Alkami Technology Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 10 speakers on the call.

Operator

And welcome to Alkermes Second Quarter 2023 Financial Results Conference Call. My name is Sarah, and I will be your operator for today's call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

Operator

I would now like to turn the conference over to Steve Kalk. Steve, you may begin.

Speaker 1

Thank you, operator. With me on today's call are Alex Schuteman, Chief Executive Officer and Brian 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.

Speaker 1

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 ks entitled Risk Factors and Forward Looking Statements. Statements made during the call are being made as of today, and we undertake no obligation to update or revise any forward looking statements. Also, unless otherwise noted, 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 filings with the SEC.

Speaker 1

I'd now like to turn the call over to Alex.

Speaker 2

Thanks, Steve, and welcome, everyone. I am pleased to report another quarter of strong operating and financial performance. In the Q2 of 2023, Alchemy grew revenue 30%, once again ahead of our expectations. We exited the quarter with 15,800,000 Live registered users on the AltaMed platform, up $2,500,000 compared to the prior year, and We achieved a $2,500,000 adjusted EBITDA loss better than the high end of our expectations for the quarter. During the Q2, Alchemy continued to execute with the consistency that has characterized our business for over a decade and recently as a public company.

Speaker 2

Since our IPO in the Q2 of 2021, the number of registered users on our digital banking platform is up almost 50%. Our quarterly revenue is up 79% and our ARR is up 78%. Our consistent growth and operating improvement has occurred quarter after quarter through both low and rising interest rates In various economic and political cycles, during the spring banking crisis in which 3 midsized U. S. Banks failed And during and after global pandemic.

Speaker 2

This consistency gives us confidence in our revenue growth targets and Our ability to achieve a 20% or better adjusted EBITDA margin by 2026. Alchemy is able to achieve a level of consistency and performance that is superior to most enterprise SaaS companies because of the unique attributes of our business. These include the mandatory nature of our products, size and health of our TAM, client insight that drives our innovation, The levers that we have in our growth model and the culture of our company. The first reason for our consistency Is that our target market considers digital banking to be a mandatory innovation. In every piece of research we conduct, The number one decision criteria for selecting a new financial institution is the quality of the digital experience.

Speaker 2

The top 2,000 financial institutions in the United States understand this and are aggressively pursuing a modern digital sales and service channel. Because of this, mobile banking adoption has been faster than computers, mobile phones or the Internet. When I talk with clients and prospects, they tell me 3 things are driving the increased pace at which they are investing in digital banking. First, the pandemic pushed virtually 100% of their customers to become familiar with digital banking. 2nd, there are new entrants in the market funded by 1,000,000,000 of dollars of extra capital that showcase modern, Easy to use technology.

Speaker 2

And third, our market is aggressively pursuing millennial and Gen Z consumers Who have grown up with a digital first mindset. The closest analogy for what is occurring is what we saw in the mid to late 2000s When companies finished major back office investments in ERP systems like SAP and began investing in customer relationship systems like Salesforce And marketing platforms such as Adobe. The average financial institution in our TAM is 80 years old, And their technology investments have historically been allocated to their legacy back office systems. They are now rotating that investment into a modern operating platform That integrates to their core back office system and allows them to interact digitally with their customers to sell, serve and improve A modern digital sales and service platform is seen as a basic requirement for a regional or community financial institution It intends to be a healthy ongoing business. Based upon our research over the past year, the digital banking platform is The most important item to a consumer selecting a bank or credit union and ranks above customer service, convenient ATMs and convenient branches.

Speaker 2

It's the most highly correlated attribute to overall bank or credit union customer satisfaction. It's the top reason a small or medium business is to consider their bank or credit union as its primary financial institution, and it is directly correlated with higher Consumer product penetration. For these reasons, 71% of regional and community financial institutions find a digital sales and service platform Like the one offered by Alchemy to be appealing. The second reason for our consistency is that our market is healthy and growing. When we became a public company, we stated that our market consisted of 185,000,000 digital users, of which even with our growth, We are today serving less than 10%.

Speaker 2

That market has continued to grow in the mid to high single digits As each of us have multiple financial institution relationships, consider just one aspect of our market. Until about 10 years ago, if you moved to a new city and that city didn't have a branch of your existing FI, you probably opened a new account and closed your old one. Today, when you move, you might open a new account, and you probably keep your old account. Our research shows that the average consumer Has 1.7 banking relationships for a debit card or checking account. Among Gen Z, that number increases to 1.9.

