Alkami Technology, Inc. (ALKT) Q2 2021 Earnings Report, Transcript and Summary

Welcome to the Second Quarter 2021 Alkami Technologies Financial Results Conference Call. My name is Vanessa, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to your host, Rhett Butler, Vice President, Investor Relations.

Thank you, Vanessa. Good afternoon and welcome to Alkami earnings call for the second quarter ended June 30, 2021. With me on today's call are Mike Hansen, Alkami's Chief Executive Officer. Stephen Bohanon Alkami's Co-Founder and Chief Strategy and Sales Officer. And Bryan Hill, Alkami's Chief Financial Officer. During the course of today's conference call, we may make forward-looking statements, including statements regarding trends, strategies, and the anticipated performance of the company. These forward-looking statements are based on management's current views and expectations and are subject to various risks and uncertainties, including risks related to our operating and financial performance management's current views and expectations and are subject to various risks and uncertainties, including risks related to our operating and financial performance. Our actual results may differ materially from those contemplated by these forward-looking statements and we can give no assurance that such expectations or any of our forward-looking statements will prove to be correct. Please refer to the risk factors included in our filings with the Securities and Exchange Commission, which are available on our Investor Relations website and the press release distributed earlier this afternoon regarding the financial results, we will discuss today to review important factors that could cause actual results to differ materially from those reflected in the forward-looking statements. Forward-looking statements made during the call are being made as of today, August 4, 2021, based on the facts available to us today and we undertake no obligation to update or revise any forward-looking statements. Also, unless otherwise stated, all financial measures discussed on this call will be on a non-GAAP basis, because we believe these measures to be useful to investors in the understanding of our financial results. A reconciliation of each comparable GAAP metrics can be found in today's earnings release, which is available on our website, investors.alkami.com and as an exhibit to the Form 8-K furnished with the SEC today. With that, thank you all for joining us on the call. And I'll turn it over to Mike.

Thank you, Rhett and thank you to everyone joining us today for this, our second earnings call. Since we were here in early May, the team of over 640 Alkamists and our partners have continued to be hard at work, executing against our mission and we are very excited with this year and results today. While Bryan will get more into the details momentarily, whereas you may have seen the press release a bit ago. Financial performance during the second quarter was again solid across all of our metrics. Additionally, during the quarter we continued to advance the important aspects of our business, including the go-to-market, product, operational, technical, compliance, security and even people aspects of our business and now about 10 months and we continue to be on track with our integration and synergy objectives with our ACH Alert acquisition with some news to share later in the call. As we look to our market, the community in the regional financial institutions in the US, we think the digital transformation of financial services is continuing to accelerate. In our view, a number of factors contribute to this acceleration. First, we continue to see significant market investments in FinTech and Financial services offerings and companies. These investments in the form of IPOs and private equity and venture capital transactions are powering existing and new players to create or scale targeted digital financial products and even offerings including cryptocurrency for consumers and businesses alike. There are even frequent examples of these investments resulting in M&A activity in this space as well. Further, the big tech companies and major retailers also remain active expanding their digital capabilities in the financial services space from digitally provisioned credit cards and prepaid cards to check -- checking accounts to Buy Now Pay Later offers as -- and just even crypto. And of course, the mega banks are continuing to up the ante in their own right, which is one of them spending approximately $11 billion on technology annually. As a result of these factors, we believe our end market continues to move at a relentlessly accelerating pace, reflected by the interest of so many players to digitally expand or redefine or disintermediate financial services for consumers and businesses in the US. This competitive landscape for financial services requires the financial institution squarely in Alkami's addressable market to move at a speed and certainty, to identify and seize their strategic opportunities enabled by the technology and concurrently identify and respond to the strategic threats from competitors that are often greater -- have often greater resources. This dynamic landscape of our end-market that continues to propel market demand for Alkami's digital platform, when that continues to advance it's speed and allows our clients to innovate quickly and compete effectively against others with many times their scale. We continue to believe the battle for relevance and success in this digitally transforming market for the community and regional bank or credit union has never been more important. As a bit more color on this transformation. In June, we solicited feedback from 150 leaders in regional and community financial institutions that have influence over the -- their digital banking decisions. Two-third of these respondents were senior executives within their institutions. When I asked to identify their institutions greatest risk over the next 18 months, the risk title changing technology landscape was cited more often than any other risk listed, including the risks of interest rate environment, Cyber threats and uncertain regulatory environment. We believe that the digitally focused community and regional financial institutions are aware of these risks and armed with the right tools to complement their own unique capabilities have thrived and can continue to thrive in this digital world. To continue to do so, they will increasingly need innovation and extensible platforms like Alkami that can deliver digital innovation at speed and scale to power their strategies over the long term. In terms of results from our community and regional financial institution clients, we've seen them continue to perform exceptionally well in terms of supporting their employees, consumers, businesses, and communities during these times. Stories and happenings abound of FIs going the extra mile. And as kudos to our clients and their teams for what they've done and how we've done it and their success is equally evident in their business results of year-over-year asset and deposit growth, well above the industry average and digital user growth of our clients exceeding 17%. To give you an idea of how our digital banking platform helps power the results of financial institution, I'll take a couple of minutes to outline the results of a client through a specific case study. The case study is from a strong West Coast financial institution in a very competitive market with over 1,000 digital users and over $2 billion in assets. We completed the implementation and launched them during the second quarter of last year with 14 products. The financial institution had specific strategic needs; they were looking to Alkami to help with. Naturally, the main focuses were around improving their end-user experience, their end-user sentiment or satisfaction for their app; let's say app store ratings, their overall end user satisfaction of the digital channel NPS scores, their digital user growth and their mobile banking penetration. I'll touch a bit on each of those, first after researching top tier financial institutions and finding that our user sentiment average 4.8, our clients at a stretch goal of achieving in 4.9 rating. Prior to converting to the Alkami's platform, they had an iOS rating of about 2.9 and Google rating of about 4.3 for a weighted average of about 3.0. Post-conversion to Alkami, they're operating skyrocketed to an iOS rating of 4.9, with nearly 13,000 reviews and a Google rating of 4.9, with nearly 1800 reviews for a weighted average of about 4.9 stars. This equates to a 63% increase in end user satisfaction. Second, after diligence with other financial institutions, the client determined that most digital banking platform conversions result in an NPS score drop for the digital channel of at least 10 points with recovery taking at least a year. Together, we executed a plan to deal with those realities around the big change event and together with their help of the Alkami platform, they fully recovered to their previous NPS score of a very lofty 85.6 in six months and within a year, they were beating their old lofty scores. This performance ranked them at sixth overall versus the large survey peer group, survey firms peer data. Third, our client obviously wanted to grow their digital engagement with their new and existing customers and members and -- and to grow their digital users in that way and prior to the Alkami platform conversions they experienced about 11% annualized user growth and post-conversion their annualized user growth results and expectations have grown significantly to around 18%. What is exciting about this is not only the strong user growth with the fact that, that growth was relatively consistent between the new and existing customers and members. This translates to tremendous success engaging these new customer members, but also significant results in penetrating their existing base. Lastly, given the importance of the digital channel mobile banking penetration engagement are incredibly important factors for our client. Prior to the Alkami platform conversion, their mobile conversion was 50% against an average of about 54%. Post conversion mobile penetration was 66%, this incredible success added testament to our clients team capabilities and strategies combined with the power of the Alkami platform. This client success stories like this that power us here at Alkami and form the bedrock of our innovation motion, ensuring our solutions, deliver the results for our clients digital strategies today and tomorrow. Results through this innovation motion are at the center of each of our four key growth drivers discussed in our last call. Bryan will briefly highlight these drivers again in his remarks following Stephen's in a few moments. Next, let me turn it over to Stephen Bohanon to update you on our innovation and go-to-market activities. I'll be back at the end of the prepared remarks with a few comments before we go to Q&A. With that, I'll turn it over to you, Stephen.

