Well, hey, good afternoon, everyone. Welcome to day one of the Barclays Tech Conference. My name is Saket Kalia. I cover software here at Barclays. Honored to have the team with us here from Alkami. We've got Alex Shootman, Chief Executive Officer. We've got Bryan Hill, Chief Financial Officer. Also have Steve Calk, Head of Investor Relations here in the audience. So just to frame this up, we've got about 30 minutes together. Let's take maybe the first 20 or 25 minutes to do some fireside chat with Alex and Bryan, which I know is gonna be fun. And then would love to make this interactive. Anyone in the audience that's got a question, just pop up your hand. I think we've got a mic runner in the back. Would love to make it interactive.
So with maybe all of that, Alex, Bryan, thanks so much for being with us here today.
Thanks for having us.
Yeah. No, absolutely. Wouldn't be a Barclays conference without you folks. Maybe just to start, Alex, maybe for you, for those in the room who might be less familiar with the story, maybe you could just give us a quick overview of the business and the market that you compete in. And Bryan, maybe we can tag team this a little bit. Bryan, for you, can you just give us some highlights from your most recent quarter that you were most proud of? And there were quite a few, so why don't you start us off, Alex?
Maybe just start with, in a regional bank or credit union, there are four critical systems that every bank or credit union has to have. It would be the equivalent of you can't run an airline without a reservation system. So there's a core system, that's their back office accounting system. There's payment systems, there's lending systems, and there's a digital banking system. So 100% of the banks and credit unions have to have a digital banking system. In the United States, and I'm gonna give you rough numbers, not like, hey, it tied out to the S-1, and it grew this much. So don't put this like a very specific TAM, but just easy math.
Yeah.
In the United States, there are 300 million digital seats, digital banking seats available. I use that term because that's the primary pricing component that we have, and it's what the market expects. 300 million digital banking seats available. 100 million are owned by the very large banks and a couple of large credit unions. So Bank of America, Chase, Capital One, maybe, Federal Credit Union. So those own about 100 million seats. 200 million seats are sitting with 9,000 regional banks and credit unions. Half of that market is banks; half of that market is, is credit unions. The top 2,000 really control the majority of those 200 million seats.
We exist to serve those regional banks and credit unions, and the reason why they need us is because Bank of America will spend $1 billion building their digital banking platform, and that sets the marker for the expectation of consumers. And so the regional bank has to compete with Bank of America from a digital perspective, but they don't have the talent or the money to do it, so they white label our application so that they can win in the market. That's basically what we do for a living.
Absolutely. Absolutely. Bryan, you want to add some, some color from the last call? There was a lot to talk about.
sure. I mean, we, a lot of really, I would say, new milestones were set for us in the last quarter. The first one that I think has been, very important for us in our journey, and quite honestly, it's probably had a lot to do with, what's driven, the positive movement in our stock price here recently, is we crossed over profitability from the Adjusted EBITDA perspective, for the first time in the company's history. And we should be expanding profits each quarter from this point forward. So we're very proud of that, and, so, that's kind of number one.
Number two is our remaining purchase obligation almost reached $1 billion this quarter, which is right around 3.5x our ARR, which is $275 million, and just so happened to grow 29% during the quarter. And then probably, maybe the second or third most important thing that happened is we added one million digital users. When Alex was talking about 200 million digital users in the market that we're targeting, we added one million digital users in the quarter. And for the last twelve months, we added just over three million digital users. So we're accumulating users to our platform faster than anybody else in the space.
Yeah, absolutely. I wanna come back to that point because I think it's gonna be a fun, a fun trajectory to talk about.
sure.
But, Alex, Alex, maybe back to you. Just to start from a high level, you spent a lot of time with customers, right?
Mm-hmm.
We were talking about that earlier, which was real fun. Maybe the question is: how healthy is the banking environment that you're selling into today based on some of those conversations? I mean, obviously, we had some issues with regional banking, you know, a few regional banking names-
Mm.
earlier this year. Just plus just some general macro, you know, softness, which general enterprise is-
I would say, for those of you all that read the newspaper, which is everybody, 2023 was an exciting year to interact with regional banks and credit unions.
Yeah.
And what's I, I think what's exciting for Alkami is the resilience in our business. If you think about kind of two shoulder seasons of spring and fall, spring, we had a couple of banks blow up, right? Fall, we had just really, if you think about a bank CEO or a credit union CEO, the fastest change that many of them seen in their career from an interest rate environment. So here you get Alkami. We're selling digital banking technology to regional banks and credit unions, navigating two extraordinary shoulder seasons with the kind of growth that, that Bryan talked about. And, and Saket, to your point, in the, in the spring, spent six weeks traveling and visiting customers. In September, October, six weeks traveling and visiting customers.