Speaker 2

This creates growth strategies for our target market that never existed before. It's also evolving the primary financial institution as defined by consumers. A few years ago, that was determined based upon where the consumer had a checking account. Our research shows that it's shifting to where the consumer does most of their digital banking. As a result of this dynamic, many of our clients are creating digital first growth initiatives when in the past They would have led with a branch investment.

Speaker 2

In addition to the growth of the market, spending on digital banking technology remains resilient. Even in the wake of the banking crisis in the spring, 89% of our target market expects technology budgets to remain the same Or increase over the next 12 months. The third reason for our consistency is that we exist To help our clients compete with the digital capabilities of megabanks. And given the criticality of this element of their business strategy, We have the ability to meet with any level and any function in our client base. And this level of intimacy gives us 1st mover advantage In developing new market opportunities, which is why our ARPU has grown 20% since our IPO.

Speaker 2

An example of this is our entry into the commercial banking market. Over 5 years ago, several of our larger credit union clients were expanding into business banking, And they asked us to develop capabilities for them. Today, we can deliver a business solution to 99% The potential bank clients and so far in 2023, we added another 6 banks to our client roster, including The largest bank win in our history. In addition to converting to the Alchemy digital banking platform, This bank is deploying a full suite of Alconate products, including segment, digital account opening and ACH alert. We now have 25 banks under contract.

Speaker 2

Another example is the Segment acquisition. From our inception, Alchemy has captured anonymized transactional data because we believe in the power of that data to help our clients interact more personally With their customers and members. But for many years, only a handful of early adopters took advantage of this capability. Recently, the combination of digital transformation and financial institutions that are pursuing a digital only growth strategy Has moved the use of data from early adopters to the broader market. For example, last Tuesday, I met with the executive team of a prospect That historically was focused on 5 counties in one state in the Northeast and now has a growth strategy to expand nationwide through a digital first approach.

Speaker 2

The main topic of conversation was their desired use of data to attract and grow customers digitally. In fact, our research shows that 84% of regional and communities FIs Want to leverage the data in their digital banking platform for more sales growth. Why? Because 73 Percent of consumers say that personalized product recommendations would make them more likely to trust, try new products from And or recommend the financial institution. But as the broader market began focusing on their data strategy, they gave Feedback that our legacy data platform was challenging to adopt, and they let us know the smaller technology company that had mastered the ability to Simplify the use of data analytics and marketing for regional and community FIs.

Speaker 2

That company was Segment, And we are very pleased with the acquisition and the pace at which we are adding new stand alone clients and the bundling of our data capabilities with new logo wins. Here's how adding innovation plays out in terms of add on sales. If our average client is halfway into a 6 year contract, That means the initial solution was proposed in 2019. When you consider the innovation that's occurred in the last 3 to 4 years And their need to compete, we don't have to force an add on product conversation. In fact, within our target market, lack of awareness in new products is a Top failure to a financial institution adopting add on products.

Speaker 2

Good account management, executive relationships And product education goes a long way towards driving our continued growth. That is why our cumulative AOR expansion Is 2 times among the 2018 2019 cohorts. The growth equation for Alchemy is simple, registered users times revenue per user. And the For our consistency is that we have multiple levers to work on this equation. First, we can grow by adding clients.

Speaker 2

We've been doing this for years in the credit union market and are now making progress in the bank market. We win as our clients win, Meaning our revenue grows as our clients expand their customer account base and add registered users to their digital banking platform. Regional and community FIs continue to add customers, and our clients tend to grow faster than the industry average. In addition, when selected as the digital banking provider, we are starting a long term relationship with our clients on average 70 months. This long term relationship reduces our attrition rate and equally as important provides us an opportunity to expand the relationship through our clients adopting additional This occurs during the contractual term and at the point of renewal, both driving a higher ARPU.

Speaker 2

And finally, since our clients tend to be on the acquiring side of M and A transactions, we benefit from M and A in the marketplace. The result of our growth algorithm is a model with multiple levers that can work at different tempos, affording a high degree of visibility And supports continued growth performance. The final driver of our consistency is the Alchemy culture. You don't sell a 6 year highly complex user disrupting solution to an 8 year old financial institution Unless you have values deeply embedded in your organization, values of client first, a long term orientation around innovation And conservative business practices that are aligned with your clients. Our commitment to culture is how we establish a leadership position among credit unions over the course of a decade.