All right, thanks Mike. As I touched on last quarter's call, while our engineering team -- innovations across the platform, our primary focus areas are business banking functionality, user experience enhancements with an emphasis on mobile extensibility and our Data solutions. During the quarter, our latest software releases that we delivered to all clients contain new functionality in line with that focus, and I'll briefly discuss each area. From the business banking perspective we launched mobile business registration as well as business payee and account analysis features, this functionality provides our clients with a more streamlined process for on-boarding new businesses and their business clients with exceptional payee management capabilities scaling to thousands of payee. In addition, the account analysis functionality increases billing flexibility for individual businesses, a key feature needed to serve -- service larger businesses. We continue to heavily invest in our small business and commercial solutions, and as a result of these efforts, we're pleased to have signed two additional $1 billion plus commercial banks in July. From the user -- user experience enhancement perspective, we launched new functionality around our card experience, financial wellness and our money movement capabilities. For debit and credit cards, our clients can now take advantage of new multifunction authentication options, advanced alerts, international alerts and controls, merchant type and transaction type controls. Cards and the associated revenue are crucial to many of our clients and so it's critical we provide the user experience that keeps their cards top of wallet. Our Financial Wellness solutions also now utilize refreshed user experience with deeper partner integration and new visualization tools to help drive in app engagement and finally we launched a new product that provides real-time account ownership verification for money movement to and from external accounts. Our instant account verification product reduces the friction and abandonment rate during the account verification process and also helps to mitigate fraud through account holder name matching. This is another great example of delivering a positive user experience while at the same time helping our clients mitigate fraud. From an extensibility perspective, we launched new functionality around registered applications. Registered applications are trusted systems like PFM sites and aggregators and devices like smartphones or voice assistance that have been granted trusted access to your financial accounts. With the proliferation of interconnectedness and open banking initiatives in general, many users are unaware, we're surprised that just how many of these applications have trusted access to their financial data. Our new functionality here makes it easier for end users to view and manage which applications have access to their financial accounts, so they can ensure their own privacy and be on the lookout for potentially fraudulent activity. From an extensibility community perspective, I'm happy to report continued momentum with our Gold Partner Program and our SDK developer community, which continues to increase in size and activity with June having the highest number of monthly project submissions at 97. Finally, we continue to make investments in data and our data set continues to grow. With the codified, anonymized data warehouse that is collected and claims now over 5 billion transactions across more than 150 financial institutions, we believe Alkami has one of the deepest and richest transaction and account detailed data sets in the country. Combine this data along with user interaction and behavior data; we are transforming this data into actionable insights through products like our new executive dashboard, to support our financial institutions digital growth strategies. The new executive dashboard provides the institutions with their historical performance over time across 10-key digital banking KPIs that explore adoption, engagement, and conversion. What's more, we provide benchmark comparison of the institutions' individual performance against that of its peers. This deep level of insight allows us to formulate growth strategies with our financial institutions based on KPIs across the digital funnel, whether adoption engagement or conversion. In conclusion, we continue to innovate with speed across the strategic priorities that we believe will differentiate our clients and Alkami by one, delivering a superior user experience for both retail and business users that taps into deep extensibility capabilities and two equipping our financial institutions with insights across a comprehensive dataset of user transactions and institutional digital banking benchmarks. Our innovation engine continues to be central and offering our clients of functional and technical advantage against existing and emerging competitors. Next, I'd like to discuss sales momentum, our overall go-to-market engine. As I mentioned in our Q1 earnings call, the arrival of our new CMO Allison Cerra earlier this year and investments in our digital marketing engine are paying off. While some in-person meetings and conferences are starting to come back, they're not at the same level as pre-COVID. This has increased our reliance from the digital channel for lead generation and we're very happy with the results. With year-to-date lead generation from digital channels, outpacing leads from non-digital by three times. We feel the business momentum for financial institutions evaluating their digital banking solutions as measured by pipeline growth has really picked up in the second quarter. Trailing 12-month new sales were up over last year and our new sales pipeline is strong with banks representing well over 20% of the largest pipeline in our history. As I stated a moment ago, we signed several banks during July. Specifically, we signed two new $1 billion plus banks to our digital banking platform and a top 30 bank with over $150 billion in assets to our ACH Alert Solution. Our first half '21 sales results combined with the pipeline in July new wins gives me confidence in our go-to-market traction. I would like to provide a few more comments regarding success of the ACH Alert acquisition. The ACH Alert solutions team continues to show the potential, we identified pre-acquisition. During the quarter, we had our fourth patent issued and since the acquisition in October 20, we've achieved new sales of 48 banks and 8 credit unions. In addition, sales of additional products have been positive increasing penetration into four large clients ranging from $15 billion to almost $50 billion in assets. In innovation perspective, new functionalities are expected to be released in the near term around deeper integration with our digital banking platform. On the horizon is perhaps the most exciting innovation in near term, a multi-payment risk processing engine expected sometime during 2022, when delivered this would make Alkami the first digital banking provider to offer not only electronic payment origination capabilities, but end-to-end processing of payments originated in digital banking. In aggregate, we believe we will have a lot more shots on goal this year than the previous year and we expect to continue to focus on execution and converting our pipeline across all financial institutions, including credit unions and banks. I'll now hand the call to Bryan to discuss our Q2 financial performance.

