump in and take this one.

Third one is the result of the financial institution being acquired generally for alchemy.

Been the beneficiary from Merck.

Merger and acquisitions of financial institutions, but in this case, we are not the.

Our finance financial solution Thats, our client is not the acquirer and they are moving to the digital banking platform of the acquiring financial institution.

Okay and then.

It sounds like the mix of banks and implementation backlog is shifting kind of above the.

One third banks that two thirds credit Union.

It has been over the last couple of quarters, but maybe.

You can just kind of talk about it.

What youre seeing there is there any difference in implementation times for a bank versus a credit union.

Yes, I'll jump in and take this one and Alex you can add as usual.

Brian: And Alex, you can add as you feel fit. The implementation time for a bank is slightly longer than for a credit union today. So our credit unions are averaging, depending on the number of integrations and the complexity and the size, but they average between eight, nine months. A bank, the implementation lift is, it's more hands-on. There's more client specificity of the financial institution that's involved in the implementation effort, like around delegation of authority, roles, and rights, and wires, and those types of things that have to be implemented as well. So that tends to extend the implementation out a bit longer. What's cool about 2023 is that we added integration into three new cores, two of those were in the fourth quarter.

The implementation time for bank is slightly longer.

And then a credit union today as for our credit unions are averaging.

Depending on the number of integrations and the complexity and the size, but the average between eight to nine months.

Bank the implementation lift as Luke it's more hands on.

There is more.

More clients specificity of the financial institution, that's involved in the implementation effort like around delegation of authority roles and rights in <unk>.

Wires and those types of things that have to be implemented as well so that tends to extend the implementation out a bit longer what's what's cool about 2023 as we added integration into three new cores two of those were in the fourth quarter. So now we have <unk>.

Brian: So now we have integration into eight bank core systems. And there's two or three more that we feel like we need to build over time to have great coverage of the bank side of the market. And maybe I would just add to that for clarity. When we say we added integration, that means the customer went live. This wasn't something that we sold.

Integration into eight.

<unk> core systems, and Theres, two or three more that we feel like we need to build over time to have great coverage of the bank side of the market.

Typically I would just add to that.

<unk>.

For clarity when we say we added integration that means the customer went live. So this wasn't something that we sold this is the customer is live on our core. These two cores are critical to our long term.

Alex: This is a customer is live on a core. These two cores are critical to our long-term bank strategy, and what we tend to see is that there's a bit of a logarithmic curve on the effort that it takes to do an integration. We're after about the fifth integration, the fifth time that we do an integration, then we're at a steady state of the integration effort.

Bank strategy and what we what we tend to see is that there is a bit of a logarithmic curve.

One effort that it takes to do an integration where after about the fifth integration. The first time that we do in integration than we're at a steady state of the integration.

The integration effort. So we were really pleased to get these two clients live on these two brand new bank cores for us, which open up a pretty big chunk of the market.

Brian: So we were really pleased to get these two clients live on these two brand new bank cores for us, which opened up a pretty big chunk of the market. And just to get more specific on the backlog, of the 17 bank financial institutions in our backlog, we expect to implement 13 of those in 2024. And we had seven bank implementations in 2023. So we're starting to see more productivity and see a greater number of bank financial institutions come live on our platform. Okay, very helpful.

And just to give more direct on the backlog at the 17 bank financial institutions in our backlog, we expect to implement 13 of those in 2024, and we had seven bank implementations in 2023, so we're starting to see more productivity and see a greater number.

A bank financial institutions come live on our platform.

Okay very helpful. Thank you.

Patrick D. Walravens: Thank you. And your next question comes from the line of Pat Walravens from Citizens JMP: your line, Oh, great. Thanks.

And your next question comes from the line of Pat Walraven from citizens JMP. Your line is open.

Oh, great. Thank you.

Alex: Hey, Alex, can I ask sort of the big picture question: what are The Biggest Challenges Facing Your Banking Clients in 24, and how might that be different from 23? And then the same question on the credit. Yeah, I would say for both, it's obviously continuing to attract and retain deposits in the environment, which creates a pretty heavy focus on digital account opening or call it, frictionless account opening, and that could be an account opening by an existing customer or member who is buying a new product, or it could be the acquisition of, I think, Pat, the thing that folks are starting to understand. And I wouldn't necessarily say, Hey, it's But it is a challenge that they're starting to address. If you think about a regional or community financial institution, bank, or credit union, there are five systems that you have to have to run that. That bank or that credit union, just like if you were an airline, you'd have to have a reservation.