Speaker 2

We built our business the same way they built theirs, serving and innovating on behalf of their customers and members rather than our own agenda. And it's why we're now winning among banks. In closing, I'm proud of our continued consistency in the Q2. It's a result of good people, Good products and good execution in a business where the market considers our products to be a mandatory innovation. It also helps that we have a large TAM that continues to grow client relationships that give us a front row seat to see new market opportunities, A business model with multiple growth levers and a culture that understands the client is the North Star.

Speaker 2

And now, I'll hand the call to Brian to take us through the numbers.

Speaker 3

Thank you, Alex, and good afternoon, everyone. During the Q2 of 2023, we delivered another quarter of strong financial results. We continue to see strong demand for digital transformation, including a higher adoption rate of the products offered through our platform to serve our clients' end users. For the Q2 of 2023, We achieved revenue of $65,800,000 which outperforms the high end of our financial guidance and represents growth of 30%. This was driven By balanced performance across our primary revenue drivers, we implemented 12 new clients in the quarter, bringing our digital banking platform client count 2018.

Speaker 3

We now have 40 clients in our implementation backlog, representing 1,500,000 digital users. We exited the quarter with 15,800,000 registered users live on our digital banking platform, up 2,500,000 We're 19% compared to last year and up sequentially 730,000 digital users. Over the last 12 months, Digital user growth continues to be driven by 2 areas. First, we implemented 38 financial institutions Supporting 1,500,000 digital users. 2nd, our existing clients increased their digital user adoption By 1,300,000 users, offsetting digital user growth, which churned at just over 300,000 digital users, Of which, the majority is represented by a single client that transitioned off our platform during the Q3 of 2022.

Speaker 3

We continue to maintain a very high gross retention rate of approximately 98%, measured in terms of ARR And digital users retained over the last 12 months. We ended the quarter with an RPU of $16.20 which 6% higher than last year, driven by add on sales success and the addition of new clients who tend to onboard with a higher average RPU. Subscription revenue grew 28% compared to the prior year quarter and represents approximately 93% of total revenue. We increased ARR by 26% and exited the 2nd quarter at $257,000,000 In addition, we currently have approximately $48,000,000 of ARR and backlog for implementation over the next 12 months. We continue to see healthy demand across our product portfolio.

Speaker 3

Our new sales performance for the first half of twenty twenty three Out Page 2022 by over 75%. In the first half of the year, we signed 16 new digital banking platform clients, Of which, 10 were signed during the Q2. Our new logo client mix reflects strong representation from banks with 6 signed So far in 2023. Our add on sales focus continues to yield results as well. Compared to last year, our add on sales effort in 27% higher total contract value as our client base adopts additional products across our 10 product family categories.

Speaker 3

In addition to add on sales, our client sales team is responsible for client contract renewals. During the first half of twenty twenty three, We renewed 5 client relationships where we raised the ARR run rate just over 11% through a combination of new product sales And a higher minimum contractual commitment. We expect to renew over 20 clients during 2023. And finally, our remaining purchase obligation or contracted backlog represented $967,000,000 as we exited the 2nd quarter, which is 39% higher than the year ago quarter. Now turning to gross margin and profitability.

Speaker 3

For the Q1 of 2023, non GAAP gross margin was 58.7%, representing 70 basis points of expansion when compared to the prior year quarter. Improvement in our gross margin results from operating leverage across our post sales functions, Such as our implementation, client success and site reliability engineering teams, offset by a higher mix of revenue from our 3rd party Our near term operating model is non GAAP gross margin of 65% as we scale our revenue. Also, we expect to achieve a gross margin of approximately 60% during Q4 2023 as we exit the year. Moving to operating expenses. For the Q1 of 2023, non GAAP R and D expense was $16,900,000 or 26 percent of revenue, 200 basis points lower than the year ago quarter.

Speaker 3

Margin expansion was primarily driven by revenue scale as we've increased R and D expenses at a slower pace As a reminder, our target operating model is to leverage R and D to 20% of revenue, while we continue to invest and expand our platform. Non GAAP sales and marketing expenses were $12,100,000 or 18 percent of revenue. In the prior year quarter, sales and marketing expenses represented 18% of revenue as well. Our annual client conference, CoLab, occurred during the Q2 of both years, Driving a higher expense to revenue ratio than other quarters of the calendar year. For the full year 2023, we expect our sales and marketing expense to revenue ratio to fall below 16%, a slight improvement from full year 2022.

