All right. Good afternoon, everyone. My name is Charles Nabhan. I am the Payments and FinTech Analyst here at Stephens. I wanna thank everyone that's joining us online and in the audience today. Today we have the pleasure of hosting Alkami, who is a bank technology provider. Joining us from the company is the founder, Stephen Bohanon, as well as the CFO, Bryan Hill. Gentlemen, thank you for joining us today.
Thanks for having us.
Thank you, Charles.
Yeah, really appreciate it. So just as a starting point, Stephen, you founded the company about 15 years ago. Could you describe the market opportunity you saw then, and how it's evolved over time?
Sure, yeah. So, August of 2009 is when we started the company. I had just... through the course of my career, I had spent about a year and a half, doing consulting work for banks and credit unions, and I happened to be doing some consulting with, helping banks and credit unions find new online or find an online banking vendor. So we would do, like a typical consultant, we would do a RFP and help them go through a scored evaluation process. And so it was kind of a paid education, if you will, on the industry a little bit.
What we saw at the time was that, really, as all the various kind of typical mainstay players came in and presented what they had and priced it out, and they'd leave the room, and you get to talk to the clients behind closed doors, and they'd say, "You know, these people just don't understand where the market's going. These systems were built," and many times, "8-10 years ago. The technology's not there, the features aren't there, the user experience isn't there. We're really frustrated, and we're scared that if we don't do something, you know, we're gonna become irrelevant." So this kind of idea began to form of, well, what could we do? Especially when we saw kind of what people were charging for this. A business plan began to develop, and it was really around kind of three key things.
One was we wanted to focus on user experience, and user experience is not... When I say that, a lot of times people just think about how pretty the screen is or something, but it was really more about how do you tie in to, at the time, it was eight-10 different third-party systems, and to basically bring that up to a user self-service across desktop. Mobile was just, you know, the iPhone had just been released a year before that, and how do you make it work all together like one seamless system? So that was a big focus, because at the time, everything was very ugly, rudimentary. Everything was single sign-on, everything was links out to other systems, wasn't portable across mobile. So user experience was one of the first ones.
The second was, these systems aren't really leveraging any data at all. They're basically reading them off the systems of record, throwing the data away. So we said, we're gonna actually read that data into our database, normalize it, and we're gonna be able to leverage it for all kinds of purposes: marketing, cross-sell, fraud mitigation, so forth. So that was another big one. And then the last one, which kind of was tied into user experience, is mobile was just starting to take hold, and a lot of people had maybe separate desktop system, as a separate mobile system.
So they'd have, like, two different platforms for desktop versus mobile, and we said there should be a single platform, no matter if you're using a tablet, a phone, or your desktop, to be able to have a singular user experience and singular platform. So those are kind of the three things that we went out to the market with and said, "This is where we see the future of digital banking going," and that vision kind of resonated with the market. And so we started to get a little foothold in, and then a flywheel effect began to take hold.
Great. That's a great starting point, and just listening to some of that commentary, it sounds like some of those things have changed and some of those things have not changed. So I guess to stay with that theme and touch on the obligatory macro question, if you will, I know anybody that follows the banking space hears a lot about efficiency and cost containment. But just listening to you guys and the commentary from some of your peers in recent quarters, especially post-SVB, it sounds like banks are still spending on digital and finding ways to subsidize those investments through cuts in other areas. So with that in mind, could you talk about what you're seeing in the spend environment, as well as how your solutions better equip banks to compete,
Mm-hmm
... in the current environment?
Yeah, I mean, the real advantage we have is that when when times are good, people spend on digital, and when times are bad, people spend on digital. Mainly because the difference is people spend differently on branches when times are good versus times are bad. A branch is not a very efficient way to grow. They're generally, on average, $1 million to build one, $1 million-$2 million, and then $1 million a year to run. You can basically, for the cost of one branch, maybe two, pay for your entire digital banking platform.
So what we see is that, when times start to get a little leaner, people decide to either not expand their branch footprint like they were or maybe close them and reroute that money to digital investments, which we all know is much more efficient, much more scalable. The digital banking platform, just to give you a sense, on any one day, on average, 30% of a total customer base of a financial institution interact with it on a daily basis.
Mm-hmm.