Hey, Alex can I ask sort of big picture what are.

The biggest challenges facing your banking clients in 'twenty four.

And how might that be different than 2003.

And then the same question on the credit Union side.

Okay.

Yes, I would say for both it's obviously continuing to attract and retain deposits and the environment.

Which creates a pretty heavy focus on digital account opening or call. It.

Friction list account openings and that could be an account opening.

An existing customer or member who is buying a new product or it could be the acquisition of <unk>.

On a new customer.

I think Pat the thing that folks are starting to understand.

And I wouldn't necessarily say, hey, it's a big challenge in 'twenty four but it is a challenge that theyre starting to address is if you think about if you think about our regional or community financial institution bank or credit Union.

There is five systems that you have to have to run that.

That bank or that credit Union, just like if you were an airline you'd have to have a reservation system you have to have a core system.

Alex: You have to have a core system, you have to have a digital banking system, you have to have payments capability, you have to have lending capability, you have to have fraud management. Now, if you're Bank of America, you would add to that your data platform and your data capability. You would consider the skills that you have in your organization to manage data, which is obviously the engine for any kind of artificial intelligence, to be as critical as the other five systems.

You have to have a digital banking system you have to have payments capability to have lending capability you have to have.

Fraud management now if you're a bank of America, you would add to that your data platform and your data capability you would consider that the skills that you have in your organization.

<unk>.

To manage data, which is obviously the engine for any kind of artificial intelligence you would consider that to be as critical as the other five systems, but we're starting to see in our customer base is a recognition that they're having to start to build the skills from a data perspective.

Patrick D. Walravens: What we're starting to see in our customer base is a recognition that they are having to start to build the skills from a data perspective to allow them to compete with the mega banks. So a kind of twofold answer, Pat; one is to continue to attract deposits and continue to be able to, in a frictionless manner, offer new products and onboard customers. But then, more strategically, they're realizing that they've got to start building some skills and capabilities that they don't have today to be able to compete with the has great content. Thank you. Your next question, from the line of Alexei Gogolev and JP. Hi, this is Elyse Connor on behalf of Alexei Gogolev.

To allow them to compete and compete with it with a megabank so kind of twofold answer.

One is to continue to attract deposits and continue to be able to.

Frictionless manner offer new products and onboard customers.

But then more strategically they're realizing that they've got to start building some skills and capabilities that they don't have today to be able to compete with the mega banks.

That's great context, thank you.

Your next question.

Line of Alex.

From JP Morgan.

Thanks.

Hi, This is luis counter on for Alexia <unk> glad you kind of touched on this earlier talking about the ratio of net new IRR to the sales and marketing spend and how you aim to get that to you I believe you said around one point.

Elysse Connor: So you kind of touched on this earlier, talking about the ratio of net new ARR to sales and marketing spend and how you aim to get that to, I believe you said around 1.6. And I know you provided some color on, you know, what that entails, but could you just kind of go into more detail on how you plan to get there? Thank you, and I'll repeat it, maybe.

And I know you provided some color on.

You know what that entails, but could you just kind of go into more detail on how you plan to get there.

Thank you.

I think the question.

I'll repeat it maybe was it around the target operating model in 2026.

Elysse Connor: Was it around the target operating model in 2026? Yes, about getting to the 1.6 ratio of net new ARR and sales and marketing spend. Thank you.

Yes about getting to the one six ratio of net new <unk> and sales and marketing spend thank you.

Yes, so when we think about 2026 and <unk>.

Brian: So when we think about 2026 and sales and marketing as a percent of revenue, ultimately driving to our 20% adjusted EBITDA, we believe that we'll continue to maintain a consistent level of efficiency that we have today. In other words, to continue to generate the new client wins and cross-sell activity, our investment dollars will be comparable in sales and marketing to our revenue growth. And so by 2026, we'll still be between a 14% revenue contribution to 15% of revenue contribution from that component of operating expenses.

<unk> marketing as a percent of revenue so ultimately driving to our 20% adjusted EBITDA.

We believe that whoops, we will continue to maintain a consistent level of efficiency that we have today. So in other words to continue to generate the new new.

New client wins and cross sell activity or investment dollars will be comparable.

And sales of marketing to our.

