Hello and welcome to Alkami's Fourth Quarter 2022 Financial Results Conference call. My name is Marise [ph] and I'll be your operator for today's call. [Operator instructions] Please note, this event is being recorded. I'll now turn the call over to Andrew Venus. Andrew please, you may begin.

Thank you, operator. With me on today's call are Alex 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 in the call are being made as of today and we undertake no obligation to update or revise any forward-looking statements. Also, unless otherwise stated, financial measures discussed on this call will be on a non-GAAP basis. We believe these measures are useful to investors in the understanding of our financial results. A reconciliation of comparable GAAP financial measures can be found in our earnings press release and in our quarterly filings with the SEC. I will now turn the call over to Alex.

Thank you, Andrew, and thank you all for joining us today. This afternoon I'm going to provide highlights of our fourth quarter operating results, observations on the demand environment and recap our five key initiatives with some comments related to engineering our technology platform for scale, before turning the call over to our CFO, Bryan Hill. I am pleased to report another quarter of strong performance as we continue to make progress on our key initiatives. In Q4 2022, Alkami grew revenue 31% once again ahead of our expectations. We exited the quarter with 14.5 million live registered users on the Alkami platform up 2.2 million compared to the prior year, and we achieved a $4 million adjusted EBITDA loss in line with the high end of our guidance for the quarter and an important milestone on our path to adjusted EBITDA profitability, which we continue to expect to occur in 2023. These results reflect continued execution on all five of the five key initiatives I outlined at the beginning of 2022. Two of these initiatives were fundamental drivers to our performance for the year; first, to become the digital banking provider of choice for banks, similar to our competitive position with credit unions and second, to drive growth by increasing add-on sales. For the full year of 2022, we've outperformed our expectations in both of these areas. We signed 37 new digital banking platforms, platform clients for the full year of 2022, of which approximately 30% were banks, and our bank wins increased a 100% compared to 2021. As we expected, new logo sales were higher in Q4 2021 than in Q4 2022. However, 2022 was a more balanced year in terms of new contract signing throughout all quarters of the year, with Q4 being the high point of…

Thanks, Alex, and good afternoon everyone. Fourth quarter results continue the momentum we experienced during the rest of 2022 across all our key metrics. For the fourth quarter of 2022, we achieved revenue of $55.5 million, which outperformed the high end of our financial guidance and represented growth of 31%. This was driven by strong performance across our primary revenue drivers. We implemented nine new clients in the quarter, bringing our digital platform client count to 199 compared to 177 in the prior year. We now have 44 new clients that are implementation backlog representing 1.6 million digital users. We exit the quarter with 14.5 million registered users live on our digital banking platform up 2.2 million or 18% compared to last year and up sequentially 810,000 digital users over the last 12 months, digital user growth continues to be driven by two areas. First, we implemented 30 financial institutions supporting 1.1 million digital users. Second, our existing clients increased their digital user adoption by 1.4 million users. Offsetting digital user growth, which churn at just over 300,000 digital users, of which the majority is represented by a single client that transitioned off our platform during Q3 of 2022. We continue to maintain a very high gross retention rate at just over 97% measured in terms of annual recurring revenue or ARR and digital users retained over the last 12 months. We ended the quarter with an RPU of $15.55, which is 14% higher than last year. This compares to our blended market opportunity of approximately $58 per digital user. The segment acquisition contributed $0.91 or 7% of ARPU expansion along with ARPU expansion of $0.96 or 7% driven by add-on sale success and the addition of new clients who tend to onboard with a higher average RPU. Subscription revenue…

[Operator instructions] Our first question comes from Bob Napoli from William Blair. Bob, please go ahead.

Good afternoon. Really nice to hear the very specific guidance for 2026 on trends to 2026 and maybe just what do you see as kind of the biggest challenges? What gives you the confidence to put out that specific guidance for 2026, and what do you view as the biggest challenges to getting there?