What was exciting in the spring is, you know, we looked at our own data, and in our own data platform, what we could see pretty quickly is that no deposit flight was happening in our customer base, and 99% of the accounts that we had in our customer base were under a depository limit. So think about that in terms of what was happening in the spring. All the customer meetings confirmed that. Then you go to the fall, and as we were talking about, I wanted to go sit in somebody's office and say: "Are you still buying this digital banking stuff? Because it's a crazy environment." 100% of them told me, "In this environment, I need digital banking more than I've ever needed it. Why do I need it more than I've ever needed it? I have to attract deposits.
It's been ten years since my team had to attract deposits, and so they forgot how to attract deposits, and now we have to do it digitally because nobody's going to come into our institution and sign a piece of paper. "Hey, we thought this interest rate thing was gonna be short term, so we sold all these short-term CDs. Well, now we got to roll over these CDs. I don't have enough people in the organization to roll over CDs." So what was really exciting for me in these two shoulder seasons is in a situation where you would expect that there would be softness in demand for a technology product, it was just confirmed that this is a mandatory innovation. These folks have to have it no matter what the environment is.
Yeah, sure.
And second, one of the misunderstandings that occurred in the spring was this perception that every regional bank, every community bank, every credit union looked like an SVB, Western Alliance, First Republic.
Mm-hmm.
Those were very unique business models. The market that we serve, they're there to be a part of the bedrock of a community. They don't take the same types of risk and chances, and in many cases, the local CEOs and business leaders, they're on the board of these financial institutions. So they're there to promote economic growth and development in those communities, not... I don't want to-
Yeah, no, I get it.
Get into this-
Bread and butter business. It's a betteri—
I had a CEO tell me, I was sitting in his office while this is happening, and look, I'll never judge another parent or CEO. But this CEO said to me, "Alex, I... Like, my board would never let me do what happened with these institutions. That was not a bank run. That was a run on a business model.
Yeah.
Is basically what he said.
Mm-hmm. Mm-hmm. And the demand that we've had and the growth that our clients have had in their digital banking communities speaks to the resilience, how our end market was not really affected by what happened to those financial institutions.
Yeah, sure.
Yeah.
sure. Bryan, maybe for you, I think one of the questions that I get from folks sometimes is just the longer-term outlook for the TAM, right? And maybe, Alex, you touched on this when you were talking about sort of the number of accounts, right?
Mm-hmm.
Or seats out there, if you will. But, Bryan, the question for you is, if bank and credit union consolidation sort of continues-
Mm-hmm
... the total number of institutions that you can go after maybe, maybe, you know, continues to sort of go down a little bit, how does that sort of change the growth equation?
Yeah
... for Alkami, if at all?
Yeah. I think the first point is our revenue and pricing protocols being driven by digital users, as Alex mentioned. The number of digital users are growing, and they're growing because everyone sitting in this room, Alex and myself, we now have multiple financial relationships. We don't just have a relationship with one financial institution and one app on our mobile device. For example, I have five or six on my mobile device. I might be on the extreme-
Mm-hmm
... but I have more than one. So that's driving a growth of 5%-8% per year, just, you know, in the market itself. If you look at consolidation in the space, you look back over the last 10-20 years, on average, it's about 3% a year. So if 3% a year continues for the next 10 years, we're still gonna be at 6,000 financial institutions.
Yeah.
But we're gonna have growing users. Who's gonna benefit from that consolidation is the top 2,000 financial institutions in the space, which happens to be who we target for our end market.
Right.
Yeah, because if you think about when one institution buys another institution, they wouldn't sit there and say: We both have the exact same customer, and so we're gonna combine and take out back-office cost and serve the same customer. They're growing by acquiring an institution that has different customers. And so to Bryan's point, we benefit from that kind of consolidation because we get user growth, and our customers are growing faster than the market-
Yeah, our clients are growing kind of low teens, 10, 11%. Where, you know, the market, again, is growing 5%-8%. In terms of actual number of digital users, on a trailing twelve-month basis, our clients grew 1.4 million digital users.
Maybe just on top of this, if you think about the market, we talked about, let's call it 200 million users available. The top four players are Fiserv, Digital Insight, Q2, and Alkami. Fiserv, Digital Insight may be close to 45 million or so users. Q2 might be about 20 million users. Alkami is 17 million users, but Alkami added... The top two shrank users. Q2 added about one million users. Alkami added three million users over the last year. So in our secret moments, we kinda do the math and think about we ought to be the number one provider sometime.