There's no branch that even comes anywhere close to that, not even a multiple of ten, right? So we do benefit from that. The other reason that we benefit from it, because this entire market, or more and more so, for instance, the way people judge their their bank or credit union is by looking at their mobile app. They're looking at their their site. That's actually how they shop. And that, in fact, a lot, a lot of surveys showing out there that a good user experience and an easy-to-use app is one of the primary, and in many cases, the number one indicator or that dictates where someone will actually move their banking relationship.
So when you have this kind of arms race or this kind of keeping up with the Joneses effect, where, as the other banks or credit unions in your market that you view as your competitors start to up their game, well, then, gosh, you know, it's like when everyone in your neighborhood kind of gets new sod in their yard, well, you kind of got to get new sod in your yard, too. So that effect helps, and that is a perpetual effect that just happens, and so we benefit from that. So even if it's something they didn't really want to necessarily spend on, because they wanna remain competitive and relevant and not be seen as a laggard, they kind of have to do it because other people around them are doing it.
Yeah. So you sort of touched on this a little bit, but assuming most of your target market already has some sort of digital solution for their customers— where is the tipping point where they decide they need a more modern solution like Alkami?
Yeah. Well, one, 100% of our market already has another solution, so this is a 100% replacement market. The tipping point is, it's probably different depending on who the institution is. A tipping point could be someone who decides, "Hey, we really wanna focus up market in the business banking market. We wanna go after our larger commercial customers. We don't have the features to go and pull them away from one of the mega banks, because we can't offer the same thing.
Mm-hmm.
That could be a tipping point. In some cases, it's tipping points where they see they're having a hard time drawing deposits from consumers, or they're having a hard time kind of cross-selling. You know, their product penetration count per customer is lower than average. And they get feedback from the market that like, "Hey, it's just, it's just cumbersome to use your systems. I have to call too much, I have to come in too much." So it's affecting their kind of their growth and their efficiency. But ultimately, the common thread that they all have is whenever they feel as though that their digital tools, their digital platform, is not allowing them to remain competitive.
Whether that be on the cost side of things or on the revenue side of the house, it's not allowing them to be competitive, and they don't think that their vendor that they're currently with, they don't see a future where that's going to change. And that's... You know, keep in mind, these are five-seven-year contracts, typically. So when you make a decision to go with someone, you're basically putting the future, your storefront, your digital storefront, you're, you're betting on them for the next 5+ years.
Yep.
And so, we always say half the decision, whenever someone makes a decision to go with a new digital system, 50% of the decision is what you have today. The other 50% of their decision is what you tell them you're actually building tomorrow and in the coming years. So that's an important piece, and that kind of creates that tipping point, the combination of current feature set plus five-year vision.
Yeah. So, just to level set for those that aren't familiar, could you talk about who you compete against, as well as your target market and how it's evolved over the past few years?
Yeah, our target market hasn't evolved too much in terms of size. So, there's generally 9,500 financial institutions in the country, split right down the middle, banks and credit unions. You take the top 30 out, which is around $100 billion and up-
Yep
... the next 2,000 down, that's our target market, about 1,000 banks and 1,000 credit unions. Because when we came to the market, we started with really a retail-only product-
Mm-hmm
... we, obviously, that resonated fine with credit unions, which many of which were retail only. But as the market has shifted, more credit unions getting to business, and of course, 100% of banks, or maybe 99% of banks, are, were already in commercial side, we had to get to the maturity level of our business banking feature set to where we could actually realistically go and replace some of the systems that they already had in place. So in that way, our target market's always been the same, but our serviceable market has really changed to go into the banks more because of the advancements of our business banking system and features.
But then when it comes to competitors, we really view the mega banks and the, what I call the neo banks, whether it be, you know, Chime, Varo, and banks like that, we really view that as our competitors because we're really a stand-in for our customers, right? They're hiring us to basically be their digital banking weapon out there in the marketplace. Yes, whenever we go into individual deals, we're competing against other players out there. You've got Fiserv and FIS and Q2 and NCR. These are the players that are fighting for the same business. But from a product innovation perspective, we actually really don't look at them. We've replaced all of them multiple times.
Yep.
So we really kind of say, "Well, what's, what's Chase doing with their $11 billion IT budget in digital?" "And what can we do to help kind of, like, even the, even the playing field with our customers?" So that's really who we look at, is really who our customers are competing with. That, those are our competitors.