Speaker 3

Non GAAP general and administrative expenses was $12,700,000 or 19 percent of revenue. In the prior year quarter, G and A was approximately 24 The margin expansion is primarily attributable to revenue scale. As we closely manage G and A expenses, we expect to further leverage expense as a percentage of revenue as we move towards our profitability objectives. Our adjusted EBITDA loss for the 2nd quarter was $2,500,000 which is better than the high end of our expectations And less than half of the loss we incurred in the prior year quarter, we expect to be adjusted EBITDA positive starting in Q4 2023. As a reminder, we've established a 2026 adjusted EBITDA margin objective of 20%, which coincides with of our 65% gross margin goal.

Speaker 3

Now moving on to the balance sheet. We ended the quarter with just over $176,000,000 of cash And marketable securities and just under $84,000,000 of debt. We are comfortable with our net cash position as it represents several multiples of capital necessary to reach free cash flow positive, which we will achieve a few quarters after becoming adjusted EBITDA positive. Related to our capital structure, during the Q2, we amended our existing credit facility. The amendment, among other things, Increases the amount of the revolving loan commitment by $20,000,000 with Citibank joining as a new lender It extends the maturity date for 1 year to April 29, 2026.

Speaker 3

We filed an 8 ks on June 28 that provides additional information regarding the Now turning to guidance. For the Q3 of 2023, we are providing guidance for revenue in the range of $6,500,000 to $67,500,000 and an adjusted EBITDA loss of $1,250,000 or 200 and $50,000 For full year 2023, we are raising our revenue guidance to a range of $1,500,000 to $264,500,000 representing revenue growth of 28% to 30% And an adjusted EBITDA loss of $4,250,000 to $2,250,000 This compares to an adjusted EBITDA loss of $17,600,000 for the full year of 2022. In closing, we are thrilled with our continued progress on solid financial performance we are delivering. We are well positioned to capitalize on our unique business model, attractive market and exceptional product offering, and We believe these will continue to fuel our success going forward. With that, I'll now hand the call to the operator for questions.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Patrick Walravens with Citizens JMP Securities. Please go ahead.

Speaker 4

Great. And congratulations on the continued execution. I have two questions that are sort of related to the demand environment and And your customers. So Alex, the survey sounded really interesting. Could you just repeat that and maybe break out for us how many were up versus Flat.

Speaker 4

And then secondly, I'm wondering what the customer base is thinking in terms of demand for Gen AI driven kinds of solutions?

Speaker 2

Yes. The one thing that I said in the script, Pat, was that Kind of even in the wake of the banking crisis, 89% of the target market expects technology budgets to remain the same Or increase over the next 12 months. There are a lot of data points in there, but basically, we haven't seen any fall off And the focus on, let's just call it, digitizing the front of the house for the financial institutions. So that Continues to be a priority. The areas that people are interested in AI Within a financial institution would be really three areas.

Speaker 2

1 is around security. We continue to work with customers on brand new threat vectors in terms of either trying to Penetrate an account or have any kind of account takeover. So anything that can help a customer Through any kind of pattern recognition, determine that they've got a new threat vector or they're getting hit with a threat is something that's Anything that can help them read the transactional data that they have And provide them opportunities to increase revenue or increase retention of their Consumers or customers, we've actually just released a I'd call it like It's a capability that the customer can use themselves to compare The economic benefit of what they have in transactional data in terms of being able to get People that are paying mortgages to another financial institution and maybe provide them an offer, we've provided a tool that allows them to see How they're performing in the use of their data versus their peer sets in the industry. So any kind of use of Artificial intelligence or any kind of learning against their transactional data that improves business performance is interesting to them. And then anything that's in the call center, right?

Speaker 2

The call center continues to be a source Of expense and investment for a financial institution and anything that they can do there. So those are the 3 areas past security, The use of data and in the interactions with their customers and members.

Speaker 4

That's super helpful. Thank you.

Operator

Our next question comes from Sam Tanwanteng with Needham. Please go ahead.

Speaker 5

Hey guys, it's actually Sam on for Mayank. Thanks for taking my questions this afternoon and nice results here. Could you guys dig in a little bit more into the add on sales success you guys had this quarter and maybe talk a little bit about how that Stacks up relative to last quarter, if that changed at all?

Speaker 3

Sure. So the add on sales team, As you're probably aware, that was a team that was created in 2019. And our ultimate goal from our add on sales team, which we refer to as client Sales is to deliver a 50% of our total contract value year in, year out from that team. Presently, we've been running in the, call it, mid-thirty percent of total contract value, maybe as high as 40% as Total contract value originated. And then so that's occurred year to date in 2023.