Thanks, Stephen, and good afternoon everyone. Second quarter financial results were strong across the board. Let me start with revenue, we enjoy a highly predictable subscription based revenue model possessing several growth drivers. First, our client success utilizing the Alkami platform to fuel their digital strategies and grow their digital communities, we refer to this as organic user growth. Second, expanding the solutions we offer in our clients' adoption of our solutions, the cross-sell activity. Third, new clients are joining the Alkami digital banking platform through new logo sales, which can take approximately 12 months to materialize into revenue, and typically timed with the contractual term of the incumbent digital banking provider. And finally, M&A activity, we continue to evaluate the M&A landscape as a way to drive organic revenue growth over the long term, add new features and functionality and drive compelling risk adjusted returns for our shareholders overall. We measure our topline performance in terms of total revenue growth, subscription revenue growth. The subscription contribution to total revenue and ARR growth along with the factors affecting ARR. Total revenue and subscription revenue both grew 38% for the second quarter compared to last year. Our subscription revenue represented 94% of our total revenue. Annual recurring revenue or ARR of $144.7 million achieved strong year-over-year growth of 38%. Underlying this performance, we added 740,000 users to our platform during Q2 and 2.4 million over the last 12 months, driving digital user growth of 29% and ending the quarter with 10.7 million registered users live on the platform. We believe we are one of the leading providers of digital banking as it relates to total digital user growth. Digital user growth has been driven by two areas over the last 12 months. First, we've implemented 24 financial institutions supporting 1 million digital users and second, our clients have increased their digital user adoption by 1.4 million users, representing organic user growth of 17%. Revenue per user is the final area driving our strong ARR performance. During the last 12 months, we've expanded our RPU by 7% and end of the quarter at $13.48 per user per year. This compares to our market opportunity, a blended average of $38 per digital user-based on the 26 products we offer today. RPU expansion has been derived from two areas. First, we are adding new FIs to the platform possessing in RPU, 26% higher than our overall company average from the prior year RPU. And second, we continue to see an RPU advantage resulting from our client sales organization that is responsible for selling add-on products and managing the renewal cycle for our clients. We've renewed four clients representing 6% of our total digital users in the first half of 2021 and expect to renew several more as we exit the year. Renewal activity will continue to be a strategic focus, adding to our sales results. Moving on to non-GAAP gross margin, our target operating model objective is to achieve between 60% to 65% non-GAAP gross margins over the next few years. We've also stated that we plan to achieve this expansion through 200 to 300 basis points of -- on an average margin expansion per year. Our progress towards achieving this objective is candidly, a bit ahead of our stated objective. For the second quarter of 2021, non-GAAP gross margin was 57.5%, an expansion of over 680 basis points compared to the same period last year. Expansion was driven primarily by revenue scale, greater utilization, and cost efficiencies in our client implementation, client support, and clients have success functions and improved cost efficiency with our third-party revenue relationships. Moving to operating expense, our goal is to balance investment opportunities with revenue growth, yet maintain a good line of sight towards profitability or adjusted EBITDA positive. We have a large market opportunity to address and recognize gaining market share at the cost of near-term profitability, is to correct trade-off for where we are in our lifecycle. We continue to expect to reach adjusted EBITDA positive on a run rate basis during 2023. This is highly dependent upon our investment trajectory, revenue growth, and M&A activity. With the second quarter of 2021, total non-GAAP research and development expenses are $11.4 million, of 18% compared to the prior year. From a percentage of revenue perspective, R&D represented 31%, which is over 520 basis points of margin expansion compared to the prior year period. Despite modestly higher personnel related costs, primarily due to platform enhancements and innovation initiatives, we achieved significant margin expansion, primarily through revenue scale. We expect to accelerate platform projects during the back half of 2021, which I will speak to you momentarily. Total non-GAAP sales and marketing expense was $5.1 million or 31% higher than the prior year period. From a percentage of revenue perspective, sales and marketing represented 14%, which is nearly 70 basis points of margin expansion. Despite higher employee-related costs from headcount increases in our sales and marketing teams, we achieved a leverage primarily through revenue scale and lower than expected cost from travel as well as industry conferences and trade shows, all resulting from the continued impact of the COVID-19 pandemic. Sales and marketing expense will increase during the third quarter 2021, as we incur costs associated with our annual client conference, we are excited to host a hybrid event and look forward to our clients, partners, and investors who were able to attend in person. However, the event will be equally as informative to those who choose to attend remotely. Total non-GAAP, general and administrative expense was $10.6 million, up 60% compared to the prior period. G&A represented 29% of revenue, which is nearly 400 basis points of margin contraction. The primary driver of margin contraction was the increased costs, necessary now that we are a public company, including higher business insurance and adding new accounting, Investor Relations legal and human resource personnel. Total non-GAAP net loss was $6.1 million, an improvement of $600,000. Adjusted EBITDA loss for the quarter was $5.4 million, ahead of our expectations. As I previously mentioned, we are taking the opportunity to pull forward and accelerate certain investment priorities around innovation and go-to-market activities as a result of the revenue and profit over performance. We continue to be laser-focused on the most balanced path to revenue growth and long-term profitability. Moving onto cash, we had over $338 million in cash on balance sheet as of June 30, 2021. Now, turning to guidance; for the third quarter ending September 30, 2021, we expect revenue in the range of $38 million to $39 million and an adjusted EBITDA loss of $7.5 million to $6.5 million. For the full year ending December 31, 2021, we expect revenue in the range of $148 million to $151 million and adjusted EBITDA loss of $24.5 million to $22.5 million. With respect to adjusted EBITDA levels in the back half of the year compared to the second quarter, as I mentioned, we expect to incur additional costs related to our investment priorities as well as our client conference, resulting in an expected sequential downtick and profitability during the third quarter with the fourth quarter returning to levels similar to Q2 '21. I will now turn the call back to Mike for a few closing comments before we start the questions and answers segment of the call.

