Hello and welcome to Alkami’s Third Quarter 2022 Financial Results Conference Call. My name is Danielle and I will be your operator for today’s call. [Operator Instructions] I will now turn the call over to Andrew Vinas. Andrew, you may begin.

Thank you, operator. With me on today’s call are Alex Shootman, Chief Executive Officer and Bryan Hill, Chief Financial Officer. During today’s call, we may make forward-looking statements about guidance and other matters regarding our future performance. These statements are based on management’s current views and expectations and are subject to various risks and uncertainties. Our actual results may be materially different. For a summary of risk factors associated with our forward-looking statements, please refer to today’s press release and the sections in our latest Form 10-K and 10-Q entitled Risk Factors and Forward-Looking Statements. The statements made during the call are being made as of today, and we undertake no obligation to update or revise any forward-looking statements. Also, unless otherwise stated, financial measures discussed on this call will be on a non-GAAP basis. We believe these measures are useful to investors in the understanding of our financial results. A reconciliation of comparable GAAP financial measures can be found in our earnings press release and in our quarterly filings with the SEC. I will now turn the call over to Alex.

Thank you, Andrew. Thank you all for joining us today. I’m pleased to report another quarter of strong performance. In Q3 2022, Alkami grew revenue 34%, once again ahead of our expectations. We also exited the quarter with 13.7 million live registered users on the Alkami platform, up 2.3 million users compared to the prior year. This past quarter, we continued to make progress on our key priorities, which we shared with you at the beginning of the year. The first two are to become the digital banking provider of choice for banks, similar to our competitive position with credit unions, and increase our add-on sales. In the first 9 months of 2022, we have outperformed our expectations in both of these areas. We signed 10 new platform logos in the quarter, including 1 bank. This brings our year-to-date 2022 new logo wins to 15 credit unions and 7 banks. The 7 bank wins so far this year outpaced the 5 wins we had during all of 2021. And our momentum continues with an additional 4 banks closed following the end of the third quarter. Our add-on sales momentum continues with Q3 representing the best quarter of the year in terms of total contract value and add-on sales represents 34% of total sales for the first 9 months of 2022. In addition, we renewed 6 client contracts during the third quarter and 11 client contracts year-to-date. The 11 client renewals represent 5% of our ARR and added $40 million to our client contract backlog, which is now $755 million. We also expect to renew an additional 5 to 10 clients during the fourth quarter. Our results continue to demonstrate the energy and passion our Alkamists have to create great outcomes for our clients and position Alkami as the preferred digital…

Thanks Alex and good afternoon everyone. Third quarter results continue the momentum we experienced during the first half of 2022 across all our key metrics. For the third quarter of 2022, we achieved revenue of $53.4 million, which outperformed the high-end of our financial guidance by approximately $1 million and represented a growth of 34%. This was driven by strong performance across all primary revenue drivers, combined with Segmint’s revenue contribution of just over $3 million. We implemented 10 new logos in the quarter, bringing our digital platform count to 190, compared to 169 in the prior year. We now have 40 new logos in implementation, representing 1.7 million digital users. And during Q4 of 2022, we expect to implement 11 financial institutions from our backlog that represent approximately 520,000 digital users. We exited the quarter with 13.7 million registered users live on our digital banking platform, up 2.3 million or 20% compared to last year and up 390,000 digital users sequentially. Over the last 12 months, digital user growth continues to be driven by two areas. First, we implemented 29 financial institutions supporting 1.2 million digital users. And second, our existing clients increased their digital user adoption by 1.5 million users or 12%. Offsetting digital user growth was churn of 353,000 digital users, of which the majority is represented by a single client that has been transitioning off our platform over the last 18 months. We continue to maintain a very high gross retention rate of approximately 97%, measured in terms of ARR and digital users retained over the last 12 months. We ended the quarter with an RPU of $15.57, which is 15% higher than last year. This compares to our blended market opportunity of approximately $58 per user. The Segmint acquisition contributed $0.89 or 7% of RPU…

[Operator Instructions] The first question comes from Andrew Schmidt of Citi. Please go ahead.

Hey, Alex. Hey, Bryan, good sales quarter here. Thanks for taking my question. Wanted to start off just on the environment. And Alex, you had some good commentary upfront, but I just want to confirm, it doesn’t sound like you’re hearing anything about pauses in decision-making or pull back in terms of IT spend. Actually, it sounds like demand is actually or desire to invest is actually stepping up in terms of what you’re getting from your customers. Just wanted to drill down on that, just to be clear in terms of what you’re hearing on that front from your customers. Thanks.

Yes, Andrew. This is Alex. Thanks for the question. Certainly, demand could soften in the future, right, because neither Bryan and I can predict the future. But right now, we have not seen any slowdown in demand. And I think what it comes back to is that comment that I shared with the president of a bank prospect: this is a mandatory investment that people have to make. They don’t have a choice but to have a great digital banking offering for their customers. And I think the thing that was most interesting to me is, even as things get perhaps a little more challenging to an institution, as they rotate back into needing to drive deposit growth, they see the digital channel as an area to drive deposit growth as well. So kind of all-around they see the digital channel as a critical part of their business environment, but we have not seen a drop-off in demand.