Got it. Okay, and you touched on business banking, but you've also added a number of additional products, both organically and through M&A. Could you maybe talk about the evolution of the product set and how it's broadened, as well as the opportunity to cross-sell?
Sure. Well, there's two aspects. One, it's organically broadened because the definition of what we would call digital banking when we started 14 years ago and what we, what we call it today is very different. Back then, just to give you a sense, our initial contracts, the first two to three years, we had to interface to about eight third-party systems in order to be able to do the conversion. Today, that number is about 18. So just the amount of things that people expect to be able to be self-serve on their phone has changed dramatically over the last 14 years. Things like, pretty much everyone has credit score reporting and monitoring now, right?
That wasn't anything we saw 10 years ago, but now it's like an expectation that you're kind of auto-enrolled, and you can see your credit score when you go in your mobile banking app. So that, that's a good example. Everyone expects to have Zelle. Everyone expects to have some sort of budgeting and spending analytics or something that they have inside their system. Everyone expects to be able to maybe send wires and obviously bill pay and all these different types of things. So the definition itself has broadened, and we've had to kind of move up with that. The acquisitions we've made have been a little bit different. In the ACH Alert side of the house, it was because we really needed to shore up the internal expertise and product features that were available for commercial customers.
So it's a very niche product that they have. It's fantastic. They have, we have now, for mitigating fraud for payments, both the checks, ACH, things like that. So that was really just an area to close a gap. In the MK Decision acquisition, that was really a part of that expansion of the definition of digital banking, where now digital account opening is really expected to be a part of any digital banking platform. It used to be an option-
Yep
... but really, the pandemic solidified that as actually a requirement because everyone said: What do we do when our branches aren't there? The Segmint acquisition was a little bit different. I would call that one us expanding the definition of digital banking. We've actually... Really, in the history of digital banking, which is roughly 23-25 years old, I know there's some early systems in the early 1990s, but really, whenever people started buying it, you saw these vendors start to come up. Digital banking has been synonymous with service. It's what it—what creates a call to the call center? What creates a visit to the branch, which is a very high-cost service environment? What can I do to push that out to self-service? And so all the features and, quote, "innovation" that you've seen along the way has been about-...
Let's make it. Let's give them people can deposit checks with their phone. Let's let them pay the bills on their own. Let's let them move money on their own. Let's do all these things so they don't have to call us. Where we really think the next five-10 years is going to go is that the service aspect of it for the ROI has been largely realized, and it's really difficult, very slim margins, to find out is my remote deposit capture product better than yours, and how much is it really gonna move the needle when it comes to cost reduction? Where we really think the next side is now leveraging the digital channel like it should be, is like an e-commerce channel-
Mm-hmm.
is driving revenue. So the acquisition of Segmint was all about being able to have a balanced approach to where we can address both sides of the income statement. We can help you lower your cost, we can also actually help you drive, get new customers, make sure your product penetration to those customers is as high as possible. And so that was that shift, where us saying, "Digital banking shouldn't be just about service, it should be about sales just as much as it is about service." And so we really think that theme, we know it's resonating with our customers, it's resonating with our prospects, and that's what that acquisition represented, is kind of that change of, no, this is a revenue channel, not just a, a cost reduction channel.
Got it. And the other aspect of the strategy that I neglected to mention is the product ecosystem. Could you talk about how that enhances your go-to-market and how you're able to monetize that opportunity as well?
Just go ahead and clarify that question for me, when you say product ecosystem?
The third-party ecosystem.
Oh, yeah, sure. So, look, the good news about all the money that's been invested in this market over the last decade or so, is that, again, it's created that arms race effect. We know that we don't have the size, scale, or expertise to be able to build everything that's out there. And so we work very closely with our customers, to say kind of you know, we have quarterly client advisory board meetings, where we're saying to them: "What are the... You know, give me a SWOT analysis that you've prepared as an institution. What are the emerging trends? What are the things you're afraid about?
What are the opportunities we need to capitalize on?" And then we kind of find maybe a theme or a particular thing we want to go and do. At that point, then we say, "Well, when do you need it by? How urgent is it?" And generally speaking, a lot of times they're saying, "Hey, we kind of need it now." Well, hey, we can't build it right now, but we can go partner with this third party. Generally speaking, what we try to do is then also wrap our user experience around it, so that we actually can have a differentiated product, and then take that. It's really a speed-to-market decision that we make. That third-party ecosystem also kind of represents a good feeder funnel into our acquisition strategy as well. So those are the two things.