Our revenue growth and so.

By 2026 will still be between 14% of revenue to 15% of revenue contribution from that component of operating expenses in order to achieve that we will maintain a one 5% to 2024% a 1.6 of <unk> creation to sell.

Brian: In order to achieve that, we'll maintain a 1.5 to, in 2024, it's a 1.6 of ARR creation to sales and marketing expense. Other areas that are equally as important are we would expect to continue to leverage our R&D down to 20% of revenue. And we're doing that in a couple of different areas. One is revenue scale.

Marketing expense other areas of that are equally as important is we would expect to continue to leverage our R&D down to 20% of revenue.

We're doing that from a couple of different areas. One is our revenue scale second is continued efficiency within our engineering group and our product group as well as some off shoring activity that we began in 2023.

Brian: Second, continued efficiency within our engineering group and our product group, as well as some offshoring activity that we began in 2023. And then, finally, G&A, we would expect to be at 10% to 12% of revenue by 2026. That's primarily coming from just expense management and scaling our G&A line as our revenue growth. So Alexei, the 1.6 to 1 ARR creation to sales and marketing investment is what we're achieving today. So that's not a future target that we're somehow growing into. That's what we achieved in 20.

And then finally G&A, we would expect to be.

At a 10% to 12% of revenue by 2026, that's primarily coming from just expense management.

And scaling.

Our G&A line as our revenue grows so so alexia the one six to one AOR creation to sales and marketing investment is what we're achieving today. So that's not a future.

Target that we are.

That we're somehow growing into that is what we achieved in 2023.

Brian: Okay, got it. Thank you. And your next question comes from the line of Charles Nabhan from Stephen Stirling News. Hi, guys.

Okay got it thank you.

And your next question comes from the line of Charles <unk> from Stephens. Your line is open.

Hi, guys. Good evening and thank you for taking my question I know the new business gets a lot of your time, but I was hoping you could comment on some of the trends youre seeing in your renewal business specifically in terms of.

Charles Joseph Nabhan: Good evening, and thank you for taking my question. I know new business gets a lot of airtime, but I was hoping you could comment on some of the trends you're seeing in your renewal business, specifically in terms of your ability to upsell upon renewal, as well as any pricing trends you're seeing when the contracts come up. Yeah, the renewal class in 2023 was pretty phenomenal.

Your ability to upsell upon renewal as well as any pricing trends you're seeing.

When when the when the contracts come up.

Yes.

The renewal class in 2023 was pretty phenomenal. So we renewed 31 clients and we renewed 20 of those in the fourth quarter and all of 2022, we renewed 20 clients. So we're seeing more renewals.

Brian: So we renewed 31 clients, and we renewed 20 of those in the fourth quarter. In all, we renewed 20 clients in 2022. So we're seeing more renewals, and as those are occurring, we're seeing a nice uplift of about 6% upon renewal that comes from a couple of different areas. It's cross-selling a new product into the client account, and then it's also the client signing up for additional minimum commitments that increase over the new renewal period. It's those two components that are driving the uplift and renewals that we're seeing. And then also, in February, as Alex mentioned, prepared comments, which was a very nice renewal for us with our largest client, which is a top 10 credit union. That's great. I appreciate that, Culler.

And as.

And as those are occurring we're seeing a nice uplift of about 6% upon renewal that's coming from a couple of different areas its cross selling new product into.

The client account and then it's also the client signing up for additional minimum commitments that increase over the new renewal period. It's those two components that are driving the uplift in renewals that were seeing and then also in February as Alex mentioned in his prepared comments, which was a very nice renewal.

<unk> was our largest client which is a top 10 credit union and when you compare the contract value of this client to the original contract that they signed six years ago the value of that contract has more than doubled.

Brian: And as a follow-up, just had a financial question, and apologies in advance if you touched on this already, but could you talk about the gross margin assumptions embedded in your 24 guide? I know, historically, you've talked about two to three hundred bits of margin expansion. I imagine it'll be somewhere in that range, but you also have, you know, some kind of balancing investment with efficiency. So, any comments you can make on cadence and how we should think about that expansion on a quarterly basis would be helpful as well. Yep, no, that's great.

That's great I appreciate that color.

And as a follow up just had a financial question and apologies in advance if you touched on this already but could you talk about the gross margin assumptions.

Embedded in your 24 guide I know historically, you've talked about two to 300 bps.