This is Alex. I'm going to start, we'll kind of talk about two things. One confidence and then two, where do we have to continue to do work. As I stated in my comments, we continue to talk to customers who believe that a digital banking platform investment is a mandatory innovation for them. And they continue to understand that this digital channel can become for them not just a service channel, which it has been primarily, but with the appropriate use of data and other capabilities, it can also be a sales channel for them that allows them to grow their top line as well. And so the confidence side comes from really from market signals about how important this investment is to financial institution's futures. Bryan kind of mentioned the thing for us to manage, which the best product wins in this space. There's no real victory and cutting cost to your future, and so we need to be -- we need to be wise about how we balance the investment in the product along with the investments to continue to get to gross margin targets that we want to get to. So in short, confidence comes from the market signals of the hard work that we have to do is continue to build a great product and invest in the platform, as I talked about, to be able to scale out that platform for the future growth. Then do you have any comments, Bryan?

Yeah, a couple things, Bob, and look, we felt it was important to provide more constructive comments in this area given the economic environment that we're in, given some of the investor conversations that we're having. And Alex and I, we have a lot of confidence in where we're headed over the next three years, but let me give you a couple. First off, we still have, healthy demand. We feel that we can continue to compound the business each year at 25% minimum. The guidance speaks to that for 2023 and the live ARR that I have coming into the year as well as the implementation backlog rises a tremendous amount of visibility into that. Second, we're starting to see momentum among bank wins. We're seeing momentum among the number of bank deals that we're participating in, and we're seeing a rising win rate as it relates to bank. So that provides us some confidence. Second on the revenue front is also our add-on sales momentum. Now add-on sales contributes 37% of our total TCV of new sales in 2022, and we expect that to continue and even out to potentially a 50% level in future years. So that provides us even further confidence in achieving the 25% revenue growth as it relates to achieving a 20% adjusted EBITDA margin. It starts with hitting a 65% gross margin. We did have a slowdown in our gross margin expansion 2022 for the reasons that I described in this call. I described on previous calls as it relates to implementation con, project concurrency we're through that now a more evenly distributed new sales year 2022, as resulted in the ability for us to better manage those investments as it relates to implementation and then really exit 2023 with a gross margin in 60%, maybe slightly ahead of 60%. So that gives us great visibility in the, in achieving a 65% gross margin by 2026. And then as you work your way down through operating expenses, we already in sales and marketing have a very efficient go to market. Efficiency as it relates to sales and marketing is a percent of revenue. G&A, we've already made our public company investments and revenue scale will continue to provide operating leverage and that line item of OpEx we saw 500 basis points for the full year of 2022 and over 600 basis points in Q4 year over year. So, lots of momentum there and then it really comes down to what I view as controllable investment in R&D but still investing in the platform for efficiency gains and investing in the platform for bringing more product to market. We expect to bring somewhere between three to four new products to market in 2023. So all these items come together for Alex and I to have a tremendous amount of confidence in providing more of a multi-year guide on when we will reach really a more acceptable level of profitability.

Great, thank you. That's super helpful. And just to follow up on the cross sales and what is working in particular on cross sales, how is segment and how is that working? It seems like a big opportunity. So just some color on cross sales and as it relates to revenue per user, you expect to see a steady little kind of growth in revenue per user with cross sales?

Sorry. Hey, Bob, this is Alex. The first thing I'd tell you is, I'm really proud and encouraged about the sales team that's in place that covers our existing customers. It's a highly professional sales team. They understand the industry, they understand their customers. They do the right thing by their customers and that is obviously a key contributor to the success. Segment was really exciting for us. We had 13, what I would call synergy deals that would be either add-on deals or deals that were new customers and then we had 40 new deals besides that and I think that we're just, I think we're just barely scratching the surface with segment. If you think about what segment is, it really is a self-contained marketing tech stack, if you will, for a bank that comes alongside existing investments and allows that bank to have a walled garden where they have the best data possible, the data that comes out of their core system, their digital banking system and then use that data to understand amongst tens of thousands of key lifestyle indicators, what micro segments they have within their customer base and then be able to target offers to those micro segments and deliver that content in channel. All of this is the holy grail of marketing and the financial institutions are just beginning to understand that this is what they need in their digital channel. So I'm, I'm really excited about what's happened with Segment so far. I'm excited about the synergy and I think that as the market continues to understand what they need to be able to interact with their customers in the digital channel, this is going to create a pretty big uplift for us.