Speaker 3

From quarter to quarter, The production from that team has been pretty even and consistent. What can cause some variability from that team is the number of renewals they may have In any one quarter, year to date, so far through 2023, we've had 5 renewals, as we mentioned in our prepared comments, but we expect to have 15, maybe as many as 20 renewals in the back half of the year. So we expect a lot of productivity coming from this team in the back half Areas where we're seeing some good cross sell adoption from our client base continues to be, and this is True for 2023 as well as 2022, but our money movement products, our security products and our marketing and analytical products.

Speaker 5

Great. That's super helpful. And then just a quick follow-up on M and A. I know it's been a little while since you guys did the segment acquisition and that's worked out pretty well for you guys by the sounds of things. So I guess just Curious what the appetite is for M and A today and maybe any potential areas you guys would look to target?

Speaker 3

Yes. So we view M and A as a part of our strategic product road map along with some of our 3rd party IP Partners, and so we're evaluating what's available, but it has to fit within our product Road map, it has to meet our financial model requirements. And then also, It's a capital allocation decision. It has to be a good return of capital. What we're finding today in today's market While it's starting to occur, the valuation expectation for M and A has still yet To catch up to where the public equity markets are at, meaning, we think deals out there that are attractive are still fairly expensive.

Speaker 3

So we're just demonstrating a lot of discipline as it relates to M and A. We're evaluating our 3rd party partner Pipeline, which could be a source of M and A for us. A couple of our acquisitions actually came from that group of partners That we've completed so far, but that's the way we think about it and where the market is today and would it yield the right capital return. Areas where we would focus on, really fit into some of the same areas where we're seeing some add on sales success. So the fraud security area would be of interest for us.

Speaker 3

Some continued extension of products within Financial wellness would be interesting for us as well as marketing and analytics.

Speaker 5

Yes. Got it. Okay. Sounds good. Thanks guys.

Speaker 5

Nice quarter.

Operator

Our next question comes from Chris Kennedy with William Blair. Please go ahead.

Speaker 5

Good afternoon and thanks for taking the question. Alex, you talked about the data platform that you have, but can you just go into a little bit more what the Opportunities are as you think about your roadmap, your product roadmap over the next couple of years?

Speaker 2

If you think about a bank trying to interact with their customers digitally, It's the same as any other generalized industry Who wanted to interact with their customers digitally. And so to do that, you need several different elements of the platform, right? You need Great. CDP or customer data platform, you need the ability to develop content and distribute content. You need the ability to plug into any kind of automated delivery of messaging.

Speaker 2

You need to be able to report on the results of your campaigns. So anything that you and I might think about in the generalized marketing technology stack, CDP, marketing automation, content management, integration into ad networks, Campaign ROI reporting, all of those capabilities are going to be necessary in a microcosm For a regional or community financial institution to engage in a digital channel in the same way that they engage in a branch. And the market understands that. What the market has been looking for is a set of technology that can be consumed By the skill sets and the skill level that exist inside a regional and community financial institution. So Hopefully, that gives you a sense of there's a lot of different vectors that we can go in, In terms of providing technology for a financial institution, the summary I would just tell you is these financial institutions have succeeded Because they have a personal relationship with their customers or members, and they understand that the digital channel is now becoming very important.

Speaker 2

And what they want to do is replicate the quality of the personalized relationship that they've had in the branch. They want to replicate that digitally, and it's not something that we have to we don't have to sell them on the idea. They understand it. They want to do it. And so that's the wide range of opportunity that we have in front of us is all of those kind of capabilities.

Speaker 5

Great. Fantastic. Great. Thank you for that. And then just one last one.

Speaker 5

You talked about the renewal outlook for this year. How does the renewal outlook for 2024 look compared to 2023? Thanks for taking the questions.

Speaker 3

If you look out over the next several years, our renewal pipeline is about 10% of ARR each year. It's pretty consistent for the next 2 to 3 years. That could depending on the size of the clients that are renewing in those years, it It'd be more or less than the 20 clients or so that we'll renew this year, but it is around the 10% of ARR.

Speaker 5

Thanks for taking the questions.

Operator

The next question comes from Jacob Steffen with Lake Street. Please go ahead.