Margin expansion.

It'll be somewhere in that range, but you also have.

Some kind.

Kind of balancing investment with efficiency. So any any comments you could make on on cadence and how we should think about that expansion on a quarterly basis would be helpful as well.

Yes, no that's great. So.

Brian: So in 2024, we're going to experience 700 basis points of adjusted EBITDA margin expansion. The way to think about that is 250 basis points will come from adjusted EBITDA margin expansion, roughly 250 basis points will come from gross margin, and 450 basis points will come from OPEX. The gross margin leverage that we're experiencing, a good component of that is coming from investments that we're making in our platform that continue to drive down our cost per registered user in terms of the hosting cost that we pay to AWS. The other areas where we're seeing nice operating leverage are in the post-sale operations of our business, so implementation, site reliability, engineering, and our support functions. All of those functions are experiencing operational efficiency that's contributing to the year-over-year gross margin expansion.

In 2024, we're going to experience a 700 basis points of adjusted EBITDA margin expansion the way to think about that as 250 basis points will come roughly 250 basis points will come from gross margin and 450 basis points will come from Opex. The gross margin leverage that we're.

We're experiencing.

A good component of that is coming from investments that we're making in our platform that continue to drive down our cost per registered user in terms of the hosting cost that we pay to AWS.

Other areas, where we're seeing nice operating leverage is in the post sell operations of our business. So implementation site reliability engineering and our support functions all of those functions are experiencing operational efficiency thats contributing to the year over year gross margin expansion.

And when we and I know you didn't ask this but when we dropped down to opex the majority of them.

Brian: When we, and I know you didn't ask this, but when we drop down to OpEx, the majority of about two-thirds of the operating expense efficiency will come from GNA, and the balance will be split evenly between R&D and sales and marketing. Great. Well, thanks again, and a great quarter, guys. Thank you. And your next question comes from the line of Chris Kennedy from William Blair. Your line is open.

About two thirds of the operating expense efficiency will come from G&A and the balance will be split evenly between R&D and sales and marketing.

Great.

Well, thanks, again and great quarter guys.

Thank you. Your next question comes from the line of Chris Kennedy from William Blair. Your line is open.

Good afternoon, and thanks for taking the question Alex you touched on the importance of data can you just talk about kind of what you're doing to leverage that data at that time were platform.

Cristopher David Kennedy: Good afternoon, and thanks for taking the question. Alex, you touched on the importance of data. Can you just talk about kind of what you're doing to leverage the data that's on your platform? Thanks.

Yes, thanks for us from the very beginning when alchemy was created there was the notion.

Alex: For us, from the very beginning, when Alkami was created, there was the notion that storing transactional data could be useful for financial reporting. And then we built some technology to do that. And then we took a pretty big step forward with an acquisition. Summer before last, I'm looking at Brian. Summer before last.

Net.

Storing.

The transactional data could be useful for the financial institution.

And then we.

We built some technology to do that and then we took a pretty big step forward with an acquisition.

<unk>.

Alex: April 22. April 22. With an acquisition on April 22, which was a company with a modern data platform. And if you think about what capability we had that that company, which is now part of Alkami, had the ability to ingest plans, contextualized transactional data from lots of different legacy bank cores. And then you combine that with the information, the transactional information that's coming out of digital banking across that surface area.

Summer before last when I'm looking at Brian <unk> with 22 April 22, with an acquisition date for trying to.

A company with a modern data platform.

And if you think about what capability, we had that that company.

Which is now part of alchemy had the ability to ingest.

Plans.

Uh huh.

Contextualized transactional data from lots of different legacy bank cores.

And then you combine that with the.

Information the transactional information Thats coming out of our digital banking.

Application, so now across that surface area.

Alex: We have transactional data that we can analyze. [inaudible] More accounts than probably anybody but Bank of America, right? And so if you think about a topic like artificial intelligence, AI is good data, plus different types of models. You could have a retrieval model, you could have a classification model, you could have a predictive model.

We have transactional data that we can analyze from.

More accounts than probably anybody with bank of America right now.

So if you think about a topic like artificial intelligence artificial intelligence as is.

Good data plus different types of models you could have a retriever model you could have a classification model you can have a predictive model.