Andrew, our sales pipeline continues to be at all-time highs. And what’s encouraging for us is we’re maintaining our strong position as it relates to signing new logos for credit unions. But even if we entered into a tougher environment, we are very thinly penetrated into the bank side of the market. And seeing the momentum that we’re presently gaining on the bank side of the market, for us, we feel that could offset future headwinds that could occur from a softening environment. And combining with that is the success that we’re having with add-on sales. I mean, with add-on sales now representing 34% of total contract value originated this year and comparing that to prior years of low 20% and sub 20%, that’s another very strong indicator that the demand is strong, the momentum in the company is still strong, and we have good visibility into the future.

Very clear. Thank you both for that. And then if I could just dig into the visibility for FY ‘23, obviously, long contract durations, implementation time frames. You seem to have pretty good visibility at this point. But sorry if I missed it, what is the – did you mention the exit rate in terms of organic ARR growth? And then maybe you could talk about the puts and takes and how that plays into sort of at least a minimum expectation for 2023 revenue growth. Thank a lot.

Yes. I’ll provide 2023 revenue guidance and revenue targets in our February update. But what we did say is we expect to exit the year with $226 million to $228 million of live ARR, and that represents a 34%, 35% total growth. And organic is 27% to 28%. And then also, Andrew, what I think is equally as important is we exit Q3 with $43 million of ARR in our implementation backlog, and that’s up well over 50% from the prior year quarter.

Perfect. Congrats on the results, guys. Thanks for taking the questions.

The next question comes from Mayank Tandon from Needham. Please go ahead.

This is actually Sam Salvas on for Mayank today. Thanks for taking the questions. And congrats on another strong quarter. Good to see the 10 new logo wins this quarter. I was wondering if you guys could talk a little bit more about these – some of the new business wins and renewals from the quarter. And on top of that, maybe give us a sense as to the size and the scope of these wins. Thanks.

No, no, that’s great. So in 2022 – and I’ll just speak to our year-to-date results, we had 22 new logos that we’ve signed, 15 of those, and this is through Q3 – 15 of those credit unions; seven of those are banks. And what we’re seeing is a much higher revenue per user compared to the prior year. And I’ll give you an example. This cohort in 2022 is about $3 a user higher than what we’ve experienced in 2021 and even much higher than what we experienced in 2020. So that’s very encouraging for us. And then Alex mentioned, during the month of October, we closed an additional four banks. And combined with that, we have closed additional two credit unions. So we’ve had six more new logos that closed in the month of October. So Q4 is starting to look like it could be a pretty nice quarter for us as well. The average size in terms of ARR for the credit unions and the banks is really very comparable. It’s about $800,000 of first year ARR that would come from this 2022 cohort. Now what drives that is that credit unions tend to have more digital users and a little bit lower RPU than the banks because the banks bring a lower number of users that all the banks have or the majority of the banks will bring with the commercial banking platform, which then increases RPU. So we’re very excited with the mix. We’re excited with the momentum that we have in banks. We’re extremely excited about the start to Q4, and we look forward to reporting the Q4 results in February.

Great. That’s super helpful. And then just touching on gross margins, I appreciate the commentary there, especially in the fourth quarter, expecting 100 bps of expansion in ‘22 for the full year. And I think you guys in the past have said we can expect 200 to 300 bps of expansion in the past. Is that still on the table for 2023 or could you guys provide any color on how we should think about gross margins heading into the next year?

No, you’re exactly right. On average, we expect 200 basis points of gross margin expansion. That could be 300 basis points in 1 year, 100 basis points in the next, but it should average out at 200 basis points of expansion each year as we progress to 65% gross margin. And then once we have a bit better line of sight to 65%, we can speak to where we will go from there. We have some good indication in gross margin in a couple of areas. As we originate new business, we’re originating that business at around a 70% gross margin. So that’s encouraging for us. The other area is, as we renew clients, the headwind from implementation costs that are deferred over the original contract go away. So upon renewal, we will have a 200 to 300 basis point lift at the unit economic level. So we do have some margin expansion built in structurally to our financial model. Now that can be somewhat tempered depending on the volume of new logo growth because you’re just bringing in new logos. So – but that is a good indication for us. Now at the beginning of the year, a couple of things that we did mention, we mentioned that the MK Decision acquisition would be a headwind to gross margin, and that’s what we have seen throughout 2022. And we also mentioned that, given the significant new logo implementation backlog that we had entering 2022, that resulted in a very high project concurrency that we had to resource for in Q3 and Q4 this year. So our expectations are, and this is all contingent on our success that we have with new logo wins in Q4, our expectations are, in 2022, we pull forward some of the implementation investment we would have expected to have had in 2023, which should put us back on a gross margin expansion trajectory in 2023.

Great. That’s really helpful commentary. Thanks, guys.

Our next question comes from Bob Napoli of William Blair. Please go ahead.