It's really kind of a speed-to-market and cost-to-build decision that we decide. The good thing is, the way we built our platform, is that it makes it very easy to plug those in. And then because we're a single code base on a multi-tenant architecture, when we go make that investment, we do that, we can immediately offer it to, you know, our entire customer base. We don't have to wait for them to, over the course of two or three years, upgrade to the version that supports that new third party now. We can immediately offer it, and that's a big competitive advantage of Alkami.
Got it. Okay. One of the more compelling things about the Alkami story, in our opinion, is the revenue visibility, which is really a function of subscription revenue. Could you talk about that and how... And we could drill into the specific drivers of revenue as well as the growth algorithm, but just in terms of the composition, could you talk about how the revenue model lends itself to visibility, as well as how investors should think about overall growth going forward?
You're on a roll, so-
No, not me. This is all you.
I wasn't even sure I was still here, Stephen. No, I'm kidding.
Didn't want you to feel left out.
Yeah, I mean, look, this is Alkami is a CFO dream job because the visibility we have in our revenue, the simplicity of the drivers of our revenue makes it very easy for me to communicate to Wall Street, what's happening in the business. It's quite simply a number of users times RPU, that equals ARR. And within that, we have a couple of different avenues in which we can grow our digital users. We add new clients, and historically, that has been overweighted to credit unions, but more recently, we're now pivoting more to banks, and that's a big part of our strategy. And between now and call it 2026, we would expect in each year to be selling as many new credit union clients as we are selling new bank clients.
So that's a growth vector and a growth driver for us. Also, the market's growing. The market's growing in terms of digital users between 5% and 8% a year. At the height of the pandemic, it was much higher than that. It was closer to 10%, but the market's growing about 5%-8% a year. It just so happens, our clients are growing more in the lower teens, so we have this macro tailwind of user growth that's happening because our clients are growing. It's not because, you know, myself, Stephen, Chuck, and others in the audience are just waking up saying: "Hey, I want to use some digital banking. I hear that's kind of a cool thing to do." No, it's because we have multiple banking relationships.
On my phone, I have four-five digital banking applications that someone is paying for, whether it's a mega bank that's doing it internally, or one that's a financial institution that is supported by a service provider such as Alkami. Someone is paying for every single one of those registered users, so that drives the revenue model. The other side of the coin is our ability to cross-sell into our base. So today, on average, our base subscribes to 12 of our products. We offer 32. Over the last few years of new sales cohorts, the number of products that are being taken is stepping up about a product a year. So now, on average, in 2023, our 2023 sales new sales cohort will average around 17-18 products. So that, in part, speaks to why someone's leaving a...
current financial institution and moving to a new one, is because of the number of products and the digital experience it's been offering, being offered through the digital banking platform. But what that does for Alkami is it gives us an opportunity to cross-sell back into our base. And so if you look at the last, just a little bit of history, from 2019 through 2023, we've gone from, you know, mid-teens% of overall TCV coming from cross-sell, go-to-market motion, to low 20s%, to low 30s%, and this year it'll be mid-30s%, maybe high 30%. By 2026, we would expect 50% of our growth in TCV or the contribution of our TCV coming from the cross-sell motion. All of this accumulates into a revenue model that's 95%-96% subscription.
Given it's a five-seven-year contract period, and it takes, call it a sell cycle of six-nine months and implementation of 10 months, the buying cycle in the market lends itself to Alkami at any point in time, having 12 months of AR implementation in backlog. So I've got 12 months of AR implementation in backlog. I've got, just under $1 billion of contract backlog of revenue, and I have a very high recurring revenue stream and a gross retention rate that's 98%+. So all these things culminate into a highly visible revenue model, that then allows us to make very strategic investments in our platform for future revenue growth while delivering on our profitability expectations.
Got it. So I know consolidation in the market has been at a bit of a standstill recently. But given the view that it could potentially pick up over the next year or two, could you talk about how your client base would potentially fare in a more of a heightened M&A environment for banks-
Yeah
... and credit unions?