Speaker 6

Yes. Hey guys. Thanks for taking the questions. Congrats on the quarter. I just kind of want to touch on the 2 times ARR expansion among the 2018 2019 cohorts.

Speaker 6

With the 2020 2021 cohorts, are you starting are you seeing the similar Kind of trajectory that you've seen with solution uptake within the 2018, 2019?

Speaker 3

We are. And so in fact, the increase in each of the individual cohorts It's really being driven by 2 things. And then this is the beauty of our financial model because we're not overly dependent on any one lever. But what's driving it Historically, it has been our clients growing their users. And then as I mentioned earlier in the Q and A session in 2019, we created our client sales team, And they're gaining a lot of momentum cross selling into our client base, which is now adding another component that's driving ARR expansion within each individual cohort.

Speaker 3

But if you look at 2020 2021, they're between 150% and 100% expansion from their original contractual minimums.

Speaker 6

Okay. Awesome. Maybe just kind of touch on the pipeline. Did you kind of break out the Bank versus Credit Union in the implementation backlog?

Speaker 3

Yes. Our Well, not in the implementation backlog. We haven't well, I can speak to that. So we have 25 Bank clients under contract, of which 10 are live and 15 are in the implementation backlog. Our total new logo implementation backlog is $34,000,000 of the 48 1,000,000 represented by close to 40 financial institutions.

Speaker 3

As it relates to our sales pipeline, Banks now represent just under 40% of our total pipeline. Our pipeline is higher than it was at this point in time last It continues to grow year over year at a nice healthy pace and then which provides us great visibility into our Future sales that we closed that leads to our implementation pipeline and ultimately revenue. So revenue visibility on into 20 24 is now developing at a pretty nice pace. And as I mentioned in the prepared comments, year to date, our new sales are 70 5% plus over 2022, which is pretty fantastic in this market.

Speaker 6

Yes, that's great. Hey, thanks for the color. Congrats on the quarter again.

Operator

Our next question comes from Saket Kalia with Barclays. Please go ahead.

Speaker 7

Okay. Hey, guys. Thanks for taking my questions here. Hey, Alex, hey, Brian. How are you guys doing?

Speaker 3

Good. Great, Saket.

Speaker 7

Excellent. Alex, maybe for you, maybe building on that last question, great to see the bank wins so far this year And just that commentary in the pipeline. Maybe the question is, can you just remind us how the profile of a bank win Compares to the profile of a credit win, for example, is it maybe higher users with a bank contract Or is it higher ARPU? Anything on sort of how the profile of a bank contract win versus a credit union contract win? That'd be really helpful to understand.

Speaker 2

Yes. I would just generalize it to say that the contract value Between a bank and a credit union is likely not that different. In the credit union, we're going to have A lower ARPU and more users because of the retail focus and then in a bank win because we add Some of our higher priced products will end up with a lower number of users but a higher ARPU. And Brian, I don't know if you got any specific examples, but just generally think about it as across the TAM, the ACV or the ARR per customer is going to be pretty consistent. Credit union, lower ARPU, higher number of seats.

Speaker 2

Thank you. Higher ARPU, lower number of seats.

Speaker 3

Yes. And if you look at our implementation backlog, which Today, as I mentioned in the last question, is 40 financial institutions, 15 of which are banks. The RPU for all 40 financial institutions in the new logo backlog It's around $24 Credit unions are at $22 and banks are at $30 So that gives you a sense of the RPU difference. In some respects, it's because 100% of the banks have commercial banking. Generally, as a product, and On average, it's about 60% of the credit unions may have commercial banking.

Speaker 3

And as Alex mentioned, generally, Thanks. We'll have fewer users, but Alex did call out in his prepared comments that we signed our largest contract value A bank client this quarter, and it just so happens that client has over 150,000 digital So that's a little bit of an exception in terms of the number of users that a bank will have. This was an 8 year deal. They took 21 products. It was a competitive deal with a few names that you would be very familiar with out there that we compete against.

Speaker 3

And we won that deal, and we're super excited about it.

Speaker 7

That's great. That's great and congrats on that win. Brian, maybe for the follow-up for you, How do you think about sort of the user adds here in the back half? And maybe just the different components In terms of how many are coming from backlog, how many are kind of coming from sort of growth and whether there is any sort of seasonality that we should think about in that net add trajectory?

Speaker 3

Yes. So every year, I mean, it's very different. There's not really seasonality to our business. It's more about the Timing of when the new logo wins occur about 9 to 12 months before the implementation. But year to date, we've implemented, from new clients, just under 700,000 digital users.