Thank you, and good afternoon. What is driving the success in banks? Has the commercial side of your platform been upgraded or – I know you’ve been investing in that for a long time, but what is driving that? And is your win rate in banks going up?

Bob, this is Alex. So yes, we spent the last couple of years, as I kind of mentioned in my opening comments, we spent the last couple of years improving our commercial bank offering. And then that was reinforced to us in this focus group that we did where we took several non-Alkami customers and had them give us feedback on the bank offering. And the feedback they gave us was really interesting because they said, look, what’s clear is that what you all have done is apply your user experience discipline. So that’s not user interface, but that’s the discipline that we have and the science we have in the company around trying to understand what’s the work that people are trying to do and then how can we have an application that is intuitive because it is anticipating the work that they are trying to do. And so they told us that there is three or four areas of our application where we’ve really rethought the way that the application is presented, and it’s more unified and a better user experience for one of their customers. So what they were reflecting on is, if this was a commercial account of ours, this is what they would be saying to us about the experience that you’re providing. So I think it’s a combination of the product, but then also we’ve made investments from a go-to-market perspective and from a services perspective to bring in skills and talent that understands that market, which is different than the credit union market.

Thank you. And then your cross-sell success, what is – and I don’t know if this relates to the acquisitions, but how are the MK Decision and Segmint going and the very strong cross-sells? What is – what products are driving – are you cross-selling from MK and Segmint or what other products? I’m sure there is other products as well.

I’ll give you a quick commentary on Segmint. And then, Bryan, if you can share some broader data, remember, we just closed the Segmint acquisition in the – in the middle of Q2. But we’ve made progress on our go-to-market integration for that line of business. From our own buyer research, we know that marketing is involved in 52% of digital banking purchase decisions. And so we developed a targeted sales play to address marketers, and we closed two new logo wins that included Segmint in the third quarter. We’ve also got a pretty big opportunity in our existing clients, where we can quickly show the value of Segmint’s analytic engine on the digital banking data. And so what we did, we’re so convinced of the ROI on Segmint to FI’s bottom line that we offered a try and buy program, which was signed by six prospects. In addition to that, during the third quarter, we sold Segmint into two existing clients. So we were pleased with the progress on go-to-market from that acquisition. And Bryan, I’ll let you comment overall on add-on sales.

Yes and just a bit of a tag-on to Alex’s comment on Segmint. Segmint also has direct business that they sell. So in addition to the two new logos, the two cross-sold into our installed base, we had six additional new logos added specifically for the Segmint product, so non-digital banking platform, new logos. And we also see experience like that with ACH Alert. So we would continue to expect as we have acquisitions, we will go to market, sell them into our installed base, include them in new logo sales, but then also be digital banking platform agnostic and sell into new logos specific to those service offerings. But as it relates to our add-on sales success, it’s very consistent with Q2, Bob. Areas – we have eight product families. We have three to four of those that are driving in large part our cross-sell success, add-on sell success. Fraud and security is an area where the individual products that are really driving that are our ACH Alert product, which was an acquisition, as you’re aware. And then also our Account Takeover product is gaining some momentum. And it really gained momentum as we exited 2021, and that’s continued into 2022. Another area is money movement. Money movement is driven by bill pay. It’s also driven by instant account verification. And that’s where our crypto product resides, it’s within that product family group. And then finally, I would say, client service, where FIs are focused on creating an improved experience for their customers, also creating a self-service environment that helps their operating expenses. And so chat and conversational AI products are doing pretty well within that product family group.

Thank you. Appreciate it.

[Operator Instructions] The next question comes from Charles Nabhan of Stephens. Please go ahead.

Hi, good afternoon. Thank you for taking my question. So most of my questions have been asked, but I wanted to get a little color around what’s next on your product road map, whether it comes organically through your product ecosystem or via M&A, if that’s part of the consideration today.

If you think about Alkami in a three-act play, right, if you think about most indispensable software technologies that you’re familiar with, those technologies evolve through three acts. The first act is it’s a great application where you’ve intuited what the user needs and you build a great experience and people are attracted to your application. And then people start saying, gosh, I’d like to do more because this is a great application. So the application starts to take on platform characteristics. That means that the application becomes extensible and it’s easier for people to connect third-party applications or do their own development into that platform. And then once you’re starting to get those different products connected to your platform, you start gathering a tremendous amount of data and you start realizing that you’ve got an opportunity to take that data and create strategic value for your customer with that data. So think about – when we think about the future of Alkami, we think about it in terms of those three acts, which are happening at the same time, but they are happening at different levels of maturity. What else can we add to our application that makes it more and more usable to the financial institution? And that’s where you saw us make the investment in things like digital account opening. How does our platform become more extensible so that it’s easier for people to plug technologies into our platform, if you look at the number of partners that we have today versus 3, 4 years ago. And then how do we take the data that is uniquely the FI’s data and turn it into strategic value for that FI? That’s how you should think about the planning horizon for Alkami.

Got it. I appreciate the color. Thank you very much. End of Q&A:

This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.