Thank you, Bryan. And thank you [indiscernible]. Gentlemen, I just want to take couple seconds to recap a few key points on our first full quarter as a public company. First, I'd say Alkami's innovation engine in the second quarter remained at the center of differentiating our clients and our company with a particular emphasis as Stephen mentioned on our UI and UX emphasizing Mobile, Business banking, extensibility, and leveraging what we believe is the hindrance of deepest and richest dataset for driving results for financial institutions. Our go-to-market engine under Allison's guidance has pivoted with the times and is well positioned with the largest pipeline in the company's history represented by a healthy mix of bank and credit union prospects and we've also seen progress integrating ACH Alert capabilities with a strong innovation and sales results posted in Q2 for the strategic area of our business. Finally, our efforts are also reflected in solid financial results and 2021 outlook. As Bryan mentioned, total revenue and subscription revenue both grew 38% for the second quarter, compared to the prior year digital users grew 29% over the same timeframe and being at $10.7 million and we're running ahead of our stated non-GAAP gross margin objectives and we finally, we increased our outlook for the third quarter and the full year. As I reflect on this first quarter, as a public company. I'm proud of our start and energized by this leadership teams and all Alkamists' commitment to our vision, our mission, and our results. So what we fully intend to be, the best digital banking platform of choice for regional community financial institutions in the US. Doing so requires a passion and competence for digital banking that is as relentlessly enduring as the change our clients space each and every day. While we're still -- While we're still new to the public market, we are stronger than ever and our mission hasn't wavered in our now 12th year as a company. We remain as deeply focused on executing and fulfilling our purpose as ever to the benefits of our clients, our partners, our users, investors and Alkamists. And now, I'd like to open up for Q&A and we'll turn it over to be operator.

[Operator Instructions] And we have our first question from Pat Walravens with JMP Securities. Please go ahead.

Okay, great. Thank you and congratulations on the second quarter as a public company. I would love it if you could -- It's just because I know -- just because it's on everyone's mind now with Delta, so can you just remind us of the impact of start of the first wave of the pandemic on your business. And then what it did to deal activity and how you're seeing that play out today.

Hi Pat, good to have you on the call. Thanks for being here with us. Good question by the way. As we entered this in the way of pandemic, I would tell you, we jumped to it pretty quickly in March. We've been the midst of kind of all the activities, financing related for the company and over the course of one weekend we made the call to be a 100% virtual and change kind of how we went about our go-to-market activities, our execution, support and implementation activities, just like everybody else in the world there to get squared away on that. We felt as we went into that stage, there was a kind of a slowdown of new business opportunities commencing like in the forms of RFPs and new activity starting there, but our launches and our implementation activities just continued with a few adjusting slightly for things going on in their operations. We stayed pretty much on track. We held to our financial plan on sales and revenues and all elements of our financial plan for 2020 and pretty much nailed every one of those throughout that year. So, we did see a kind of a small uptick in the user accounts, not a massive adjustment in user adoption by our client base. And our clients, I think after hunkering down and getting ready for some of the credit and other considerations of concerns around their employees that they were dealing with, I think settled into a pretty good steady state. And so, we've been marching on that path and have started to see, I'd say, coming out of this quarter, we're starting to feel some of the energy back. In May, we felt some at the end of first quarter, the energy coming back into new initiatives and new projects and getting going a little bit for the new initiatives and our client sales are a kind of been pretty strong during this period, as our clients who are already on the platform, we're looking for new ideas and new things that they could implement. So, that's kind of how I would summarize it, I don't know Stephen or Bryan want to add to past question.