Really, if you look at the numbers, especially over the last, you know, you can do them in decade cohorts, you could do it across 30 years or whatever, M&A's actually been pretty consistent. It's about 3%-3.5% a year in terms of number of institutions. One year, I think it was over 4%, but other than that, it's been pretty steady. What you see that's dried up is de novo, right? So not many new charters being created-
Right
... you're right, over the last several years. Well, maybe because we don't need any more. But and I, and I think one of the reasons is, too, because so many institutions now are able to go beyond their typical borders.
Mm-hmm.
In the past, you know, you kind of, "Oh, wait, this town doesn't have a bank or a credit union. Let's go in there and do it." Well, now they can have it because they got, you know, 100 of them that can actually advertise and pick up customers there. So I don't think that we're gonna see a big pick back up in de novo institutions.
Yep.
I do think we'll still continue to see a shrinkage of the total number of institutions in the country, especially because, a little bit of what we've been talking about, the expectations from a digital experience and what you have to have and offer, very difficult for a very small community institution, $100 million-$200 million in assets, to be able to offer. The regulatory environments and things you have to have for compliance, very difficult. So then that brings us to, okay, well, then how is Alkami positioned? A lot of people don't know, but Alkami, on average, has more users on their platform per client than any other digital banking provider in the country. Anyone with any sort of scale, like over a couple million users. So we've always kind of gone after that market.
We go after, if you—again, if you take out the top 30, we go after the next 2,000. What we see is that our customer base is outgrowing the market consistently over the last decade. One, they have the scale to where they could acquire. They have the scale to where they're viewed as a legitimate alternative to the mega banks. I think the main reason people think that the M&A market has died down is because for years and years, you had B of A, Chase, Wells, Citi buying up everyone. After the whole too-big-to-fail mess, they were, there was a moratorium on them being able to acquire anyone, right? They could only grow organically.
So now all of a sudden, the headlines are gone about M&A, but it's still happening at the RCFI level, or regional and community financial institution level. What we're seeing is our clients are the benefits of that. Because they're big enough, you know, $1 billion, couple billion, $5 billion, $10 billion, they're buying up the $200 million, $300 million-dollar institutions. You're seeing credit unions buy banks, you're seeing banks buy banks, you're seeing some credit unions turn into banks. So you're seeing all this happen. The other thing that we really see happening is that credit unions are now really getting into the business banking market. They traditionally are limited to, I think it's like 15% of their total assets, but if they're designated low income, they can actually, they have an unlimited cap.
So you're starting to see them go in and start to pick that up. Well, that naturally, when you have more competition that people feel are driving prices down, people start talking about joining forces. So I think you're gonna see more and more of that, where credit unions and banks get together, banks and banks, and so forth. So it's just the bottom end of the market, we think, generally is obviously gonna be the acquired.
Right.
The upper end's gonna be the acquirees. And so we think that and it's proven out so far, we're well-positioned. It's the reason we go after that upper market, and we don't really, we don't really kind of play below. Like, we have a basement of, like, 10,000 users.
Yep.
Anything below 10,000 users is probably not worth the time. Then our largest client's a little over 1 million users.
Got it.
One other point on consolidation. In most markets, when there's market consolidation, the inference oftentimes is for service providers into that market, it's a contraction of the TAM. That's not the case for us because our revenue model's being driven by the digital users, not the financial institution in and of itself.
Yep.
Uh, so-
Great point.
Yeah. So we wouldn't expect consolidation to have a dramatic impact on the number of digital users.
Got it. So you touched on something that I wanted to drill into a little bit, which is specifically demand for business banking solutions from credit unions, which have historically been retail-focused, but at the same time, there's sort of a thin line between retail and SMB. Could you maybe talk about the evolution of that demand, as well as how the development of your business banking solution has helped your clients meet that demand?
Yeah, sure. You know, sometimes it's a common misconception that, like, Alkami went out to the market looking for credit unions. What's funny is, myself and some of the other early investors, all of our history up to that point was in banks. We didn't really know the credit union market very well. But when you looked at what would have to be built in a 100% replacement market, what would be the minimum viable product to go replace something, being able to do retail banking was just a shorter list, required less investment. And guess who was fine with retail-only digital banking? Credit unions.
So that's how we kind of fell into credit unions, is 'cause, you know, we were retail only, and many of them were retail only, and so that made it a good fit. But some of them weren't retail only, and so what was nice, too, is it allowed us the time to kind of mature into that market, because since they didn't have a lot of really higher-end middle market, higher-end commercial or global corporate kind of needs, the SMB market was fine for them. So it allowed us to kind of build those things and for them to kind of roll those out and kind of grow that market as well. And, you know, we were just kind of plodding along.