Speaker 3

I would expect, unless we have an implementation that could slip out because that happens from time to time, we should be somewhere around, Call it 800,000 to 850,000 digital users that we'll implement in the back half of the year with a lot of concentration in Q3. As it relates to our clients growing their digital user base, just, Saket, continue that 100,000 Digital users a month is the way that we think about it. We're a little over that year to date through June 30. I would expect we'll add somewhere The neighborhood of $600,000 $650,000 in the back half of the year.

Speaker 5

Got it. Very helpful. Thank you.

Operator

Our next question comes from Charles Madden with Stephens. Please go ahead.

Speaker 8

Good afternoon and thank you for taking my question. My question is on M and A and the impact it could have on your business over time. Obviously, consolidation activity is pretty

Speaker 2

slow right now, but as we near an

Speaker 8

end to It's pretty slow right now, but as we near an end to the rate hike and presumably a soft landing hopefully, I was curious if That's become a topic of conversation with your clients. And if so, could it potentially be a catalyst for Investment in technology

Speaker 2

as some of

Speaker 8

your clients prepare for another M and A cycle?

Speaker 2

Fortunately for us, our customer base Tends to be the customers that are more digitally advanced. Thinking about invested if you think about an Alchemy customer, If somebody who has, by definition, decided that they are going to have best of breed technology, and They are choosing best of breed technology because technology is part of their growth strategy. And so these are the customers that tend to be the acquirers in an M and A environment. And so one of the things that was in my prepared remarks What we've seen so far is that the M and A transactions that have occurred Have been a benefit to us because our clients have been the ones making the acquisitions. So once again, there's Almost 10,000 Financial Institutions in the United States.

Speaker 2

We target the top 2,000 Financial institutions in the United States, and they tend to be the acquirers of the smaller institutions that are Not being competitive. So in general, we think of M and A in our market as Being good for us. And the other thing to think about is, and I know I'm telling you stuff you already know, but We price per seat, right? So the overall number of seats, Even if M and A is occurring in the United States is not going down, it continues to grow. And if Financial institution is buying another financial institution.

Speaker 2

They're not buying them because they have the same customers. They're buying that because they want to grow. So our pricing model also helps us in the M and A environment because we price By number of seats, not necessarily a huge platform fee that's charged to an individual financial institution. So in summary, M and A is good for us.

Speaker 8

Got it. And I apologize for missing your comments earlier. I hopped on a little late. Apologies in advance if you've addressed this one as well, but wanted to get your comments on the competitive landscape with private FinTechs more focused On profitability and funding drying up, curious if you're seeing anything different in the competitive landscape. And Conversely, if you're seeing any different behavior from the larger guys you compete against as well?

Speaker 2

Not really. I mean, if you think about it, if Somebody is going into a first of all, as you know, 100% replacement market. So we don't ever go to our customer and go, We have this cool idea around digital banking, and they go, Oh, my gosh, I've never thought about that. So The primary wins continue to be against legacy technology That is not providing the type of digital and sales and service platform that the institution wants. So by the time that somebody Starting an evaluation process, which can take a period of time, they've already decided That the legacy technology that they have is insufficient for their business needs, that's why they've kicked off A process in any case.

Speaker 2

So there's good competition in the marketplace. We all compete honorably with each other. But really, what we're primarily doing is replacing legacy technology. And once again, to reiterate, When we launched our IPO, we said the market was 185,000,000 users, our target market. That continues to grow.

Speaker 2

And even with our growth, we're still serving less than 10% Of that market. So I think the good thing about this market is there's a couple of folks that can compete really well in this market And grow nicely because there's a lot of legacy technology to replace.

Speaker 3

Yes. And I'll just add a couple of comments To Alex's commentary, if you look over the last two and a half years on a run on a win rate from a win rate perspective at ARR It's up for grabs. We're consistently winning in that 34%, 35% Of the ARR that we're competing for, that was consistent in 2022 and it's been And year to date 2023 as well. What's interesting in that is as it relates to credit unions, Very consistent. And then actually, we're probably a little bit on the higher end of that number in 2023.

Speaker 3

We're approaching 40% Of the ARR that we've been competing for. Now what I find even more intriguing is, our win rate for banks It's increasing, but more importantly, the number of bank deals that we're competing in, that's increasing as well. So So there's a lot of marketing effort, a lot of marketing energy focused on increasing our share of voice And the marketing sub segment of the market that we're going after. So that's just a little bit of flavor on How we're performing in terms of win rate as it relates to the ARR that we're competing for in each of these deals.