Good question. Yes, I think Pat you are kind of asking about some of the delta variant, some of this new stuff coming in the way as well. Yes I think that what we definitely see us as Mike says his activity has absolutely picked back up. The biggest dip was kind of Q2 and Q3 of last year as far as net new deal opportunity creation RFP deterioration. I think the only thing it's not kind of fully back yet or kind of all the kinds of conferences and trade shows. We're seeing some of them still have delayed out until next year. Other ones are doing versions of them this year or may be certain versions with mandatory vaccinations and things like that. So, that part isn't quite back to normal, but in terms of overall deal flow, RFP generation, and so forth, that's -- that's what we're seeing is about back to pre-pandemic levels.

Great, thank you for that. And I'm glad you're making the effort to make your conference hybrid.

I think we started we started doing it Pat, we're trying to decide how -- how far down the hybrid path we're going to do a lot, actually that was still moving around at this point, I would also say that number of our team has been out and about and monitoring with our clients and with their conditions in their respective facilities and things are tightening down again in our client community for what they're going to be doing. I think they're comfortable with supporting it, but it is still having a kind of day-by-day impact on the actions -- interactions with our clients in our operations.

All right. Thank you very much for that perspective.

Sure.

Thank you. We have our next question from Sterling Auty with JP Morgan.

Yes, thanks. Hi guys. So in terms of the incremental investment, you're talking about of the upside, on the go-to-market piece specifically. I'm curious, how much of that is going to go into kind of quota carrying head count versus some marketing and top of funnel lead generation programs, just help us understand where you're putting that incremental amount to work and maybe quantify how much that is?

Fine Bryan, you will touch that a little.

Yes, Sterling. Yes, thanks for the question. Good talking to you again. As far as where we're allocating funds for the go-to-market, it's predominantly around marketing activities, sales training activities, and lead generation, so I would characterize it more as top of the funnel for go to market. We're also investing further in our client sales team, likely to add a couple of quota-carrying reps there. We've recently and we may be announced this last quarter because post quarter end, we added Vice President level leader within that organization, a woman with lots of experience in the digital banking community. So really it's just continuing on a lot of the success that we have and furthering regeneration from sources, now that we're more absent, or at least lower activity from in-person events like trade shows and conferences.

Great. And if I could sneak one follow-up. And I'm curious you kind of -- where the ACH enhancement for 2022, how should we think about the monetization around that and what kind of revenue opportunity that might lead to?

I'll take the revenue opportunity. It is in flight and so it's more of a road map items. So in terms of revenue impact in 2022, it would be very little. In terms of sales activity, we will sell in advance of actually delivering the product and then have implementations occurring later, so there could be some in the back half, some increased sales activity related to it. We were mentioning it on this call. Just to provide an update on ACH Alert; so the investment community and others would understand that we're advancing the product in that platform. It wasn't as though we are acquiring, something we wanted to hold static, because it's a very strong team with great knowledge around what they do in fraud mitigation and we feel it's important to provide insight into how we intend to take the asset further.

Understood. Thank you.

Thank you. Our next question comes from Andrew Smith with Citi.

Hey guys, thanks for taking my question here and congrats on a good quarter. I wanted to ask a question about the bank side, I know you mentioned two commercial bank wins in July, was hoping you could talk a little bit more about the nature of those wins and how conversations with banks are evolving generally speaking, particularly as you get more reference clients, you're more focused on the go-to-market, just curious how the progress in the bank and market is evolving? Thanks.

Yes. Hi. This is Stephen, I'll take this one. So I would say that the momentum is building there and you hit on it right here. The more references you have, the easier it gets to get the next one. And so I would say that the sales are getting a little easier because obviously we're winning some, we were getting more live, we're enhancing a lot of the business banking functionality and features that really probably been the number one reason that would -- that had kept us out of certain accounts right now, I think I mentioned it earlier, but we've got out of the largest pipeline we've ever had 20% of that are actually bank deals and I would say that the list is kind of getting, the GAAP list in terms of what you have to do in order to be able to convert those system -- those clients over to your system and replace their current system. That list is getting smaller and smaller and smaller, and so you have people more and more willing to trust you that that you'll get those things done in time for their launch. So, I'd say that in all those areas it's not to the levels where we are on the consumer side and obviously in the credit union space yet. We don't expect it to get there in the next year or so, but I would say that the positive signs are there and the momentum is there not only in the pipeline, but also in actual contracted deals.

Got it. Super helpful, thank you for that. And then just a quick follow-up. Performance in the quarter -- the outperformance, when does that primarily related to visit organic that and you guys have good visibility going into the quarter, but organic user growth kindly of go lives, just curious to get any sense for the nature of the revenue outperformance in the quarter. Thanks.

Andrew, could you repeat that question?

Sure. I was just hoping to get a little more color on the revenue outperformance in the June quarter, where the key drivers were, whether it was growth exceeding expectations or time you've got lives, anything like that?

Yes. So, a couple of things on a -- from a user perspective, we grew just over 740,000 users during the quarter. What covered in the quarter were a couple of things compared to Q1. We mentioned in the last quarter that implementations were more of a mid-year story for 2021 and we absolutely saw that with over 475,000 users implemented during the quarter, but maybe equally as important, but less impactful what we saw an increase or recovery in the organic user growth of our existing clients that was fairly low or mild in Q1, we saw that recover in Q2. We attributed the Q1 modest increase from coming out of the pandemic, high user growth and seeing more users roll off the platform as a result of coming more towards the back end of the pandemic and so we saw that recover in Q2, which is nice and we expect that to continue through Q3 and Q4. In addition to those items, nice ARPU pick up, and that's another area of our revenue model where we would expect 5% sustainable revenue per user growth year-on-year, we grew 7% during the quarter. So, part of the benefit of our model is there are several different revenue levers that we can leverage and utilize and we're seeing, we're firing on most of those during this quarter.