I think the first, our first customer on business banking was about 7.5 years ago, was when we had our first customer roll out our business banking suite. And then just as we have kind of... We've continued to put additional investment into it, and we've had our customer feedback drive a lot of that. We got to a point to where we're like: You know, we actually think we're pretty close to being able to replace what banks have for commercial. And we had the good fortune of having a couple of banks that said, "Yeah, we think you're pretty close," and we did some, you know, weeks-long due diligence with them, and then got orders to do that. And so now that's why you see the success here.
It was just, it was just building it over time, and we finally got to the point to where what we had and what would it took to replace them, that list was a pretty short list, and that they felt that the, that the risk was low enough for them to go with us, and then that has just kind of turned it... And we're basically running the same playbook we did with, with the credit unions.
Yeah.
You kind of find an established player, you go replace their system and a couple of clients. Those clients, you make them happy, they love you, they tell all the other people that are on that platform, 'cause they all know each other, "Hey, we just went with Alkami. Why don't you guys go with Alkami, too?" That, that effect is what we're starting to see in the bank market as well. So it's really just a timing and because it's harder to do business banking, quite honestly. It's much more complicated, more at stake, and it's just harder to do it. And so, it just took us time to get to where we had a good enough product to replace the systems out there.
Got it.
Yeah. And we now have 10% of our clients under contract are banks. 40% of our sales pipeline is represented by banks. If we were to go back 18 months ago where we wanted to be as it relates to penetrating the bank side of the market, we're exactly in the middle of the fairway where we wanted to be. It started first with the product, as Stephen was describing. The next step was really creating some demand and some awareness that Alkami isn't just a retail digital banking service provider, but also we have a great product with a similar digital experience and same approach that we took on the retail side, that we've now ported over to the commercial banking side.
What that had the impact of doing, Chuck, was, it really increased the number of RFPs that we were participating in, which, you know, in the earlier innings of this, it actually drove down our win rate. And the reason why it drives down the win rate is for a financial institution to make a decision to go with a new digital banking provider, one of the first questions they'll ask is, "Are you integrated into my core offering?" and
Have you replaced the system I'm on before?
Have you replaced the system I'm on before, and have you integrated with my core service provider?" And there's about 12 different cores, and some of them are multiple of them are provided by the same core provider, either FIS, Fiserv, Jack Henry, or a few others, but there's about 12 of them. We now have integration into nine. And there's a couple in our sales pipeline, if we're fortunate enough to close those deals, that'll add another two. So the next inflection point is having that broad coverage as it relates to cores, that opens up a, you know, a lot of density in the market to where you're no longer the first financial institution to go through that integration.
Right.
So we feel like we're there, and it should really begin to open up the number of banks that we're selling. So last year we sold 11 banks. This year, through October, we had sold nine, with some opportunity to sell more, in the remaining months of Q4, and next year we should even sell more. So we're really at a good... So when we have a goal of 50% banks and 50% credit unions sold in a given year by 2026, we're well on our way of establishing that goal or achieving that goal.
What does that pipeline look like from a, from an RPU standpoint?
Well, let me explain to you in terms of what's in our implementation backlog, 'cause I think that's the easier way-
Yeah
... to explain it. So we have about a year, as I mentioned earlier, about a year of new client wins and backlog to be implemented. That's about $28 million of ARR. Within that, it's represented by 35 financial institutions. Of those 35 financial institutions, 15 are banks. The banks are at an RPU of $30. The credit unions are at an RPU of $23, and it blends to $25. Our company average today for all live clients is $16.28. So it gives you an idea of two things: the higher our RPU potential as it relates to a bank, and the desire of financial institutions to come off an incumbent system and absorb more technology by the new service provider.
Got it. So before I switch gears to, to financials, I wanna open it up and see if there's any questions in the audience.
Just on the integration into those cores, I would assume that there was some investment, you know, in integrating and making those connections. Was that done recently? And, you know, once you finish those connections, sh-
... I can talk about the timing, and you want to talk about the gross margin aspect of it?
I was gonna talk about the timing.
Oh, go ahead.
No, no, I'm kidding.
Go ahead.
I'm kidding. I'm giving you a chance.