That's gonna be fun, a fun thing to watch and talk about. But, you know, that was actually super helpful, competitive.
Mm-hmm
... you know, kind of framework, if you will, Alex. And maybe as I think about the market, I kind of think about this as sort of like a three-horse race, right? But it's you, it's Q2, and I'll just put the others into a third category with the core providers. The question is, when you go head-to-head with these folks, what helps Alkami win?
Mm-hmm.
And how has that sort of competitive dynamic changed, if at all?
Well, so all customers have digital banking. You never go into a customer and go, "Hey, I got a new idea for you, you should try digital banking." So they all have it. So it's all a conversion, and they're all converting because they have decided that they have to offer their customers a betteri digital experience. What 100% of them know is that the number one decision criteria for you and I choosing a new preferred financial institution is the quality of the digital experience. They all know that. So when they're making a decision, they make the decision, really, on four criteria. The first is: what is the user experience? If I buy this product, what will my customers experience?
Alkami is the number one rated app on the App Store, so it's great user experience. The second thing is: what is the reliability and performance of that platform? If you think about digital banking, it's not like LinkedIn, where it can go down for a little bit and we can all survive. It has to be up all the time. So they actually do a lot of technical due diligence on the platform to understand how do you build your product, how much money are you investing? Is this thing gonna scale? The third thing is there's a lot of different applications that people want to plug into the platform. So they want to make sure that it's easy to take a third-party application and integrate it into the platform.
Then the fourth is: what is actually your track record for doing conversions? Because it's a pretty big event to do a conversion. So that's the decision, that's why we win, is because those are the four decision criteria, and it's just so happens we're really good at all four things. So that's why we end up winning.
Absolutely. It's a good place to be in. Bryan, maybe shifting gears a little bit. I want to dig into how your customer mix is evolving right now, right? Because it's been an interesting growth driver. And so maybe the question is: can you just remind us sort of the proportion of your customer base that's credit unions versus banks? And I think an important follow-on question to that is: how does sort of the ARPU or the deal size, any other metrics you think about, how do they sort of differ between a credit union customer and a bank customer?
sure. So when Stephen Bohanon founded the company, somewhat, 13 years now?
Mm-hmm.
12, 12 to 13 years, he started with retail banking, and retail banking lended itself to credit unions, so we have a credit union bias today. Now, one misunderstanding is, well, if you serve credit unions, you must be downmarket. But we have very large credit unions. We have one credit union that has one million digital users.
Mm.
So, it's a little bit of a misunderstanding that credit unions would be considered downmarket. The credit unions that we serve, to grow deposits, strategically, they made the decision we should pursue commercial accounts. So we partnered with some of those clients, we began developing out a commercial banking platform. So today, out of 264 or so clients under contract, slightly less than 10% are banks. But we've been gaining momentum in the number of banks that we've been selling. It was-
Big driver pipeline, too.
In terms of the pipeline, in terms of what we've actually sold. So two years ago, it was like five or six banks. Last year, it was 11 banks. So far this year, through October, it was 9 banks. And our pipeline now is represented by 40% by banks. If you look at our implementation backlog, we have 35 clients in the process of implementation. That's about a year's worth of implementation. Of those, 20 are credit unions and 15 are banks. So even a greater percentage-
Mm
... of our pipeline is, of, of our implementation pipeline, are banks. And when you look at the RPU, the RPU of a bank is higher for a couple reasons. Generally, they'll have fewer retail clients, 'cause they're being driven, their asset size is being driven by commercial banking deposits, and they all have commercial banking. So within our implementation backlog, those 35 clients average $25 of RPU. The credit unions are at 23, and the banks are at $30.
Mm. Got it. Super helpful.
Yeah.
Alex, maybe I wanna pick up on that a little bit and just talk about the model here-
Mm-hmm
... a little bit more broadly, 'cause I think it's a really good one. You know, you've got a lot of products that these institutions can add on to sort of increase-
Mm-hmm
... that RPU, but then you can also grow as they grow.
Mm-hmm.
Right? When they add new users to their own platform. Maybe the question is: what are some of those key products that you're seeing customers add on lately to drive that RPU?
Yeah, you know, what's fascinating is the product mix has changed with the market environment. So if you go back, you know, a year and a half ago or so, I got too many deposits. I need products that I can use that soak up those deposits and increase my loan volume, right? So that was what you would see, you know, 12 months ago. So now it's: I don't have enough deposits. I have to be able to attract more deposits or sell more products. So things like our data platform, right? So if I've got to generate more income as a financial institution... Let me take an example of what Bryan just shared. There are retail accounts—there are commercial accounts inside of an institution that masquerade as a retail account. Right?