Got it, makes the momentum. Thanks a lot guys, I appreciate it.

And we have our next question from Saket Kalia with Barclays.

Okay, great. Hey, thanks for taking my questions here guys. Hi, Bryan. Maybe I'll start with you just off the back of that last question, that 740,000 net increase in -- in registered users was great to see, maybe I wonder how you think about the cadence of those customer adds, maybe over the next couple of quarters and you touched on the ARPU a little bit, but maybe how do you think about the ARPU that those kind of new users are coming in at kind of for the back half of this year, does that makes sense?

No, that's a great question. So what you're going to see is an uptick in user implementations in Q3 and Q4 will be modestly down from Q3. So, the back half of the year implementation should be in that 800,000 to 900,000 range. In terms of organic user growth, we would expect to continue for our clients to continue to grow on a 15% to 17% level in the back half of the year -- year-on-year. So continued nice user growth for the full year, we should exit the year somewhere between 11.6 million to 12 million live users on the platform, which is a bit ahead of our expectations and we're excited about that. As it relates to RPU, new users are coming on at a much higher level than our overall company average and so in Q3, Q4 we expect the ARPU related to implementations to be in that $15 per -- per user per year, which is driving that as our sales force is becoming more competent at selling more products on the initial order. We're seeing that average somewhere between 14, 15, and 16 products and in some cases, up to 20 products and above on the initial order when the company average is around 10. So, lots of attraction within our sales force when they're landing a new logo and selling more products as the company has more products to offer.

Got it, that makes a ton of sense. Maybe for my follow-up for you, Mike, or Steve. A lot of -- a lot of focus here on the business banking capabilities. It sounds like, to your point, can you believe that gap list is decreasing, obviously a nice part of the pipeline from here as well. I'm wondering if you could touch a little bit about on the competitive win rates there, how those have trended, how you feel about where you stand versus maybe some more entrenched competitors in the space.

Yes. I think it's hard for us to give great numbers on this because we will look at the particular quarter. We like to look at trailing 12 months, which is probably the best way to kind of normalize it. I would say that I would be happy for our win rate to stay of what it was a year ago because of how many more deals that we're being invited to. So we would find is they have a great win rate, but how you only you only invited to the party 4 times that's where that you one wants to 25%, but you weren't in 95 parties. So for us, I think what we're really seeing the most encouraging is, we're seeing -- we're seeing as being invited to a lot more of those, that means that the consultants are seeing us to RFPs, that we're getting natural references from our existing clients. And so, our name is just kind of give through our marketing engine, is getting our name out there. So, we've seen a substantial pickup in the number of bank deals we're -- we're invited in. And I would say that our win rate is holding steady; so just take that for it's word [ph].

Yes. And the other thing I would add about investments in our business banking is increasingly our credit union clients in the credit union opportunity business banking is becoming more important today, opening up close to half of our live users are using some aspect of our business banking platform. Our business users on the platform are up almost 60% over the prior year. So it's not just benefiting the bank segment of our market, it's also impacting our sales in the credit union side. I was just completing that.

Got it, that's very helpful. Thank you.

Thank you. We have our next question from Bob Napoli with William Blair.

Thank you. Good afternoon, Hey Mike, Brian, Stephen, and Rhett. Nice quarter. Nice trends, it's just the progression on the gross margin has been pretty -- pretty dramatic and I know, Brian, you went through some of that, but you're certainly ahead of the expectations that we had coming into this year. What are your expectations for that, the trends in that gross margin like in the back half of the year and you're still and then maybe your expectations may be in 2022, 2023, just longer term, but the cadence, has that changed?

Yes. So the cadence for 2022 and 2023 hasn't changed at this point. So, will still be targeting 200 to 300 basis points of margin expansion in those years. And as we mentioned, as a part of the IPO roadshow and even on the Q1 call, we don't think we're capped at 65%, but we need to reach 65% before we revise that outward view where we could go. Revenue mix certainly has a large impact on where ultimately we can go because our largest cost to sell component is the pass through costs related to us reselling third-party solutions in IP through our platform and that's a big part of our story is the ability to deliver innovations, much more quickly than the competition, whether it's through organic development, M&A activity, or adding third-party partner, so an understanding of where that third-party mix goes in the future can certainly impact it. The next two big items we're hosting in implementation cost and we're seeing an incredible amount of efficiency within those groups. And our IT team is doing, really a fabulous job in driving down our cost per user for hosting and also keep in mind since we're 100% in AWS, which we think is advantage for us from a go-to-market perspective. It also includes the cost of renting CapEx. So we have CapEx components in our cost of sales that many of our competitors or peer comps do not have and we're still achieving nice gross margin leverage. And then finally on the implementation product, I can't say enough for our implementation team through the pandemic. I think they've learned some lessons along the way, they've learned how to be more efficient, how we can provide the same level of service and client satisfaction and do that from a remote setting, which means less travel and less cost associated with the implementation. So that is a good fact that's come out of what we've learned over the last 12 months, and it is now benefiting our gross margin. For the back half of the year, I don't want to get over much details, and so we're going to repeat Q2, we're going to advance beyond Q2. I think for the full year, you'll see us have -- 300 to 400 basis points of gross margin expansion and large part due to the one-time revenue event that landed in Q4 at 2020 for a client termination, that bled a lot of gross margin in that quarter, but absent that, we would be up significantly more than 300 to 400 basis points in 2021.

Thank you. And then, you seemed to have a lot of success with ACH Alert, you have a lot of third-party partners, and that's where the ACH is a third-party partner. From the M&A perspective, are you looking, which should be expected to see other ACH Alert type transactions of third-party partners and what are you most focused on in that regard?