So there was a few of them. So there are a couple of different core products that are for banks or credit unions that we've had. So we happen to have them with our credit union clients, so we've just kind of carried those over to some banks that had them. But generally speaking, because banks are POD processing, credit unions are online real-time processing, generally the cores are one or the other, and you don't generally see kind of cross-pollination in the industry like that. But the other ones that are like bank-only cores, these are ones we actually started, I guess, three or four years ago when we got our first Jack Henry core, right?
And we've kind of been adding at, like, one-two a year ever since then over the last three years. So these are things that we've been just kind of adding. And then, as Bryan said, you know, generally what happens is we have it slated, but we don't just go try to spend the money and build it if we don't have a customer that we know that wants to buy it. And I'll let him speak to as far as what it does from a gross margin perspective once we once we-
Yeah, but the investment areas are really two. One is, as we bring in a new bank, there's always client commitments that we need to close from an R&D perspective, which is what Stephen was referencing. And so there's R&D commitments, so outside of gross margin, more in OpEx. We always have that. And it'll begin to subside as we have more banks on our platform running the same exact trajectory as related to credit unions. Within our cost of sales, there's really a couple of things. We have made investment in implementation services resources that better equipped us to implement a bank, because that looks very different than implementing a credit union. Or said differently, implementing a commercial banking platform versus a retail banking platform. There's just more—it's more involved and more to it.
So that has been a headwind to our gross margin expansion over the last 12-18 months. But area for a gross margin opportunity and gross margin expansion for us is really in, you know, a couple of different areas. The first is, when we renew a client, we experience, at a unit economic level, a 300-500 basis point gross margin expansion upon renewal. The reason for that is the implementation effort is actually at a gross profit loss, so a loss at the gross profit level. That gets amortized over the life of the initial contractual term, so the first 5-7 years. Once that client renews, that's no longer there, and you get an automatic uplift in gross margin. We're now having more renew...
more clients coming up for renewal. We have a very high batting percentage of renewing clients, and it's around 10% of ARR a year that we're renewing as it relates to recent cohorts, and that's what we would expect over the next couple of years. Another area for gross margin expansion opportunity is as it relates to how we consume hosting resources, so AWS resources. We have what we're referring to as a platform modernization effort going on. That sounds like a negative term, like there's something wrong with our platform, but really what it is, it's an eye towards how do we scale our platform to 50 million digital users versus the 17, just under 17 million that we have today, and do it in a manner in which the cost per user isn't a linear equation.
So we brought in a new CTO at the beginning of this year. His name's Deep Varma. Deep, he developed all the products for Varo Bank, which is more or less a neobank. He's worked at Zillow and been through platform modernization efforts in other companies, and he has just a terrific approach in how we're doing this and working hand-in-hand with AWS. So that's an area for margin expansion. The other area is through our cross-sell go-to-market motion. Selling into your base and implementing a product for an existing client is at a much higher incremental margin than bringing on a new logo. So those are the two or three areas where we expect to continue to see gross margin expansion opportunity.
And over the next three-four years, we expect about 200 basis points-300 basis points of gross margin expansion a year, which will lead us to 65% gross margin by 2026.
Got it. You're knocking out a lot of my questions.
Oh.
That's terrific. Could you remind us of... you did address the 2026 targets?
Yeah.
But just in terms of getting to where you need to be from a revenue and cross-sell standpoint, are there new products that you need to add, or could you get there with the existing product mix? And I guess a follow-up to that would be, the product roadmap-
Mm-hmm
... and areas that you're investing in specifically from a product standpoint?
Yeah, I'll take the first one.
You know, we can talk about capital allocation as well-
Yeah
... but just in terms of, like, you know, potential products or areas that you're particularly focused on.
So the 2026 financial model or guidance that we provided was maintaining a CAGR of 25% revenue growth, achieving 65% gross margin, and a 20% adjusted EBITDA margin. In that, we did not contemplate new product, we didn't contemplate new partners that we would add and resell, nor did we contemplate M&A. So we think we have the product set that can guide us to 2026. But we're thinking beyond 2026.
Yep.
We have a whole product roadmap initiative around where we would either want to build versus partner or buy, and I'll let Stephen jump into that.
Yeah.