Yeah, and Bob, just in terms of the product categories that contributed to the majority of our add-on sales effort, the theme in Q4 did not really change from the themes for the first three quarters of the year. The money movement product family category that was a significant contributor. Our client services account category, which includes, chat and chatbot and conversational AI products fraud and security, which includes ACH alert, which was an acquisition from 2020 that was a pretty significant contributor and then finally the marketing and analytics product family category, which includes segment. So those four product family categories really are I would call 75% of our add-on sales success came through those areas. And if you step back and give some consideration to those products, those are really some of the newer products in the market. So our install base, which averaged nine to 10 products from several years ago when we were bringing in new logos, these products really either were not available or certainly not available through Alkami, and now they are, which is what presents that back cross-sell opportunity.

Great. Thank you. Thank you very much. Appreciate, appreciate it.

And now we'll proceed with a question from Andrew Schmidt from Citi Andrew, please go ahead. Andrew. I'm sorry. Andrew, are you okay now? Yeah, there we go. Thank you. Go ahead Andrew.

Great, thank you so much. Hey, Alex. Hey Bryan. Good results here. Thanks for taking my question. I wanted to dig into the just the demand environment a little bit. It's good to hear the resilience and obviously, a great step up in terms of the wins in the fourth quarter. Maybe talk a little bit about based on top of funnel pipeline, how you're thinking about just the environment for net wins or net logo wins and additions to the user backlog for 2023, because clearly, we're back at an elevated rate and it's great to see, but I'm curious how you're thinking about the setup for the coming year. Thanks a lot.

Yeah, Andrew? This is Alex. As I mentioned in my comments, we continue to see a strong pipeline. That pipeline is kind of evenly balanced between banks and credit unions. And as I've said on other calls, we can't predict the future, so maybe sometime in the future that demand drops off, but over the last couple of quarters we just have not seen that drop off. We've seen consistent growth in the pipeline, consistent movement in the pipeline and consistent balance between credit unions and banks.

Yeah and Andrew, the way that the pipeline works through the year, because even though sales were more evenly distributed in 2022, there still is an overweight to q4. It just wasn't as pronounced in 2022. So when you go into the year your sales pipeline is most likely at one of the lowest levels, and then you're building it up as you continue through the year. But our Q4 exit sales pipeline in 2022 was larger than q4 from 2021, from 20 20, 20 19, as far back as you want to go. So we feel very confident in our sales numbers that we need to put up this year in order to continue to achieve our revenue aspirations. Now, Alex did make a comment that our pipeline is evenly distributed between credit unions and banks. That is a change from where we have been, I would say from the previous quarters when banks contributed about a third. So we're seeing more activity from banks, we're seeing that we're participating in more deals as relates to banks, and we're winning. Our, our win rate is increasing among banks, and our win rate among credit unions is staying very constant as it has in previous years. So I think all this speaks to the resilience of the need for innovation in this space, particularly through the digital banking channel.

Got it. Makes a lot of sense. And then the comment in terms of just banks being a larger part of the mix, does that suggest that when we think about the growth outgrow for 2023 and beyond that we'll see more of a lean towards ARPU as you're maybe onboarding banks that perhaps consume more products and perhaps have lower users relative to credit union. Just curious about, how the build-up might change as we think about the model going forward. Thanks.