Yes, we would love to repeat the ACH alert to success and acquisition and over and over if we can, we view that the third-party revenue channel as a sourcing channel for activity especially for the ACH alert or maybe slightly larger sized partners that we have areas of focus for us has not changed digital account openings a very key area for us security that's another key area of financial wellness and then of course any marketing data and analytic type product. And quite honestly talent would be something that we would heavily pursue as it relates to M&A activity.

Ultimately, I'd add to that is probably in the area of business service banking services for the commercial customers they have, -- payments or other services like that would be the other place. Bob, did we lose you?

I'm sorry; his line has dropped from the queue. Would you like me to proceed to the next question?

That'd be great would be great.

That'd be great would be great. Bob will be back. We know Bob pretty well.

Thank you. Our next question is from Josh Beck with KeyBanc.

Thank you so much for taking the question team. I wanted to go back to some of your earlier comments, Mike just about the pace of change and acceleration that you're seeing within the industry. So I'm curious maybe what is it really seems like, it's obviously always been there. There's been a drumbeat, but it really feels like things are structurally steepening on some of these adoption curves, so I'm just curious maybe what's driving that and you mentioned by that later. So I'm just kind of curious, the news and everything, how the banks are approaching that space?

Well, for sure as we've talked about before Josh. This whole idea of the digital transformation of financial services is not sneaking up on the digitally oriented bankers and credit union leaders of today. They are hyper aware of it -- hyper aware of virtually every product that is being presented in the market space as a product offering that they could render themselves if they chose to, if it's pricing availability access, whatever element of it, there is, because it's not actually, the user experience itself is interesting, but a lot of it is the proposition that's underneath it. And so, I think the banks take of it is, yes, it's part now that it is more of an enabler and a differentiator possibility than it is only a threat. So, you'd see Stephen [ph] in boardrooms now more often than ever on banks and credit unions, so what's going on in digital, why is it matter. And so that sense of awareness and appreciation and recognition converted to action is what we're feeling in big status with our consumer -- on the consumer side or on the business side. So if we think of the acceleration, it is really just more of the possibilities seem to be more reachable, more doable, more achievable into the field is leveling on the competencies. It takes to do it with partners like us and so that's I think creating a big chunk of the acceleration we're feeling and a good idea that in the marketplace for us as a, let's call it a direct to consumer, direct to business are offering immediately opens the eyes of a financial institution leader in the digital world versus that product or service that we just saw director, a type of customers, a product, we could do ourselves if a partner like Alkami could bring it to us. And crypto is a good example with [indiscernible] here recently, PFMs and other plays credit scoring, while the topics like this that you could have seen we're in those ways are now get integrated into the value prop of a financial institution in their holistic view and they can differentiate on the aggregate, so that -- we think is just the awakening of something that they had seen already on their corners from other industries, not to have happened and the tools are more accessible and more doable than before. Hey Rhett, if you would add anything?

Right, that was very well stated.

Okay. Well, great, well thanks for the color, that's super helpful.

And I'm sure as all of you are consumers of digital banking products for your own lives and so you can see this happening already probably if any of the poor leading financial institutions used to do a lot. These days do we have that, no I haven't and it is that -- that field leveling and differentiation in the new way is just going, I think.

Well that's -- that's very good to hear. And maybe just -- just want to follow-up for Bryan, just looking at the ARR growth in the first half, it seems like it's high '30s, that's like I think really encouraging will be indicator. And then just looking at the revenue growth in the back half. It's obviously take a step down from that. So maybe just help us bridge what are some of the big moving parts there and any areas of conservatism that we should be thinking about?

Yes. I think, Steve, one of the items just the point back to again was in the back half of 2020, we had a large termination fee that impacted those results and so on a full year basis we're looking at revenue growth of 33% and that's before you would adjust for that from a run rate perspective to truly understand the momentum of the business. We had good visibility based on our backlog of users that are being implemented, we will have as I mentioned, earlier close to 800,000 to 900,000 users that will implement predominantly in Q3 rolling into Q4 and we'll exit the year a bit higher on live users than what we were expected, which will provide us good visibility into 2021. The other unknown variable is really the pace at which our client sales team closes add-on business. For the first half of this year, client sales team is up quite a bit over the first half of last year in terms of new cell sold, they are actually the mix of big sales or TCB within that attributed to client sales is actually picking up and increasing. So to the extent that momentum continues, those are products that we sell that goes into backlog when we implement much quicker. It's more around 60 to 75 days versus a 9 month to 12 month implementation cycle. So that's an encouraging trend, and, if it continues in the back half, so it is up nicely for 2022.

Excellent. Thanks, team.

I am sorry, just to only thing I had to add to that -- that during the back half of the year as we've talking about on the sales pipeline, this is kind of like in every business, there is a story of the pandemic and its implications on the business is almost different for every one of those and you kind of heard our description of that as it relates to our existing customers and their awareness and their emphasis on digital, the slowdown in speed up of initiatives related to their existing platform or new ones shifting in slowing down and then picking back up. And so this back half of the year is subject to the delta variant discussions we've had. This is going to be a key part of what that trajectory looks like, how this next couple of quarters as we unwind or whatever is next under the pandemic and whatever variant is next and that's going to be the next component of, kind of that element of next year and the year after that, it's hard to predict right now. Anybody here [indiscernible] how the delta variance is going to play out, don't see it yet.

So helpful context. Thanks, Mike.

Thank you. Our next question is from Mayank Tandon with Needham.