But it's really a decision around speed to market, who are the providers in this space for that particular functionality, or is there already a number one or number two, and should we just partner with them and then consider acquiring them over time if they're the right size? But if you wanna just give a couple of areas-
Yeah
... where we'd focus within our product portfolio.
Yeah, well, maybe start with, you know, after we acquired Segmint, which was on the data side, and again, data, as if you remember back, Chad, we said when we started the company-
Yep
... that was kind of a key piece of this. So a little over a year ago, we organized our product engineering groups into kinda three separate complementary disciplines. One was what we called digital banking, and it was, like, the typical what you think about when you think about digital banking feature set. So that was there, and that's logging in, and checking your accounts, and transferring your money, and paying your bills, and checking your statements, and so forth. Then we had, we actually separated out platform services. The investment platform services is, I guess what I kinda almost call the, the I don't know what the future holds investment.
And that means we can't possibly predict everything, so let's just ensure that we're in a spot that whenever that thing comes around, we can act on it quickly, we can integrate it easily, it can look like it's part of the overall system, and we're not, like, caught, you know, flat-footed. So that's really kind of the plan and the platform side is focused on our APIs, our SDK, our design systems, all of those types of things. That's what they do. They don't really work on any features. They work on that aspect.
And then we have our data services group, and that's all around data that's used for reporting, data that's used for cross-sell, data that's used for, you know, obviously, marketing, data that's used for fraud mitigation, data that's used just for insights, driving our AI models, all of that kind of stuff. So those are... That's really, when you think about it broadly, those are the three areas of investment. We did that because we said we want all three of these to have their own separate investment, whereas before, it was all kind of wrapped under digital banking.
Mm-hmm.
Like, the other platform and data was just kind of a side hustle. It's now actually a specific group's job to advance that. And then I could go through kind of in each one. I'll just give you, like, on, on the digital banking side of the house, the areas that we're seeing clients really be focused on. One, they're resonating a lot with what we're talking about with driving revenue through the digital platform. So how can I really drive sales and revenue and new customer acquisition through this? So that's an area we'll be putting more focus on. There are areas in cards and in interacting with cards.
That's everything from applying for a card, getting a card, getting it issued, being able to see your card digitally, being able to push it to your wallet, being able to freeze it, being able to have alerts on it, all those things, because cards drive a lot of revenue for financial institutions. Another area is in fraud mitigation. So I tell you what, I mean, it is now where the money is.
Yep.
Right? And so, there's people that get up and go to work every day that try to come and either... They don't really try to hack our systems anymore. They're really trying to hack the customers, right? That's a much easier target, and so account takeover is a big issue, fraud, you know, social engineering, all these types of things. And so right now, our customers are dealing with, like, "Hey, we did a really good job. We got everybody online. We gave them all these features, all this money movement, self-service. Well, now what happens when they have horrible password hygiene, and they're not paying attention to their alerts, and now... And because of CFPB and other things, we're on the hook to pay for all these losses?" And so they are, they are really focused.
They're just seeing that their fraud amounts are going up. They're crossing over their internally acceptable thresholds, and this is a big area where they're saying, "Alkami, whatever you can bring us around fraud mitigation, we'll buy it." So that's obviously a big area. If anyone says that, then you obviously want to invest in that area.
Yeah. Yeah, no, I was at a conference recently, and I think a vast majority of the attendees on the exhibition floor were fraud-related.
Yeah.
So definitely a consistent theme. So a lot of good things going on in the business, a lot of positives, but what keeps you up at night? What do you view as the biggest risks to your thesis and, and where you're trying to be?
I think, you know, Alex and myself, Stephen, it's really around the client experience. It's around sticking the landing on implementations, particularly with banks, because we're so early into penetrating that market. And every implementation that we have now is a potential referenceable client in the future. So other than the standard things that you would hear from a SaaS company around security and security-
Yeah
... breaches and those type of things, for us, it's really about just creating the most fantastic client experience from the moment they sign the contract till they're live, and now we're servicing them as a live client, and keeping the culture of service in the company. It has been our secret sauce, and to continue that as we penetrate the bank side of the market.
Mm-hmm.
Remind me, do you use third-party integrators or?
We do not.
Okay.
We do not today.
Gotcha. Okay. Well, gentlemen, I think we're just about out of time. It's good to see you again, and I-
Yeah
... really appreciate you making the trip and sharing your perspective-
For sure
... on the company. Thank you.
Thank you.
Great. Thank you.