Speaker 8

Got it. Appreciate the color guys. Nice quarter. Thank you.

Operator

Our next question comes from Dan Kuchman with Craig Hallum. Please go ahead.

Speaker 9

Hey, thank you guys. This is Daniel on for Jeff. Just first off, just kind of on the sales motion for banks, Where do you guys think in terms of the go to market in terms of is that refined in terms of the pitch? Is that do You guys have us down yet or does that need more work yet on refining the pitch? And then kind of just looking forward to where we're at, so it looks like 6, If I have this right, 6 signings of banks in the first half twenty twenty three versus about 6 signings in first half twenty twenty two, just What are you guys thinking in terms of the bank adoption curve?

Speaker 9

Is this steady, slow acceleration? Is there a point at which there's a critical mass or Flexion point, how should we think about that kind of adoption rate?

Speaker 2

Yes, this is Alex. I'll take the first half of the question. I'll let Brian take the second half of the question. Terms of the sales motion, in Q1, we identified 12 specific skill sets That you can't learn to swim in the front yard, right? So we started making progress in the bank market.

Speaker 2

We started engaging with bank prospects. We started winning some banks. And then through that, we started Okay. Actually, and I would kind of expand it to not just the sales motion, but to say from the sales through the implementation Motion, what have we learned? And as I was saying earlier, we Learned that there were 12 specific skills that we needed within the organization, and then we set a goal for ourselves To bring those skills on board in the Q2, and we were able to bring those skills on in the second quarter.

Speaker 2

And then, Brian, the question the second part of the question was related to how do we see the Adoption of banks moving forward, is it going to be in the same ratio that we have right now? Is that ratio going to change?

Speaker 3

Yes. I mean, longer term, we think that we'll remain at our current level of competitiveness For credit unions, so we'll continue to win between 30 to 35, maybe as many as 40 credit unions per year. Once you get to 2026 and beyond, we would expect to win the same number of banks. So last year, we won 11 banks. This year, year to date, We're at 6 with a building and strong sales pipeline.

Speaker 3

So, I suspect that we're going to do better, Quite a bit better than the 11 that we signed last year and then next year, it will continue to increase. And then as we Reach out to 2026 and beyond, we'll be at that 30, in terms of number of banks that we're winning each year, which would be a commensurate amount As to what we're winning on the credit union side of the market.

Speaker 9

Thanks. That's great color. And then Just kind of maybe sticking to the go to market theme in terms of sales capacity, how many reps you've got now and whether That's a good amount. We're expecting to seal that up where that might be by the end of the year.

Speaker 3

Yes. We don't really disclose the number of sales reps that we have. In terms of total sales team, we're in that kind of 60 to 65 FTEs, and so that includes sales Sales engineers as well as direct sales reps for new logo and client sales. When we do go to market, we do have a hunter and farmer mentality, meaning we have a new logo team. We have our client sales team that's responsible for renewals and cross sell.

Speaker 3

And then as it relates to some of our acquisitions, we'll have a few sales reps that are more of a specialty sales rep Variety as it relates to those individual products because they may have some uniqueness to them. And then it also helps support And drive sales through those other teams by having the sales specialists involved.

Speaker 2

I will say just one add on comment with Brian. One of the things that We really like about this business model is if you look at a company like an Alchemy versus a generalized SaaS company. In a generalized SaaS company, you have to spend maybe 30%, 35% of revenue on Sales because you have to stimulate the market with the with your sales organization. And so As you're growing revenue, you're actually having to add sales expense Ahead of time to make sure that you're pushing the market, for lack of a better term. But obviously, in a highly verticalized SaaS Or type of industry.

Speaker 2

And then if you go deeper than that, the thing that's great about our industry is It's really an industry where you can really do account based marketing because think of all of the data that's published About every single one of these institutions, what they have to publish to the government. And so what you would normally have to do To leverage your marketing organization to drive demand, in a lot of cases, it's really hard because of the lack of data about the industry. But here, the data is there, and so it allows us to utilize the marketing organization In a much more targeted manner than in other kind of go to market situations, which allows us to keep sales headcount, Frankly, lower than a lot of other SaaS models.

Speaker 9

That's great color. Thanks so much for taking my

Operator

This concludes our question and answer session, and our conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Alkami Technology Q2 2023
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