Alex: And so what we're able to do with our customers is have this great data set that we've been able to do a lot of machine learning on that helps them classify their customers or members into demographic groups that allow them to target better, and then also has a predictive model in it so that it can say for them, "This demographic group, you ought to make this offer for." So in summary, we think that data capability is the long-term differentiator for digital banking, and we had both our own organic build from the very beginning of the company that supplemented that with a really great acquisition in April 22 that resulted in a data platform that's got an immense amount of transactions that we can do machine learning against and apply both classification models. And, you know, I'll turn to Brian because we actually saw a lot of success in cross-selling that product and in selling that product with our new logos this last year. That's right.

And so we're able to do with our customers is had this great dataset that we have been able to do a lot of machine learning against that helps them classify their customers or members into demographic groups that allows them to target better.

And then also has a predictive model in it so that it can say.

For them. This demographic group you ought to make this offer before so in summary.

We think that data capability is the long term differentiation differentiator for digital banking.

And we had both our own organic build from the very beginning of the company then supplemented that with a really great acquisition.

April of 'twenty, two that results in a data platform. That's got an immense amount of transactions that we can.

Do machine learning against and apply both classification now.

The models to help customers.

I'll turn to Brian because we we actually saw a lot of success in cross selling that product.

And in selling that product with our new logos. This last year. So that's right. So this was definitely a differentiator for us as it related to new client wins, we had 22 of the 39, new clients that we sold in 2024 that adopted.

Cristopher David Kennedy: So this was definitely a differentiator for us as it related to new client wins. We had 22 of the 39 new clients that we sold in 2024 that adopted the segment marketing and analytics product that Alex was referring to. Thanks for taking the question. And your next question comes from the line of Adam Hotchkiss from Goldman Sachs. Your line is:

The segment marketing and analytics products that Alex was referring to.

Great. Thanks for taking the question.

Okay.

And your next question comes from the line of Adam Hotchkiss from Goldman Sachs. Your line is open.

Adam R. Hotchkiss: Great. Thanks for taking my questions. It would be great to talk a little bit about the broader industry and, Alex and Brian, what you're hearing in your customer conversations around bank IT budgets for the year. Anything to call out there? Yeah, like I said in some of my remarks that the priority for the customers that I talk to is really three big things. One is reducing friction.

Great. Thanks for taking my questions would be great to talk a little bit about the broader industry.

Alex and Brian what Youre hearing in your customer conversations around bank budgets for the year or anything to call out there.

Yeah like I said in my in some of my remarks.

The priority.

For the customers that I talk to.

Or around.

Really three big things one is reducing friction so how how can they take an end to end new customer new member or existing customer remember looking for a new product how can they take the friction out.

Alex: So how can they take an end-to-end new customer, new member, or existing customer and member looking for a new product? How can they take the friction out of that experience? Number two is fraud. Fraud is huge on their minds. It was interesting. We had our customer advisory board together a few months ago, and we kind of created a decision framework for them to try to understand where they were leaning. For so many years, so much of what they asked us to do was to improve their customer or member experience and do certain things that would make a really great customer or member experience. Some of those things have the ability to create a threat factor.

All of that experience.

Number two is fraud fraud is huge on their minds.

Interesting, we had our customer advisory board together, a few months ago, and we kind of created a decision framework for them.

Try to understand where they were leaning for so many years so much of what they asked us to do was to improve their customer our member experience and do certain things that would make a really great customer remember experienced some of those things have the ability to create a threat vector and so what we're asking them is how do you think.

Alex: And so what we were asking them was, how do you think about things today? Are you still leaning into the customer member experience? Are you more leaning into fraud management? 100% of them said, "Boy, I'm willing to give up some of the customer or member experience to fight fraud because fraud is just really becoming a big deal." And then finally, the modern money movement, right? Obviously, as the generations change. You know, if you look at something like a bill pay, it looks a lot like a check.

Things stay do you you still leaning into customer member experience are you more leaning into fraud management hundred percent of them said boy I'm willing to give up some of their customer.

Member experience to fight fraud, because fraud is just.

<unk> is really becoming a big deal for me and then finally modern money movement right.

Obviously as is the generational change.

If you look at something like a bill pay it looks a lot like a checkbook and so what our customers have asked us to do that we've that we've built for them is.