So I've got a retail account, but I'm running a bit. Well, our data platform, we can help an institution analyze the retail accounts that are making payroll transactions, and then they can go convert those to commercial accounts, which are fee-based, which are fee-based accounts. So we got 10 product areas. The main product areas that are performing well right now are like the data platform that I just explained, money movement, things like, card push provisioning, right? So now I want to attract a new customer. They saw the Apple Card. Well, I have to be able to show somebody that I've got an Apple Card experience that can, they can come in, sign up, get a card to the digital wallet, go buy something at, at Starbucks tomorrow. And then, for sure, any kind of fraud product.
Some cool technologies around biometric security, any kind of fraud product is being successful. Cost reduction now matters, so now when we go talk to customers about, "Hey, let's have a chatbot," a call in a call center costs $20. Let's have a chatbot that handles that instead of a call in a call center. Maybe I couldn't be bothered with that a year ago because that wasn't my problem. Now I can be bothered with it. What I love about our product mix is on both sides of the situation that we've been in with banks over the last couple of years, either I've got too many deposits and not enough loans, or I need to attract deposits. We got a product mix that we can sell to both sides of the equation.
Yeah. Yeah, absolutely. Bryan, may I, I wanna, I wanna build on that topic a little bit. I mean, you've been building your, you know, your, your total user base here pretty nicely. I mean, really, ever since the IPO, it's been just a, a nice growth trajectory. Can you just remind us how that growth in users that, that we see from you in a given quarter is kinda split between your existing client's base growing, right? So that 5%-8% that, that, that clients typically do, versus new deals that are implementing, because it's been, it's been goodness on both ends. You've been getting a lot of new bank and credit union customers, but then your existing customer is also growing. How has that sort of played into that, that user growth equation?
Yeah, so it was... During the pandemic, it was different than what I'm about to describe.
Mm-hmm.
But it's about 60% coming from new clients and 40% coming from our existing base. And again, as an example, for the trailing twelve months, we grew our users on the platform 3.2 million, 1.8 million came from implementation, 1.4 million came from our existing clients. During the pandemic, that was flipped. There was an acceleration, so our clients during the pandemic actually grew 17%-
Mm.
per year, which is pretty, pretty astonishing growth. And the whole market grew more than the 5%-8%. But you can really count on kind of, you know, two-thirds, something like that, coming from new clients and the remaining coming from existing.
Just the existing.
Yeah.
Yeah, absolutely. Alex, maybe just building on,
Yeah
... or related to the user, user base point. I mean, you've got such a, you know, you talked about a year's backlog, right, with some customers, Bryan. Like, you've got a high level of visibility in your model, just given that pipeline and that those implementations. Can you just remind us, though, how long the lag time is between when you sign a customer and when they go live on your platform, and how that might change or evolve as more of that mix shift towards banks?
Yeah, I mean, one of the things that you really like about this, if you sit in mine and Bryan's seat and you're running a technology company, what you want to be able to do is invest as much as possible in the technology. And so if you've got a really predictable forward view of revenue, it means you can invest a whole lot more in terms of building new products. So I'm gonna answer more than you asked, but the predictability for us is, imagine I'm a CEO of a bank, and my contract is coming due next October, and I've made a decision that I need to modernize my digital banking platform, right? So now I've got to make that decision by December of this year because it's about a 7-, 8-, 9-month implementation cycle.
So I've got to make that decision by December of this year, and I've got to start making that decision by March of the year that we're in. So when you think about the economics for our business, that means that our... we can carry a very, very small sales team because we see all of the active demand, right? We're not out trying to get somebody to convert off of a contract that they already have. So I've invited you in, active demand, that's the cheapest thing to sell into on the planet. I invited you in in March of 2023. I'm gonna make a decision in December of 2023, and then I'm gonna get onboarding in October of 2024, and the revenue doesn't start until October of 2024.
So if we're competing in March of 2023, and we've got a pretty good view of our win rate for banks and credit unions, that gives me and Bryan a lot of visibility into how we can invest in building new products.
what I would add to that-
Please
... is, Alex described the new logo wins. And so it's, you know, 7-10 months of lead time from signing an order till we start generating revenue. In 2019, we created our client sales team that's responsible for cross-selling product. So we offer 32 products. On average, our live clients have 12 of those, and so that gives us a lot of white space that we can sell into our base. Now, we've shown some success, so far, through the first three quarters of 2023, 37% of our TCV that we sold came from the client sales team. Well, a client sales or cross-sell opportunity converts to revenue in 90 days. Maybe 120 days for some products, but typically it's 90 days.
So when you think about, well, what could accelerate revenue growth within Alkami? It's continuing to have success in our cross-sell go-to-market motion because that converts so much quicker to revenue.