Yeah. Well, our thoughts on the mix is we will remain com, in the market leading position in adding credit unions and our focus on credit unions has not changed. What has changed is we understand the importance of our addressable market consisting about 50% of bank financial institutions. Now as when we look out several years, our view is we will sell into an originate an equal number of banks as credit unions. That's our longer term objective, and we think we can achieve that over the next three to four years. How that will change the characteristics of our client base is exactly what you were suggesting. Generally for the same ARR opportunity between a bank and a credit union, the bank will have fewer users, but will also have more products as a result of the business banking platform resulting in a higher revenue per user. And then the one thing I would, I would add to that Angie, that's interesting is there is an increasing understanding amongst banks that they have to provide a great modern digital experience. I just got off a video call with the president of a bank right before we had this earnings call and he told me Alex, the first time we looked at Alkami, we couldn't afford you. The second time we looked at Alkami, we couldn't afford you. This time we decide that we can't afford not to afford you because we need to be able to give our customers a modern user experience. So I think that the other thing that we're seeing in banks is a realization that it is really, really important to have a great user experience for a bank. And I think that will provide us tailwinds because that's been our D&A, our D&A has been to build a great user experience.

Yeah, that makes a lot of sense. And, since you said that, I just want to tab on your one question. Obviously, the big opportunity is potentially when some of this inertia breaks down more kind of RFPs up for grabs each year. Are you starting to see that at all? It sounds like, based on your commentary, we're maybe at the beginning beginnings of seeing banks be a little bit more focused on having best in breed versus, versus more cost and full platform solutions such. But just curious if you're seeing any indications that way. I'll leave it there, guys. Thanks.

I think the only thing I would, yeah, the only thing I would just point you back to is the comment that Bryan made, which was through most of last year, the pipeline was a third banks, two-thirds credit unions, and right now it's probably closer to half and half. So I think that the objective evidence that we have right now.

Right. And, we competed in roughly two times the number of bank opportunities in 2022 that we competed in in 2021. So we're saying rising pipeline rising actual real opportunities that we're competing in. It's not just for business banking. These are, full platform deals, retail and business banking and we suspect that that will continue now that our pipeline continues to pivot more towards banks.

We will now have a question from Mayank Tandon from Needham. Mayank, please go ahead.

Hey guys, this is Sam on from Mayank today. Thanks for taking the questions and nice results here. Wanted to ask a question on the growth algorithm for '23; how should we think about revenue growth in the year and the balance between ARPU gains and user growth because, ARPU this quarter was obviously still strong at 14%, but it did decelerate and dip to touch sequentially, so just trying to get some color into how we should think about that for this year. Thanks.

Yeah, the way that we think about the growth algorithm is 7%, five to 7% revenue per user growth. This quarter was 14%. Half was really from having the segment acquisition, so that would be an inorganic component. But the other 7% came through just cross sale activity as well as onboarding clients with a much higher RPU than the average of, of the company for existing clients. So we don't suspect that that'll change, which means 18 to 20% digital user growth. And that will roughly come half from our backlog of new logos that we'll be implementing this year. And the other half will come from just our clients growing. We generally think about our clients growing at a clip of a 100,000 users a month.

Got it. Okay. Yeah, that's helpful. And then just one quick housekeeping item. Last quarter you guys gave this segment contribution for the quarter. Did you guys give that for one q this year that I might have missed? Because I think you acquired them in March of last year. So yeah,

We, acquired Segment in April and we adjusted our guidance $9 million at the point in which we added them. So $9 million for the remainder of 2022 and Segment came in right at that $9 million of revenue contribution.

Our next question comes from Charles Nabhan from Stephens. Charles, please go ahead.

Good afternoon, and thank you for taking my question. Just a couple quick ones from me. First, does the deceleration in the M&A environment have any impact on user growth or your expectations for the next year for revenue?

So the user growth for us generally is coming from our clients, growing organically. We have benefited from some consolidation. In fact, we had a renewal in January February of 2023, which was a result of a merger, and it's going to bring in a significant number of users at a level in 2024. So, we do benefit from that, but generally it's more from organic growth within the financial institution.

Got it. So it's good to see your winning in the market and some very constructive positive commentary, but just curious in terms of the feedback you hear from your from your new banks and credit union clients, where are you, I'm just curious where you're specifically differentiating on these RFPs. Is it technology, is it service? Is it all the above? What I'm getting at here is just curious where you're -- where you're winning specifically.