Alex: And so what our customers have asked us to do that we've built for them is, "Can I have a much more modern looking money movement place where somebody comes in, and they're selecting between four or five different options of how they can move money, as opposed to going to three or four different applications that are unintegrated?" So any kind of friction reduction, digital account opening, any kind of ease of buying a product. There is a lot of investment around fraud and fraud management and the discussion of the nuances between, The Balancing of a Good Experience with Fighting Fraud and then providing a more modern payment. And Adam, with the innovation that's occurring through the digital banking platform that Alex is describing, that's the driver in the market.

Can I have a much more modern looking money movement place, where somebody comes in and they're selecting between four or five different options of how they can move money as opposed to going to three or four different applications that are that are unintegrated, so any kind of friction reduction.

<unk> digital account opening any kind of ease of buying a product.

Any a lot of investment around fraud, and fraud management and the discussion of the nuances between.

The balancing of a good experience with fighting fraud.

And then providing a more modern payment experience.

And Adam with the innovation, that's occurring through the digital banking platform that Alex was describing that's the driver in the market. That's the tailwind in the market for companies like alchemy to pick up the number of new clients in the digital users that were picking up.

Alex: That's the tailwind in the market for companies like Alkami to pick up the number of new clients and the digital users that we're picking up. The current providers in the space are not keeping up with the mega banks and some of the super regional banks and what they're investing through their digital banking platform. And that's what requires the end market to look at more of a contemporary provider of services in the space, such as Alkami, which is benefiting us and the market share that we're gaining. Thanks. That's all really useful color information.

The current providers in this space are not keeping up with.

The Mega banks, and some of the superregional banks and what they're investing through their digital banking platform and that's that's what requires the end market to look at more of a contemporary provider of services in this space such as in the alchemy, which is benefiting us in the market share that we're gaining.

Got it. Thanks, that's all really useful color and could you just remind us what the typical product roadmap looks like for a bank versus a credit union, how that land and expand motion differs between the two just just curious if there's anything you've learned if some of your earlier bank cohorts have matured a bit.

Brian: And could you just remind us what the typical product roadmap looks like for a bank versus a credit union and how that land and expand motion differs between the two? Just curious if there's anything you've learned as some of your earlier bank cohorts have matured a bit. So we're pretty early in the early innings of penetrating the bank market, and it really depends on the bank financial institution. So if it's a bank financial institution that's heavy-leaning into commercial clients and commercial deposits, then the primary difference between a credit union and a bank is the commercial banking offering.

So we're pretty early in the in the early innings of penetrating the bank market.

And it really depends on the bank financial institution. So if it's a bank financial institution, that's heavy leaning into commercial clients and commercial deposits than the primary difference between the credit Union and our bank is the commercial banking offering as it relates to the retail side, if it's a bank financial.

Brian: As it relates to the retail side, if it's a bank financial institution that's predominantly growing and has a strategy more of focusing on retail clients, it looks very similar to a credit union. So there aren't a lot of differences there. Maybe you can comment, Brian, on just what we're seeing from an ARPU perspective between a new logo bank and a new logo. Sure. And the best way to look at that is to unpack our backlog that we have going into the year. So 44 financial institutions, 1.3 million digital users, and the ARPU on our backlog going into 2024 is around $26. A bank financial institution or the banks that we have in our backlog, and there are 17 of them, they're averaging $31 per user compared to the credit unions, which are $23 per user.

Situtions thats predominantly <unk>.

Growing and has a strategy more focusing on retail clients. It looks very similar to a credit union. So not a lot of differences. There maybe you can comment Brian on just what we're seeing from a <unk> perspective between.

New logo bank and a new logo credit Union sure.

And the best way to look at that as to unpack our backlog that we have going into the year. So 44 financial institutions, one 3 million digital users and the <unk> on our backlog going into 2024 is around $26.

Bank financial institution or the banks that we have in our backlog and there are 17 of them, they're averaging $31 per user compared to the credit unions, which are $23 per user.

Brian: Even the $23 per user on the credit union side of our backlog, that's a significant uplift above where the company's blended average is. What's driving that is the number of our products that are being adopted on the MSA and on the original sale. As I mentioned earlier, on average, now, our clients are adopting 18 products on the original order compared to 17 a year ago, and 15 a year before that. So much different. But what's driving the increase between a bank and a credit union is predominantly the commercial banking platform and commercial banking application that they'll take. A really great color.

<unk> 'twenty, even the $23 per user on the credit Union side of our backlog, that's a significant uplift above where the company's blended averages what's driving that is the number of products that are being adopted on the MSA.