Thank you. Good evening. Most of my questions have been answered, but I did have one on the land and expand. I think Bryan you mentioned the 26 product portfolio that you have today, where are you today in terms of penetration in terms of the products across your customer base and what is sort of the road map to get to that 26 magic number over time? And I'm sure you'll see more products over time, but just looking at the 26 number, where are we today in terms of penetration?

Yes, so today, on average, we have 10 products installed with each client. What we're seeing is, as I mentioned, our new sales team is actually generating more products than the 10 on average, with new logos that we're landing anywhere from 12 to in some cases, up in the '20s and its averaging out around 15. So that's encouraging for us, I think equally is encouraging. If you just look at our products in the penetration into the base comparing where we are at 06/30/2021 to the prior year, every product except for one has increased in penetration and that's really the combined effort of the new sales team or new logo team with the success that we're seeing on the client sell side. So, I can't give you the exact cadence of when we're going to be fully penetrated to 26. I think the answer to that is never because we're going to continue to add product and continue to innovate and will always be chasing that, but I can assure you from the CFO seat and the finance side, I will not allow the sales force to tell me that we can't be 100% penetrated because we can always drive more sales. I have Stephen here he's squirming a little bit as I'm -- as I'm saying and I'm kidding a bit but it truly is a land and expand story and we're seeing a lot of success from the client sales team and I think renewals, I mean that is another area of focus for us we've renewed 6% of our digital user base in the first half of this year, we have more clients that will be renewing in the back half and we all know that when a renewal is approaching that's a great time to try to sell more product and just refresh the value prop. And the benefits of our products as you have a close relationship with the client through the renewal process. I mean, we maintain a very close relationship with our clients, but it obviously gets much more closer as they are approaching the renewal, because they're signing up for another five years to seven years with us. And so in some respects, we're selling the value and the innovation that the company can bring to the financial institution.

That's very helpful perspective. Just a very quick follow-up, given the success in corporate banking and maybe as you move up market, how critical is it to leverage the FI partners. Is that something that's on the table?

Did you say the FI partners? So you said FI partners, sorry. Right now, there's been templates of other firms that have tried to use.

Successfully maybe, and successfully used SI partners. What we have found for us and for kind of our position given our platform move, so quickly 1000 of releases a year, a major releases frequently there is almost impossible that we keep a third-party up to speed on what's the latest version., the latest implementation and expectation. So, we've decided that at least at this point that implementation of our solution is something that is part of our core competencies that we have to do exceptionally well. You heard a little bit about that in the case study and so we've kind of lift that to others and maybe future consideration, but it's not anywhere near our list because we just feel like it, it's essential that our clients are counting on our unique expertise and knowledge of the last version of the product to make that implementation work. And so, we're not going down that path there. We're using some of the partners for helping us accelerate other elements of this but doing that part of it is one of them.

And financially, we're still seeing nice margin expansion, even across our implementation teams, the implementation process from our perspective is not a gating item and we typically gating item in the implementation is when is the incumbent provider contract in and managing towards that and then also as you're moving a bit into this smaller FIs and the segment of the market that we address that they don't have as much technology personnel on their side. So, then that can be a bit of a gating item but we worked very closely with them to ensure successful experience, a successful launch of the platform, but we're not seeing a disadvantage in the financial model in the client experience through the speed at which we're growing our revenue by not bringing in a third-party partner.

Good point. Thank you so much. I appreciate the color.

Thank you. We have our follow-up from Bob Napoli. Please go ahead, sir.

Hey, we were hoping you'd be back; we were hoping you'd definitely back.

I'd imagine you gave a great answer to my question; looks like that kicked off somehow. I'll get that from the transcript, I know that I don't think, just took the last quarter you had given a metric on the PCD growth from cross sales versus new logos. I was wondering if, A) you could tell us how many institutions you won in the second quarter and associated users. And then, what have your revenue PCD growth, how much of it was from cross sale versus new logos?

Yes. So for the percent of our sales in the first half of this year compared to first half of the prior year. We're approaching more to 30%, that's being attributed to our client sales team and so that, 20% number 12 months ago. So we're seeing some nice traction there, also just kind of state of the first half of the year. We closed nine new logos in 2021 that compares to nine new logos in 2020, that every year is going to have a story to the year, a story to the quarter, and what we have found is in 2020 we had several very large financial institutions that we had the benefit of selling to and closing, and now we're benefiting from that in our implementation cycle. The story of the first half of 2021 has been more medium to the lower end in terms of size and of the market and the sales that we've closed. Now when we look at the pipeline and we're looking at deals that are expected to close in the back half of the year. There are some very uniquely large opportunities that we feel have a great chance of going our way so I would look at our sales for the first half of 2021, kind of wait and see and let's see what happens in the back half of the year. We're not pleased with the first half of the year, it's a little bit out of control, but it's dual velocity. So, if you think about the pandemic, as we exited Q1 and we were in Q2, we actually saw opportunities decline and Stephen spoke to this a bit in his prepared remarks but, and then as we went through Q3 and Q4, we saw activity coming back. Q4 was a very strong quarter for us. But what you see in the first half of this year is those that the opportunities -- the different opportunities we didn't have as much of a deal of the loss in the first half of the year. Q4 of 2020 was really driven by deals that were in the pipeline, expected to close pre-pandemic and I think that's a pretty important point, we saw again the opportunities increasing Q3-Q4 that carried over into Q1 of 2021, which has given us confidence in the back half of 2021. To Mike's earlier comment, the delta variant and is that going to kick us into yet another kind of wait and see type of position on the end market in making decisions; we don't know but what we're seeing in our pipeline and what we're seeing from our sales force is that's not the case at this point in time.

And, thank you. This concludes our question-and-answer session. We thank you all for joining today, this concludes our conference. Thank you for your participation. You may now disconnect.