Yeah. The reasons why a customer chooses Alkami are, number one they have a commitment to provide a great user experience for their consumer. We continue to rate at the very top of the app scores at of the app store scores on user experience that's known in the market that's understood by buyers. And so it starts with are you a available performant secure system that I can count on? Do you provide my consumers a great user experience? Are you on are you on a modern technology platform that allows you to innovate? And allows me, the other thing that our customers have come to understand is, $200 billion spent on FinTech by venture capitalists in the last 18 months or so, has created products that their consumers want. And so they want to understand, can I take a product that my consumer wants to use and integrate it into my digital banking? What I would all begin to call, not just an application, but our digital banking platform. And then there's one that's kind of an intangible that is really, really important to customers, which is, are you a down to earth approachable company that's humble, that's customer focused that we're going to be able to work with because they understand that they're getting into a seven, eight, nine year relationship. A lot of the customers that are looking to make a decision actually will spend multiple days at our headquarters visiting with 40, 50 different alchemists across the organization. Because like I said, they understand they're not just buying a product for one year's worth of use. They're getting into a long-term relationship with a with a company. So those are the things, when people make a decision to buy Alkami, they make a decision to buy Alkami for those reasons.

Got it. I appreciate that color. And if I could sneak in one last quick one, and apologize in advance if you touched on this, but how should we think about the growth rate for Segment the segment component of the revenue base over the next year?

So we haven't provided specific outlook as it relates to Segment, but we do have a lot of excitement and confidence on where it is in the market. Segment, since we acquired Segment in April segment created 50 new client relationships, 37 or so, of those 40 of those came from their standard go to market motion that they had prior to us acquiring them. Over the last couple of quarters of 2022, we started gaining quite a bit of momentum and including segment and new logo opportunities as well as cross-selling back into our base. So we're in the, the very, very early innings of gaining traction there, and we expect Segment to continue to be a fairly significant contributor to our RPU expansion.

Got it. I appreciate the caller guys. Thank you.

Our next question comes from Josh Beck from KBCM. Josh, please go ahead.

Hey guys, you have Maddie on for Josh. Just wanted to say thank you for all the granularity you're giving on guidance and in the quarter it's been super helpful. Just in terms of the healthy backlog and implementation timeline that you guys mentioned, how are you thinking about the penetration that you're at for the total market opportunity is my first question. And my second question is, how should we be thinking about margin expansion going forward? Obviously you mentioned the 200 basis points expansion. Should that all just naturally come from the scaling of revenue or are there any additional cost cutting initiatives that you guys need to take? Thanks.

Yeah, I'll take the first one. Let Bryan touch the second, but I would say we don't have cost cutting initiatives, so I'll start with that. We I'll let, so I'll let Bryan kind of talk to the gross margin expansion. We, we think we're in really, really early innings of a pretty large market. I think we said that we're at 14 and a half million live registered users. The overall market is 280 million plus users, of which a third of those might be owned by a small number of mega banks and mega credited unions. And so if you just kind of think of two thirds of that being a market where everybody already has a digital banking platform and that market is very fragmented with a significant number of those digital banking users being on legacy platforms that are not a great experience. We feel like we're in pretty early days of a pretty large TAM that we can go after. And I'll let Bryan talk about gross margin expansion.