And on the original sell as I mentioned earlier on average now our clients are adopting 18 products on the original order compared to 17, a year ago 15, a year before that so much different but what's driving the increase between our bank N a.

Credit Union is predominantly the commercial banking platform, a commercial banking application that Phil Tighe.

Really great color. Thanks, a lot Bryan thanks, Alex.

Brian: Thanks a lot, Brian. Thanks, Alex. And your next question comes from the line of Saket Kalia from Barclays. Your line is open.

And your next question comes from the line of Zachary <unk> from Barclays. Your line is open.

Okay, Great Hey, guys. Thanks for taking my questions here and nice quarter.

Saket Kalia: Okay, great. Hey, guys, thanks for taking my questions here in Nice, Porter. Hey, Alex. Hey, Brian.

Hey, Alex Hey, Brian Hey, listen sorry in advance if these questions have been asked but maybe maybe first for you Brian on <unk>.

Saket Kalia: Hey, listen, sorry in advance if these questions have been asked before. But maybe first for you, Brian, on the ARPU point, the revenue per user, that really stood out to me this quarter. And you just touched on sort of the add-on sales motion, really adding more products to the existing base. Can we just talk about maybe one or two of those additional products that are most substantial to sort of that ARPU lift?

On the <unk> point.

The revenue per user is that really stood out to me this quarter and you just touched on sort of the add on sales motion really adding more product to the existing base.

Can we just talk about maybe one there are two of those additional products that are that are most substituting substantial to sort of that <unk>.

Brian: Well, where we're seeing a lot of product adoption is really in four areas in 23, and those are pretty consistent with 22. So in the money movement area of our platform, we're seeing nice cross-sell activity that's happening. Also, in the customer service area, which is where you'll see some machine learning-type products that come through, like chatbots and those type of things.

<unk> lift.

While we're seeing a lot of product adoption is really in four areas in 'twenty three and those are pretty consistent with 22, so and the money movement area of our platform, we're seeing nice cross sell activity that's happening.

So on the customer service area, which is where youll see some machine learning type of.

The products that come through like chat bots, and those type of things that security and fraud is an area, where we're having some pretty strong.

Brian: Security and fraud is an area where we're having some pretty strong cross-sell activity. A lot of that's being driven by our ACH alert acquisition from a couple years ago. And then, of course, segment, that's contributing a lot on the marketing side of our platform and driving some adoption there. All those products that I just mentioned, or those product family groups, those are what I would refer to as more of a richer RPU set compared to some of the other product groups that we have. Got it. Got it.

Cross sell activity a lot of thats being driven by our <unk> acquisition from a couple of years ago, and then of course segment, that's contributing a lot on the marketing side of our platform and driving some adoption there all of those products that I. Just mentioned are those product family groups. Those are what I would refer to as.

More of a richer RP you set compare to some of the other product groups that we have.

Got it got it that makes sense, Alex maybe for my follow up for you.

Saket Kalia: That makes sense. Alex, maybe for my follow-up for you, you know, a lot of focus, a lot of success in the bank vertical here. You know, and I think you made some comments earlier, just on the pipeline. I'm curious, how is the win rate in that vertical evolving?

A lot of focus a lot of success and in the bank vertical here.

And I think you've made some comments earlier just on the pipeline I'm curious how sort of the win rate in that in that vertical evolved and do you feel like youre getting the reference enough reference customers to sort of.

Alex: And do you feel like you're getting enough reference customers to sort of, you know, help that discussion to shorten the sales cycles going forward? Anything, anything on that win rate and sort of sales cycles, if you will? Yeah, you know, from a market perspective, one of the things that we measure is how much awareness is there about us as a provider, and that's something that we continue to try to move. We still have room to go there.

To help that discussion to shorten sales cycles going forward anything anything on the win rate and sort of sales cycles. If you will.

Yeah.

From a market perspective, one of the things that we measure is.

What is the awareness of us as a provider.

And Thats something that we continue to try to move forward still we still have room to go there.

Alex: We are consistently number one or two, the buyer being aware that they should consider. We're currently number seven in the bank market. So we still, you know, we're, we're, we're building a new business in that market. And so we're still making progress in terms of general awareness. We had I think we talked about this in the last call. Probably a year to a year and a half ago, we had a really high win rate in the bank market, but we didn't have a lot of that fast cash. And we said to ourselves, we... It's probably not good news.