That cross-sell team has just been such a success story ever since the IPO.
Yeah.
So that makes sense. That makes sense. You know, Bryan, I wanna actually, maybe this is a question that we can tag team here with Alex and Bryan. But I'd love to talk a little bit about profitability, just given, I think you used the word milestone, right? Just given some of the milestones lately. You know, we had our first positive operating income quarter this past Q3. I think you're expecting it to be positive hereafter, sort of on a sustainable basis. What are some of the key things or key areas that you're where you're driving more efficiency out of the company from just a strategic perspective? You know, maybe, I don't know, Alex, you maybe, maybe wanna start, Bryan.
Yeah. Well, first I would just say, we are not cutting costs to get to profitability.
Yeah.
So just be very clear, we are still investing in the business. Really, I mean, if you really think about it, the company is growing into a couple of things that have been very expensive from a digital banking perspective. One is to run the platform, right? This is a 24 by 7, always-on application, 17 million users. You gotta spend some money on that, but we're getting betteri and betteri at figuring out how to run that. Second, is you've got to onboard customers. Lots of systems that you have to integrate into, right? But as we get, as you do more integrations in the same core, for those of you that have ever studied manufacturing companies, there's a concept called the learning curve, where it takes you less time to do something the more that you do it.
So the more integrations that we do, we get betteri and betteri at those integrations. So there's nothing happening inside of Alkami where, "Hey, we're cutting costs because somebody said we ought to be profitable." It's actually, we're just doing a good job of growing into some pretty hard things to grow into, which is scaling out a B to B to C platform. And look, we're gonna launch, what? 36-37 customers this year.
That's right. Yeah.
There's nobody else that's launching 37 new digital banking customers in a year. At last quarter, we did three in one day. Nobody on the planet is doing three in one day, and we're just getting betteri at it.
Yeah. Yeah, absolutely. Bryan, maybe building on that. So, you know, we talked about reaching that milestone this quarter. You know, you've talked about targeting, you know, I think it's 20% operating margins by 2026.
That's right.
You correct me there if I'm wrong, but I think that implies about seven points of margin expansion per year on average. Maybe the question is, what are some of the key bridges that you think are gonna help Alkami get to that 20%? Maybe help us understand your framework and kind of what gives you confidence around that.
Yeah. So just to break the 700 basis points down into major categories, we expect to achieve about 200 basis points per year from gross margin, and I'll come back and talk about gross margin. And then the balance of 500 basis points will come predominantly from R&D and G&A. Within G&A, that's just a revenue scaling game. We've already got all of our public company investments behind us, so now we just need more revenue scale to scale down G&A. So we're thinking about 2026, G&A will be about 10% of revenue. Within R&D, for Q3, we were at 26% of revenue. We'll continue to invest in our platform, continue to invest in creating greater scalability of our platform, but we think we can drive that down to 20% of revenue by 2026.
The modernization and scalability effort that we're investing in, in R&D, that actually helps gross margin, and that helps our efficiency in how we consume AWS resources, how we implement, how we support going forward. And so that's what's going to drive the 200 basis points of gross margin expansion per year.
Yeah. Yeah, absolutely. Very helpful target that you put out there, just-
Yeah
... thinking about the long-term model. You know, in the last minute or two that we've got here, Alex, I've got a question for you, and it's a bit of a fun one. You know, something that you alluded to earlier, but the question is: how do you sort of see your user base in the coming years relative to others in the coming years? When you talked about adding more than some of those other competitors are-
Mm-hmm.
Do you sort of see a crossover point here in terms of leadership, you know, from a subscriber perspective?
We're not, we're not playing this game not to win.
Absolutely.
So, I mean, we, you know, we have ambitions, but the... I mean, the big ambitions we have are, for those of you that have studied bank technology, it's very complicated. There's a lot of legacy technology that's involved. And for these regional and community financial institutions, it's been hard. It's been hard for them. And so our biggest goal is to be the company that they depend upon, that they go, "They've got a really good technology stack. They come out with new products, they give me good service, they help me be successful." And so we think we can be the most desired digital banking platform by doing a good job providing newer technology to these institutions that have really struggled having to deal with some legacy technology.
So that's our goal. Our goal is that the market looks up and goes, "They're like the Kleenex of digital banking. If you're gonna buy digital banking, you buy Alkami. That's what you buy.
The Kleenex of digital banking.
That's right.
I can't think of a betteri way to end right there. Well, Alex, Bryan, I think that's about all the time that we have. Thanks so much for taking the time.
Yeah, thanks.
Thanks.
I really enjoyed it.