Yeah. And just before I move on to gross margin expansion, back to the market penetration. So, so today we're less than 8%, 7% penetrated in the overall market. As, as Alex mentioned at the most penetrated level of the market it's, it's certainly higher than where Alkami is at, but Alkami's adding more digital users than any other provider in the space to the digital banking, to our digital banking platform. So we see a market opportunity where over the next three to four years, there's no reason why we would not have doubled our users based on the pace in which we're adding users today. So we, we don't feel there's a market saturation issue, and we think the market is hungry for innovation and innovation that can be added quickly and provides flexibility through an extensible platform which is where Alkami sits today. From a gross margin perspective, I provided quite a bit of constructive narrative in my prepared comments today on gross margin. But to Alex's point we're not going to achieve our margins through cutting costs. We're going to continue to invest in our platform. We're investing our platform to provide more products to our clients as well as to have the ability to scale our platform more efficiently, which will add to our gross margin profile. All the while will also leverage our r and d spend while we're doing this. In other words, we'll gain operating leverage through that. I also mentioned how renewals can impact our gross margin. So at a unit economic level, when we renew a client, which we have a very high success rate at renewing clients we achieve a 300 basis point to 500 basis point gross margin expansion at the contract level. And then finally our third party IP partners, that's an area where we had some success in restructuring an arrangement in Q4 of 2022. And we suspect as we continue to add more digital users to our platform, we'll be able to continue to leverage the economies related to those arrangements to Alkami. But that, that that's kind of near term areas in addition to revenue scale that will provide us gross margin expansion.

Awesome. And I appreciate that additional color. If I could sneak one last one in, just wondering if you guys are seeing any differences on the willingness of IT spend between banks versus maybe credit unions kind of looking towards 2023 IT budgets in general?

Yeah, the conversations that I have with bank presidents and credit union CEOs is that obviously because of the environment they're scrutinizing the full stack of their IT budget and the full stack of their IT spend, but they prioritize their digital banking channel, right and so that's where you've heard me talk about a, an understanding that this is a mandatory innovation for them. So, I don't want to speak for any other industry other than digital banking, but I could imagine that on the fringes of a full stack of a bank's IT budget that there would be things that they would be shaving. But so far we have not seen that on the digital banking investment in the digital banking channel.

We have a question from Patrick Ravens from J m p Patrick, please go ahead.

This is Owen on for Patrick, and thank you for taking the question in for the congrats on the good results of this quarter. So I was wondering a little more on kind of combining two of the, two of the previous questions on the add-on versus net new logo additions versus its effect on gross margins. And kind of philosophically how do you guys how do you guys think about going and pursuing those two different lines of business considering its effects on the gross margin?

I'll let you answer the effect. I would start with saying when Bryan talked about, look, when we think out into the future we think that a healthy enterprise SaaS software company that's got a product that people like, and it's a company that people want to do business with ought to shape their business where they're getting about half of their new TCV growth from new logos and about half of their TCV growth from add-on sales. By the time you've acquired a customer and have a good relationship with a customer, and you've got a professional account team that is engaged with that customer and understanding their business and really has a front row seat to how they're thinking about their digital banking platform, what that gives us is real insight into what their priority areas are, where they would invest. And so that allows us, that's kind of a virtuous cycle that then feeds back into our product management organization and gives us viewers the products that we should build or the partnerships that we should have or the acquisitions that we should make. So, we think of, first of all, begin with the end in mind, a really healthy enterprise SaaS software company. It's got about half of their new TCV that's coming from add-on sales. And then if you've got a really good account team between your sales team and your customer success team you've really good insight with these customers about where their investment priorities are, and that gives you a great feedback into the product management organization. So that's how we think about the business in general. Let Bryan talk about how we think about it in impacting the gross margin.

Yeah. A couple of benefits from add-on sales. The, the first one maybe even the most important is an add-on sale is significantly less effort in the implementation process. And what I mean by that is a new logo today for Alkami has on average 20 system integrations that occur in order to launch the platform and the new logo the add-on sale effort from an implementation perspective. There, is still some complication there. However, it's able to leverage those integrations that occur once the platform has been integrated that results in a, a lower implementation effort in terms of cost which helps the gross margin profile. Secondly, an add-on sale, the speed to revenues go going from order to revenue is much quicker. So to the extent that we're having success and add-on sales, it can be an acceleration to our organic growth profile.

Great. Thanks so much for that. And that's it for me. End of Q&A

Thank you. And this concludes our question-and-answer session and it also concludes the conference. Thank you for attending today's presentation. You may now disconnect.