We are consistently.

Number one or two in the credit Union market in terms of.

A buyer being aware that they should consider alchemy. We're currently number seven in the bank market. So we still.

Where we are.

Building, a new business in that market and so we're still making progress in terms of in terms of general awareness. We had I think we talked about this in the last call.

Probably a year to a year and a half ago, we had a really high win rate in the bank market, but we didn't have a lot of at bats, and we said to ourselves we.

It's probably not good news, we actually need to see a win rate come down which means we will have more at bats. So we had more at bats. This year the win rate came down.

Alex: We actually need to see the win rate come down, which means we'll have more at-bats. So we had more at-bats this year. The win rate came down, and that is a result of being more well-known now in the bank market. So, in summary, we have room to go to become known as a provider in the bank market, and we're working on that. We got more at-bats this year than we had last year, and so, year over year, the win rate went down as a result of the increase.

That is.

As a result of.

Being more well known now in the bank market. So in summary.

We have room to go to become known as a provider in the bank market and we're working on that we got more at bats. This year than we had last year and so year over year. The win rate went down as a result of the increased <unk>.

Alex: Yeah, and Saket, when we look at the bank market, there are a lot of factors that drive success there. It's not just, at this stage, it's not just the number of new clients that we're adding. It's how are we moving the product? What's the product market fit?

Increased at bats, and second when we look at the bank market.

There's a lot of factors that drive success there it's not just at least at this stage. It's not just the number of new clients that we're adding it's how are we moving the product.

What's the product market fit and as Alex mentioned earlier in the call in some prepared comments is we had a consultant come in and they evaluated our commercial offering and we feel like were 992%, there and having the right product to reach.

Brian: And as Alex mentioned earlier in the call and in some prepared comments, we had a consultant come in. They evaluated our commercial offering, and we feel like we're 90, 92% there in having the right product to reach a broad set of bank financial institutions, and we're going to close the remaining gap in 2024. Also, it's the core integrations that you have. We now have core integration into eight bank core systems. There's probably two to three more that we need to add to even provide greater density, but we're making a lot of progress in adding additional bank core integrations. And then unaided awareness or share a voice, however you want to describe that, what Alex was just describing. If you go back two years ago, we were only in 20 bank deals. In 2022, we were in about 45 or so. In 2023, that moved up to over 60.

Broad set of bank financial institutions, and we're going to close the remaining gap in 2024 also it's the core integrations that you have we now have a core integration into eight bank core systems Theres, probably two to three more that we need to add to even provide greater density, but we're making a lot of progress.

S and adding additional bank core integrations and then.

Unaided awareness our share of voice, how do you want to describe that Alex was just describing if you go back two years ago, we were only in 'twenty.

Bank deals.

2022 we're in about 45 or so in 2023 that moved up to over 60. So now we're being invited to more deals that results in a lower win rate, but as all three or four of these factors come together. That's ultimately how we will forge success moving forward.

Brian: So now we're being invited to more deals, which results in a lower win rate, but as all three or four of these factors come together, that's ultimately how we'll forge success moving forward with the objective by 2026. When you look at the composition of the new clients that we sell in 2026, our view is half of those would be credit unions, and half of those would be bank financial institutions. I'll just probably summarize to say, you know, there's a management team here that has been in companies that have entered the market. And what we understand is that you can't learn to swim in the front yard.

With the objective by 2026, when you look at our new the composition of the new clients that we sell in 2026. Our view is half of those will be credit unions that half of those would be bank financial institutions.

Probably summarize to say.

There is a management team here that has been in companies that have entered markets.

And what we understand is that you can't learn disappointed in the front yard and so you decided to go into market and you go to start attacking that market and then you understand what you need to take as a next step and so we are exactly where we expect it to be at this point in time in terms of.

Alex: And so you decide to go into a market, and you start attacking that market, and then you understand what you need to take as a next step. And so we're exactly where we expect it to be at this point in time, in terms of building in the bank market. We know what to do next with products, with skills, with awareness, and with marketing. We're really pleased with the progress. Got it. It's really nicely done. Thanks, guys. Thank you. And our Q&A session has now ended. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now go.

Building in the bank market, we know what to do next with products with skills with awareness with marketing, we're really pleased with the progress.

Got it really nicely done thanks, guys.

Thank you and our Q&A session has now ended ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

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Okay.

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